Chile Billionaire Burned in Argentina by Peso DevaluationSebastian Boyd
Argentina’s devaluation is turning bonds from Cencosud SA, the retailer controlled by billionaire Horst Paulmann, into Chile’s worst investment-grade debt.
Cencosud’s $1.2 billion of notes due 2023 have lost 2.1 percent since Argentina, which accounts for a quarter of the company’s sales, scaled back support for the peso and triggered the biggest currency plunge in 12 years. The selloff is the biggest among Chile’s dollar bonds rated at least Baa3 by Moody’s Investors Service, data compiled by Bloomberg show.
The turmoil in Argentina is the latest setback for Cencosud, whose efforts to stave off a downgrade to junk were dealt a blow in December when an agreement to sell assets to Sao Paulo-based Itau Unibanco Holdings SA collapsed. Cencosud’s leverage ratios are likely to climb as the value of sales at the company’s Jumbo and Vea supermarket chains in Argentina declines, according to MCC Securities Inc.
“There’ll be an impact on Ebitda from the devaluation,”said Diego Torres, head of emerging-markets corporate debt research at MCC in Santiago. “That will increase leverage and make it harder to maintain an investment grade. In Argentina, there’s also the concern that the economic situation could get get worse and sales deteriorate.”
Andrea Brajovic, the head of corporate communications at Cencosud, declined to comment on the effect of Argentina’s devaluation on its bonds.
Argentina’s central bank, which controls the currency by buying and selling dollars in the spot market daily, allowed the peso to drop 12 percent on Jan. 23 in a bid to preserve foreign reserves that fell to a seven-year low last month. Reserves have dwindled as Argentines pulled money out of the country to avoid inflation and the central bank spent dollars to prop up the peso. The currency’s 17 percent decline this year threatens to erode the value of Cencosud’s revenue from the country.
Argentina’s peso fell 0.1 percent today to 7.8197 per dollar as of 12:08 p.m. in New York.
Cencosud gets 26 percent of its revenue from Argentina, its biggest overseas market. The company has operated in Argentina since the 1980s.
“They have major exposure to Argentina,” said Jose Vertiz, an analyst at Fitch Ratings in New York. “They have a good track record of operating in the country for many years, but it could be a difficult scenario.”
Cencosud said Dec. 23 that its deal with Itau had fallen through, six months after the Santiago-based retailer agreed to sell 51 percent of its Chilean and Argentina credit-card units to the biggest bank in Latin America. Itau was to pay $307 million and a further $1.3 billion to refinance the loans. Cencosud planned to use the proceeds to pay down debt.
Moody’s and Fitch placed their ratings for Cencosud on review for a downgrade after the sale was scuttled. Cencosud is rated Baa3 by Moody’s, the lowest investment grade, and an equivalent BBB- by Fitch.
Cencosud’s total adjusted debt relative to earnings before items was 4.6 times for the 12 months through Sept. 30, Moody’s said. Similarly rated companies have an average ratio of 3.5 times, according to data from Moody’s. The company has yet to publish fourth-quarter results.
“The cancellation of the transaction with Itau was negative as it was a good opportunity to reduce leverage,” said Fitch’s Vertiz. “We understand that the company has been taking steps, but even after that the leverage is still high.”
Cencosud said on Jan. 9 that it will have reduced leverage down to below 3 times by the end of this year. It planned to trim capital expenditures to 58 billion pesos ($104 million) in 2013, almost half the 114 billion pesos it spent in 2012.
“Our models suggest they can reduce leverage without Itau, from cash flow and by reducing capex,” said Cristina Acle, an analyst at Banchile Inversiones in Santiago. “It can be done. The company faces major risks from the Argentine devaluation and deceleration in Brazil, but Chile, Peru and Colombia should be OK. This company at some stage is going to be in very good shape, just maybe not this year.”
The extra yield, or spread, investors demand to buy Cencosud’s bonds due in 2023 instead of Treasuries swelled 0.79 percentage point since Argentina devalued the peso to 3.79 percentage points on Feb. 3, the most since the notes were sold in November 2012.
“The big problem is that the levels of debt didn’t come down,” said Felipe Lubiano, a credit analyst at Credicorp Capital in Santiago. “The asset sale was supposed to reduce debt. We’ll see in the results if they have been able to refinance any short-term debt. Argentina is obviously a big part of the company’s income.”