Morning Commentary: Battered EM debt market limps into the weekend; lira drops again

By Rebecca Melvin

New York, Aug. 17 – Emerging markets debt “limped into the weekend” on Friday, after a bit of a bounce in the previous 24 hours to 36 hours, as the Turkish lira resumed a downward trajectory, a London-based trader said.

The lira turned lower again after recovering for three sessions following a record low notched on Monday.

“Spreads are struggling, commodities are still for sale, rates are better bid, and Turkey is 20 to 25 wider,” the trader said, regarding Friday’s market and referring to a 20 basis points to 25 bps wider move for the week for Turkey’s sovereign debt.

“We tried a little bit of a bounce,” the trader said, “with guys nibbling on some of the stuff that really got beaten up.” Demand had been better on Thursday for some corporate names, including Turkcell Iletisim Hizmetleri AS.

Liquidity was described as “dire,” however, with market players unable to trade as much as they may have wanted given the uncertainty and the mid-August market. Many people are away on vacations and trading desks are lightly staffed, so matching orders was “very, very difficult,” the trader said.

Turkcell’s 5.8% notes due 2028, of which $500 million priced in April, were last at 80, having started the session better at 83. The notes saw their biggest slide on Monday. They dropped to 76.50 on Tuesday before recouping some ground Wednesday and Thursday. On July 29, the bond was 89.40.

Turkcell’s 5ľ% notes due 2015 remained higher on the day, at 87.40 bid, 88.05 offered, which was up 1.3 points. This bond had sunk to 81.80 this week from 90.75 on Monday.

In May, S&P Global Markets downgraded Turkcell but left its ratings two notches above the sovereign rating, noting that Turkcell keeps almost 80% of its cash in hard currencies and tries to keep enough cash reserves to serve its next 12 months of debt obligations. Its rating is BB+, which was lowered from BBB-.

S&P noted in its Turkcell ratings action that “in the hypothetical case of a depreciation of the lira, we think that the appreciation of the cash balance would offset the increase in unhedged short-term debt maturities and capital expenditures.”

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