The Moorish Wanderer

2020 Eurobond Yields Go Up – A Debt Problem

… and I will try to provide proof that the yields are increasing because actors on financial markets express their doubts over Morocco’s debt, and not because of some financial international turmoil. The consensus, so to speak, is that Moroccan authorities lack credibility in halving their public debt, domestic and foreign.

I am saying so because the Finance Ministry issued a report on October 2011 [pdf] with a section on Morocco’s foreign debt, with the very explicit message that the rise in spreads on the 2020 Eurobond – and subsequently on the required yield to maturity as well- where due to turbulences in financial markets:

Dans le sillage des turbulences des marchés, les primes de risque assorties aux titres marocains (eurobond 2020) ont atteint 386 pb début octobre, en hausse de 118 pb depuis début août et de 180 pb depuis leur creux du mois d’avril.

First, I don’t know how the Spreads are computed, but it seems to me the 386bps is undervalued – It would be more around 440bps up to mid-October 2011. Second, the report produces some benchmarks to point out that the Moroccan Eurobond isn’t doing that bad after all – While it is true it has fared better compared to the overall emerging bond market, the report does not specify the shortcomings of such comparison: the selected benchmark index, JP Morgan EMBI (Bloomberg Quote: JPEMCOMP:IND) holds a heterogeneous array of emerging bonds, including non-investment grade – a feature that explains alone why Index spread is higher than Morocco’s bond, thus invalidating the report’s point about the 2020 Eurobond actual performance relative to the market.

To that effect, the JPM-EMBI methodology clearly states that the largest weights are attributed respectively to Argentina (quite…) Brazil and Mexico, i.e. 54.8% of total index. Argentina, with 20.4% weight is rated ‘B’ by S&P (below Investment Grade) and has a history of reneged debt and default. My point is that such an index is not suitable a benchmark to assess the current Spreads on the Morocco 2020 Eurobond. It would have been wiser to either look for an alternative index, or devise a custom-made one with Investment-Grade benchmark countries of similar GDP and growth features.

There is also another way to see how the 2020 Eurobond fared this last year – and that is to consider how the 2017 Eurobond did itself. Indeed:

Par ailleurs, les CDS10 à 5 ans sur la dette souveraine du Maroc ont atteint un nouveau pic de 281 pb le 3 octobre, en hausse de 104 pb depuis début août et de 168 pb depuis leur plus bas du 11 avril. Les performances du Maroc sur les deux derniers mois restent comparables à celles de la Tunisie et de la Turquie et s’avèrent relativement meilleures que celles de certains pays de la région comme le Bahreïn et Dubaï ainsi que de la moyenne des pays émergents.

Since it seems CDS time-frame does not matter in risk assessment -at least on longer maturities- there is no harm in comparing both 2007 and 2010 bond issues with prices and yields to maturity.

close correlation, but one that owes very little to market variations.

Lest we forget, the 2017 Bond issue started off with a higher coupon -5.37%-  and the yield to maturity gradually went down, as low as 4.1% in mid-October 2010, regardless of the high volatility observed Summer 2008. The fact of the matter is, the yield to maturity remained stable during the first year compared to that of 2020, and that is so regardless of market conditions: the steep decrease in yield after November 2008 testifies to the market valuation of the 2017 Eurobond fundamentals, and a signal that Morocco has the means to pay when the next coupon is due.

The graph opposite shows one thing: the 2017 Eurobond yield is just going back to its coupon rate, just like a Discount Bond is supposed to do. As for the 2020 issue, things have started on the wrong footing, and no matter how other comparable bonds did, there clearly is some market scepticism about the authorities willingness to halve the deficit and the stock of public debt; in short, there is no fear that Morocco will default on the 2020 Eurobond, but the absence of serious signals that Moroccan government is serious about reducing its debt will result in an increasing yield to maturity -which is already the case after one year the bond has been issued- and a higher future coupon if and when Moroccan authorities decide to go on DCM again.

The Finance Ministry report seems to underestimate the seriousness about the 2020 Eurobond; the previous issue has fared better and results are showing – bond prices are sold at a premium, which means that investors are very confident about them; it is therefore relevant to ask why is the market discriminating between the 2007 and 2010 issues? Since market disturbances do not spare specific securities just for the fun of it, it must be that the same markets have some doubts about the solvency of the 2010 issue.

2020 Places below EMBI and IG variant.

To that effect, I would suggest to compare the 2020 Eurobond spreads and pricing with a more relevant global index – one that encompasses only Emerging Market, Investment Grade debt. Luckily enough, there is a specific fund with similar features to the Moroccan 2020 Eurobond, the same JP Morgan EMBI but with a specific focus on Investment Grade countries. The last three months placed the Moroccan bond price below both benchmarks, the low valuation vindicates the initial claim that investors are sceptical about the information attached to the bond, mainly how Moroccan authorities will deal with the existing stock of public debt and future borrowings.

The 2020 scored a 3% increase since October 2011, less than other Investment Grade EMBI component, and relatively a lot less than the general EMBI.

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  1. […] more concerning for the minister is the credibility attached to Morocco’s foreign debt. True, it represents only 23% of total GDP -or 18.2Bn; so far, it matches up almost perfectly with […]

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