Fitch: Latin American Leveraged Finance Stable Despite Challenging
CHICAGO -- June 26, 2014
Latin American leveraged finance activity is expected to remain robust despite
challenging market conditions for the weakest credits, an increase in
defaults, and other industry and country-specific difficulties, according to a
new Fitch Ratings report.
'Credit protection measures have stayed relatively unchanged for Latin America
high-yield corporates despite tepid economic growth of 4% in the region,' said
Joe Bormann, a Managing Director at Fitch. 'Conditions will not turn around
quickly. Fitch projects GDP growth of only 3.9% in Latin America in 2014 and
4% in 2015. Corporate are adjusting capex to account for slower growth. Many
'BB' credits and a select group of 'B' rated corporates have accessed the
market to lower refinancing risk.'
Capital markets have been challenging for Latin America 'B' corporates since
market conditions slowed for emerging market corporates in June 2013. Since
then, these credits have raised only USD8.1 billion in the cross border market
- excluding PDVSA USD5 billion notes - representing a 32% decrease from the
same period in 2013. Investors remain concerned about the small size of most
'B' issuances, which lowers liquidity in the secondary market.
Default activity in the first half of 2014 consists of Sifco, a Brazilian
supplier to the automobile industry, and Aralco, a sugar and ethanol producer
located in Brazil. This pace is on par with 2013 when Fitch rated six Latin
America high-yield corporates that defaulted. Four of these companies --
Axtel, Corporacion GEO, Urbi Desarrollos Urbanos, and Desarrolladora Homex --
were domiciled in Mexico, while Sidetur was a Venezuela steel producer and OGX
Petroleo e Gas Participacoes S.A. was a Brazilian oil and gas company.
Following Aralco's default, credit conditions remain difficult for Brazilian
sugar and ethanol producers. Operating cash flows are weak, as record sugar
levels have resulted in low global sugar prices. Capital expenses are high and
free cash flow is negative. Companies that tapped the market recently such as
Virgolino (GVO) and Tonon had to settle for very high coupon levels.
In Argentina and Venezuela, inflation is very high, capital markets access is
limited, and governments continue to control foreign exchange access. The
Argentine peso and Venezuelan Bolivar devalued sharply as the governments
sought to lower the differential between the formal and informal exchange
rates and curtail the outflow of U.S. dollars. Corporate defaults could occur
in 2014 if conditions deteriorate.
For more information, a special report titled 'Latin America Leveraged Finance
Stats Quarterly' is available on the Fitch Ratings web site at
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Latin America Leveraged Finance
Stats Quarterly (Fourth-Quarter 2013)
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Fitch Ratings, Inc.
Joe Bormann, CFA, +1-312-368-3349
Fitch Ratings, Inc.
70 W Madison Street Chicago, IL 60602
Paula Bunn, +55 11 4504-2600
Elizabeth Fogerty, +1-212-908-0526
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