Default Knocking on LatAm’s Door: Corporate Credit Ratings

In a period of low global interest rates, where lending has been cheap for long, we take a glance to how credit ratings have evolved for LatAm issuers.

  • We observed first defaults of ICA and Pacific in 2015 and 2016, respectively.
  • Interesting set of companies one notch away from junk bonds and a negative outlook such as  Vale, Braskem and Ultrapar.
  • GOL being among the worst credit rated non-in-default companies in our sample at B- coupled with a negative outlook.
  • Oil companies Petrobras and YPF in junk territory, with Ecopetrol surprisingly holding on to investment grade.
  •  Investment grade long gone for Brazilian Banks Itaú and Santander.

 

Funds rate.pngSource: Trading Economics

Our LatAm Sample: We focus on LatAm corporates with ADR, available long-term foreign currency credit rating and higher debt-to-equity ratio. We use Standard & Poors rating scale and, when not available, we use equivalent ratings from Moodys or Fitch Ratings.

Investment Grade: Not much activity, boring is good. Within our sample of relatively strong issuers with investment grade,  few rating changes have ocurred, the latest happening in 2015 with the downgrade to A- of Ambev and an upgrade of BRF to BBB. Both América Móvil and Ambev hold the 2nd greatest credit rating of our total sample of A-.

CD1

 

Barely Investment Grade: A notch away from junk bond.  Among our lower quality investment grade sample, all companies have a BBB- rating and most importantly all of them, except for Fibria (stable outlook),  have  a negative outlook.  Vale stands out with a downtrend of credit rating revisions in the recent years. In the case of Gerdau, although rated BBB- by S&P,  the company has lost its investment grade as it is rated Ba3 by Moodys.

CD2

Junk Bonds. Where the fun comes from. In this subgroup we observed the first default within our sample, coming from Empresas ICA in 2015.  We also find GOL Linheas Aereas Inteligentes, a non-in-default firm among the worst rated in our sample, with a B- rating and negative outlook. Additionally, we see shaky corporates such as  Oi S.A., Companhia Siderurgica Nacional (SID), Latam Airlines Group, Avianca and Companhia Energetica de  Minas Gerais with BB to B+ credit ratings.  It is worth mentioning that despite low credit ratings of Cemex with a B+ rating and Transportadora de Gas del Sur (TGS) with a B- rating outlook, both show a positive uptrend with positive an stable outlook respectively.

 

CD3

 

Oil Companies. One in default, three to go. Here we see the second default within our sample: Pacific Exploration and Production (Rubiales) in 2016. We observed a downtrend for Petrobras and YPF both in junk territory with a BB and B- credit ratings, respectively. Finally, we surprisingly found Ecopetrol as the only investment grade among our oil companies sample with a BBB credit rating, although its outlook is negative.

CD4

Banks. Brazil in  junk  territory. We observe a clear difference in credit rating between Banco de Chile, which holds the greatest credit rating of our total sample (A+), and its Colombian and Brazilian peers. Although with a stable outlook, Bancolombia is a notch away from junk territory with its BBB- credit rating. Both Santander and Itaú lost their investment grade in 2015 and hold a BB+ credit rating with a negative outlook.

CD5

 


 

LATAM PM’s take: We believe further corporate credit defaults loom in Latin America. We expect an additional deterioration of credit ratings in LatAm corporates going forward, with many companies with negative outlook currently under review by credit agencies. We see special weakness in the materials and oil sector due to weak global demand. We anticipate that corporate default will impact banks’ credit portfolio and will weight into loan criteria that will limit loan portfolio expansion, reducing financial liquidity.

Source: LATAM PM with S&P, Moodys and Fitch Ratings data.