March 26, 2020
Katana Labs
Santiago Braje (CEO & Founder)

Market insight

First Signs of Reversion in Relative Value in EM Credit

At the close of March 25, we have started to see reversions in the z-spread difference between emerging market issuers. This is the case in the Chinese Real Estate sector. Over the last weeks the riskiest Issuers such as China SCE Group Holdings (CHINSC) and Times China Holdings (TPHL) have sold off ahead of better-rated ones like Poly Real Estate Finance (POLYRE). For example, TPHL 23 (BB-) widened from around 400bps in mid February to 1,455bps as of March 23, while POLYRE 23 (BBB+) went from 135bps to 188bps. Our data shows that as of yesterday the z-spread difference fell dramatically from a peak of 1,267bps to 563bps, as TPHL recovered and POLYRE sold-off.

We start to find cases with a similar dynamic in Brazil, where for example Banco do Brasil had been widening faster than BNDES and we saw a sudden correction yesterday. The difference in z-spread between the BANBRA 23 and BNDES 23 had gone from an average of 37bps over the last year to a peak of 344bps as of March 20 before reverting to 58bps as of March 25. Both issuers’ continue to be priced at around 3x the z-spread level over the past year, but the dislocation in the relative spread difference is back within the range.

At this stage these are isolated cases, but perhaps are an early indication of the market beginning to see beyond the initial panic and rebalancing the perspective on issuers’ relative risk-adjusted returns given the current economic outlook.

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