Latin America's Biggest Corporate Debt Binge Sparks IMF Warning

  • Chile regulators may have to take measures, IMF said
  • Latam Airlines, Cencosud are among most-indebted companies

After going on Latin America’s biggest corporate debt spree, Chile is getting a warning from the International Monetary Fund.

The Washington-based lender said last week that regulators in the region’s highest-rated nation may have to step in after corporate debt surged by 20 percent of gross domestic product between 2007 and 2014. Only companies in Turkey and China borrowed more.

To Banco Bilbao Vizcaya Argentaria and Banco de Chile, the nation’s companies will have the wherewithal to pay their debt without government measures. Latam Airlines, Latin America’s biggest carrier, and billionaire Horst Paullman’s retailer Cencosud SA are among the most-indebted after taking advantage of low interest rates in the U.S. to finance expansion into faster-growing economies elsewhere in the region.

“We are talking about sectors that should have shoulders broad enough to carry that level of debt,” Jorge Selaive, the chief Chile economist at BBVA, said from Santiago.

Bank lending to the private sector in Chile now outweighs its GDP, putting the country in the same category as Greece, Portugal, Spain and the U.S.

“Although the financial sector is generally healthy, prudential measures might need to be considered if corporate debt continues to grow rapidly,” the IMF said in its regional economic outlook.

Chile is financially more developed than its peers, meaning that the corporate debt load isn’t as big an issue as it appears, Finance Minister Rodrigo Valdes said in an interview in Lima following an IMF meeting on Oct. 10.

“Chile is not a country that has particularly high debt,” he said. “Balance sheets remain relatively healthy.”

Still, all that borrowing by Chile’s companies hasn’t necessarily paid off. While the 14 listed companies with debt in emerging-market corporate indexes increased total debt by $19 billion in the past five years, 12-month free cash flow fell by an average of $38 million, data compiled by Bloomberg show.

By contrast, 17 Brazilian non-financial companies increased total debt by $20 billion in the same period, and free cash flow rose an average of $56 million, implying the money was better spent.

While seven Chilean non-financial companies have had their ratings cut in the past year, their counterparts in Brazil have fared far worse. Sixty-six firms in Latin America’s biggest economy suffered downgrades in that span.

And in the past two years, Chile’s dollar-denominated corporate bonds have returned 10 percent, second in the region only to Peru and indicating investors remain comfortable with the companies’ debt levels.

“Chile had a significant influx of capital but largely long-term capital in foreign-direct investment and those flows tend to be less volatile than portfolio investments, where changes can be more brusque,” said Rodrigo Aravena, the chief economist at Banco de Chile.

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