LATAM and CEEMEA Corporate Credit – 2017 Outlook

Deutsche Bank Markets Research Emerging Markets Corporate Credit Date 25 January 2017 LATAM and CEEMEA Corporate Credit – 2017 Outlook ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Eduardo Vieira Research Analyst (+1) 212 250-7568 eduardo.vieira@db.com Himanshu Porwal Research Analyst (+44) 20 754-74234 himanshu.porwal@db.com Xavier Olave Research Analyst (+1) 212 250-6135 xavier.olave@db.com In this publication, we present our 2017 outlook for CEEMEA and LATAM hard-currency corporate credit, as well as our updated views and recommendations. We also provide tables and charts with credit fundamentals, relative value metrics and bond valuation filters for companies in different sectors, and take a closer look at the credit ratings and new issuance trends across these regions. Macro Backdrop and General Outlook CEEMEA and LATAM corporates started 2017 on a stronger footing than in 2016, in general, as the economic slowdown of recent years seems to have bottomed out (notable exception being Mexico due to US protectionism fears), cost and capital structures have further adjusted, and Chinese growth has proven more resilient than some market participants expected a year ago. Moreover, the recent stabilization of US Treasuries and reversal of fund outflows from EM post US elections also turned the momentum back in favor of EM credit – although we argue that global markets may not have yet fully adjusted to near-full employment in the US, leading to potentially weaker capital flows to EM. Positive government measures in some countries also added to the more constructive outlook in the region. Valuations LATAM and CEEMEA USD corporate bond spreads have tightened significantly (by about 240bp to 360bp in LatAm excluding PDVSA, and by 140bp to 250bp in CEEMEA) since the beginning of 2016. Also, spreads of CEEMEA and LATAM corporates are now tighter than their 5- and 2-year averages and at the lows of their 2-year averages. LATAM and CEEMEA corporates have also outperformed EM sovereigns in the last 2- and 5-year periods. Although valuations have cheapened recently in yield terms driven by the US Treasury-led sell-off post US elections, spread levels haven’t fully adjusted as yet, thanks to strong technicals. This makes us believe that there could be room for spread widening in the near term, as secondary liquidity picks up, supply trickles in, and global portfolio allocations get revisited. Credit Strategy We start 2017 on a defensive note on CEEMEA and LATAM USD corporates (on a valuation basis) and expect to see better entry points towards the end of 1Q17, when US rates and corporate bond spreads could (hopefully) normalize further. This stems from our belief that the adjustment in global markets to the outcome of US elections and the beginning of monetary policy tightening in the US is not complete, and we caution against extrapolating the recent USD weakness and return of inflows to EM bond funds, which we view as a technical pause. Therefore, we currently have Hold recommendations on the majority of CEEMEA and LATAM bonds under our coverage, and generally prefer 3-to-8-year bonds of select credits. In CEEMEA, we prefer select Russian and South African non-financials over Turkish issuers and recommend RV opportunities in select Middle Eastern credits. In financials, senior bonds of Russian state banks look less compelling to us while their subordinated notes offer most value on a risk reward basis, in Distributed on: 26/01/2017 03:18:27 GMT 25 January 2017 Corporate Credit Page 2 Deutsche Bank Securities Inc. our view. Finally, we view Turkish issuers as the weakest link within CEEMEA universe being exposed to persistent TRY depreciation, looming Fitch downgrade, higher refinancing risks and deteriorating fiscal/growth backdrop. Although, we believe valuations are largely pricing in these concerns. In LatAm, we advocate an overweight position in the oil & gas sector (focused on our Buys in Petrobras’s 5-year sector and YPF’s 7-year sector) and a tactical slight underweight in Mexican corporates (focused on tighter and higher-beta credits). The key rationale for our overweight stance on LatAm energy (focused on Petrobras and YPF) includes positive relative value, leverage-containing efforts, ability to generate cash before capex at current oil prices, strong implicit government support, and superior trading liquidity (within EM corporate) among SOEs. Although Mexican corporates now offer a sizeable ratings-adjusted di