Chile’s Cap Bonds Fall Sixth Day as Citigroup Cites Debt Risks

Cap SA bonds fell a sixth day as Citigroup Inc. said the Chilean iron-ore producer may need to renegotiate covenants on its debt, which Standard & Poor’s cut to junk on Friday.

The company’s $200 million of bonds due in 2036 dropped 0.13 cent on the dollar to 102.73 at 11:47 a.m. in New York, bringing its decline since Jan. 23 to 5 cents. Yields jumped 0.44 percentage point in the period to 7.13 percent.

S&P cut Cap’s rating one step to BB+, the first notch below investment grade, as a plunge in iron ore prices dims prospects for the company. The commodity is trading near a five-year low after major producers have raised output, spurring a glut just as China slowed. Cap may have to get a waiver on bylaws that govern its bonds as a drop in cash-flow generation poses a threat to rules that limit its debt ratios, according to Citigroup.

“The main problem for Cap will be to meet its debt covenants,” Thiago Ojea, an analyst at Citigroup in Sao Paulo, wrote in a Feb. 1 note to clients. “In our view, a renegotiation of the debt terms and/or a waiver for breach of certain covenants will be necessary in 2015.”

Citigroup forecasts Cap’s net debt to earnings before interest, taxes, depreciation, and amortization will peak at 5.8 times in the first quarter of 2016. That would exceed the limit of 4 times agreed with creditors, the note said.

Cap’s corporate communications office didn’t immediately return an e-mail and phone message seeking comment.

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