The Daily Update - Saudi, Mexico, Argentina, Brazil

Saudi Arabia’s Deputy Crown Prince Mohammed Bin Salman was named as the heir to the throne in a palace shakeup yesterday. The king’s decision to elevate his son who is 31, who already controlled the defence, oil and economy portfolios, was supported by 31 out of 34 members of the Allegiance Council, made up of senior members of the ruling Al Saud family. This broadly puts an end to a power struggle between Mohammed Bin Salman and his cousin Muhammad Bin Nayef who reportedly backed the royal decree in a letter to King Salman. This is important as Prince Salman has been the driving force to diversify Saudi revenues from oil, but also gives him more of a free hand in the management of the Kingdom.

Meanwhile, in Washington State Department spokeswoman Heather Nauert, in the strongest language yet on the Gulf dispute, said ‘the more time goes by, the more doubt is raised about the actions taken by Saudi Arabia and the UAE.’ Adding, ‘At this point, we are left with one simple question: Were the actions really about their concerns regarding Qatar's alleged support for terrorism or were they about the long-simmering grievances between and among the GCC countries’.

Middle Eastern bonds were under a bit of pressure yesterday not only from the lack of information flow regarding the current dispute, but also from oil, as pricing hit the lows back to November last year in the face of a further pickup in inventories and reports US fracking production was higher than expected.

Following on from yesterday’s daily we have been asked to look at the pricing of 30 year debt in Latam using liquid government bonds in the region.

So in Argentina we have the 7.625% maturing April 2046 a $2.7bn issue, rated B3 by Moody’s, with a 11.7 year duration, priced at 104.80, a spread of +453bps to the US long bond. Fair Value, (FV) we have as a spread of +692bps, and so 239bps expensive which calculates to a price of $80.68 making this bond around 24 points in price overvalued.

In Brazil we have the 5.625% maturing February 2047 a $1.5bn issue, rated Ba2 by Moody’s similar to the other two agencies, with a duration of 13.8 years, priced at $96.50, which is a spread of +315.5bps. FV according to our RVM is +339bps and so this bond is priced almost at fair value although still expensive, by about 3 points in price, not much when looking at 30 year bonds.

Mexico has the 4.35% issue maturing January 2047, a $2bn issue, rated A3 by Moody’s and BBB+ by the other two, with a duration of 15.9 years, slightly longer than the Brazilian and Argentinian examples, priced at $95.75 which is a spread of 190bps. FV is calculated at +137bps which equates to this bond rallying by 8.75 points to get to fair value.

Broadly, we see Argentina as a ‘sell’ being priced far too expensive for its ratings and that’s without looking at the recent past history of defaults and disagreements, you really are not compensated for the risk involved, avoid.

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