The Daily Update - If Carlsberg did Paired Trades….

If Carlsberg did paired trades….

Looking through the RVM (our “Relative Value Matrix”) the other day, I hit the “sort by credit notches” by ascending order by mistake. Thinking back to our “long / short” days (something we may well yet look to revisit once again) I wanted to highlight a fictitious paired trade for your amusement.

Keeping within the Government universe and from an “expected return” viewpoint it would have to be a Brazil vs Qatar trade. Short of the long dated Brazil 5% 2045 issue, this bond currently trades nearly 3 credit notches expensive (as if it were rated Baa3, and not its actual rating of Ba2/BB-) with an expected return of -27% (if the spread were to move to “fair value” over a 1 year time frame).

As we recently wrote, Brazil’s weakening credit profile has seen it reduced to sub-investment grade and our estimates put its net foreign liabilities close to our cut-off of 50% of GDP. IMF research indicates that countries with net foreign liabilities in excess of 50% of GDP are associated with increasing risk of external crises.

Long of the Qatar 4.817% 2049 issue, this bond trades nearly 3 credit notches cheap (as if it were rated A3, and not its actual rating of Aa3/AA-). It has an expected return of 16% (using the same 1 year time frame to move to “fair value”).

Regular readers will remember that Qatar has been a long held favourite of ours for many years now. With our highest rating of 7 stars, the country’s credit profile reflects a strong balance sheet, vast hydrocarbon reserves and exceptionally high per-capita incomes. We believe these factors continue to provide significant shock absorption capacity and mitigate the economic and financial risks arising from their ongoing diplomatic spat.

Whilst we aren’t necessarily suggesting that Brazil and Qatar will conveniently move to “fair value” spreads PDQ, a 40% or greater return could certainly be considered a Carlsberg moment and we’d definitely raise a Cheer to that!

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