Levi’s to Zara Egypt Suppliers at Risk From Ratings: Arab Credit

Mohamed Talaat Khalifa says if trucks carrying his company’s garment exports manage to avoid unrest at Egyptian ports and secure scarce diesel, he can’t escape banks charging more money to do business.

Six credit rating cuts at Moody’s Investors Service and five at Standard & Poor’s since the 2011 uprising have prompted global banks to demand more to finance imports of raw material, said Khalifa, chief investment officer at Al Arafa Investments & Consulting, which counts Zara and Banana Republic among clients. Magdy Tolba, head of exporter Cairo Cotton Center, says his suppliers now demand payments in advance.

Higher costs for everything, from import financing to fuel and insurance, are offsetting gains from a 6.6 percent drop in the Egyptian pound this year amid the worst slide in foreign reserves in at least 15 years. The country’s credit risk has surged the most in the world after Argentina in 2013, according to data compiled by Bloomberg, as violence, political unrest and a currency crisis shattered the initial optimism that followed the June election of President Mohamed Mursi.

“As an exporter I am in a better shape, but you can’t be happy in your apartment if the building is not fine,” Khalifa said by phone from Cairo. “If the country doesn’t start to show signs of recovery, all manufacturers will come under pressure and at risk of losing customers.”

Limited Supply

The cost of insuring Egypt’s dollar-denominated debt against default for five years has jumped 188 basis points, or 1.88 percentage points, this year to 698 yesterday, data compiled by Bloomberg show. The government’s local-currency borrowing costs for one year climbed 78 basis points in the last debt sale to almost 14.5 percent, the highest since September, according to central bank data on Bloomberg.

The most-populous Arab country, which imports fuel and wheat, is rated Caa1 at Moody’s, the fifth-lowest junk score. The nation is rated B- at S&P.

The central bank started to limit dollar funding to banks at the end of December to conserve dwindling reserves, which have plunged more than 60 percent since the uprising to $13.5 billion in February, enough to cover less than three months of imports.

Essential Imports

“My job is to preserve the reserves as much as possible,” central bank Governor Hisham Ramez told reporters at a conference in Dubai April 2. The regulator’s focus is to secure “essential” imports while the government attempts to obtain a loan agreement with the International Monetary Fund, he said. “Once things start moving, the market will go back to normal and supply and demand will meet.”

The dollar shortage has led to the emergence of an unregulated currency market, where the gap with the official exchange rate is as wide as 17 percent, according to a dealer in Cairo who asked not to be named because his trade is illegal. The crisis has forced some companies, such as carpets exporter Oriental Weavers, information technology company Raya Holding and private equity firm Citadel Capital to switch part of their debt into pounds, paying higher interest rates.

Oriental Weavers shares dropped 22 percent last year even as the benchmark EGX 30 Index soared 51 percent. Al Arafa’s dollar-denominated shares have slumped 21 percent in 2013, compared with a 10 percent slide in the index.

‘Boost Margins’

Ramez and Egyptian officials are counting on the IMF loan to lock in about $10 billion in support from lenders including the World Bank and the African Development Bank. The currency’s weakness will also “boost margins,” Oriental Weavers said in a statement on March 6. “Oriental Weavers is positioned as a net exporter with substantial U.S.-dollar-denominated revenues,” it said.

Trading in non-deliverable forwards shows investors expect the pound to weaken about 7 percent in three months, according to data compiled by Bloomberg.

In the meantime, the “credit rating of Egypt and Egyptian banks is affecting in a big way,” Khalifa of Al Arafa said. “This is reflected in the costs of the letters of credit and the letters of guarantees. The import activity is difficult.”

For textile companies to benefit from the currency weakness, the percentage of imported raw materials must not exceed 40 percent, compared with the current level of as much as 70 percent, said Tolba, head of Cairo Cotton Center.

‘Granting Discounts’

After the uprising, the company lost two of its biggest clients, Macy’s Inc. and Calvin Klein Inc. “Macy’s for me was an account of $12 million a year. I was a supplier to them for 19 years,” Tolba said in an interview at his office in Cairo. He shifted his focus to Europe and opened a factory with a Turkish partner supplying Levi’s jeans, he said.

More than two years after the uprising, Al Arafa has managed to keep all clients “at the expense of our margins, granting discounts and offering promotions, delivering by air,” Khalifa said.

“Our strategy is retaining our customers at any cost, because if you lose your margins, you still have a future, but if you lose your clients, you don’t.”

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