CG/LA Infrastructure's InfraBlog
By Boris Korby & Julia Leite – Aug 13, 2013 12:23 PM ET
More Brazilian issuers are under the threat of rating downgrades than in any other Latin American nation as a sluggish economy erodes the creditworthiness of companies from Petroleo Brasileiro SA to Gol Linhas Aereas Inteligentes SA.
Twenty-six borrowers with about $104 billion in dollar-denominated debt have negative outlooks on their credit grades from Moody’s Investors Service, Standard & Poor’s or Fitch Ratings. That’s three times the number of Mexican companies that may have their ratings cut and almost double the number of Brazilian companies in line for upgrades, according to data compiled by Bloomberg and Credit Suisse Group AG.
Moody’s says corporate downgrades may outpace upgrades in the coming year, after the weakest two-year stretch of economic growth since 1999 and persistent inflation that sparked the biggest protests in two decades prompted S&P to put Brazil on review for a rating cut. Corporate leverage rose to 3.5 times in 2012, the highest in at least five years, according to Fitch.
“Brazil is a deteriorating story,” Allan Grauer, head of Latin America debt trading at Mizuho Securities USA Inc., said in an interview in New York. “The amount of leverage in the corporate sector in Brazil is increasing dramatically at a very bad point.”
Petrobras has met with rating companies to discuss leverage levels and “agencies were left quite comfortable with the rating,” Chief Financial Officer Almir Barbassa told reporters yesterday. “The increase in leverage in the second half won’t affect Petrobras’s rating perspective,” he said. The company’s press office declined to comment further.
A press official for Gol, Brazil’s largest airline, declined to comment on the company’s credit grade.
Dollar-denominated bonds from Brazilian companies have lost 7.4 percent this year, more than double the average decline of 3.3 percent in emerging markets. Brazilian corporate borrowing costs have climbed an average 1.37 percentage points in the span to 6.05 percent, according to Bloomberg’s U.S. Dollar Emerging Market Corporate Bond Index.
S&P says a negative outlook signals there’s at least a one in three chance a rating will be cut in the next 24 months, while for Fitch it means a company’s rating is likely to be lowered in a one- to two-year period. Negative outlooks at Moody’s indicate a higher likelihood of downgrade over the medium term.
Median adjusted net debt to operating earnings before interest, taxes, depreciation, amortization and rent for Brazilian issuers rose to 3.5 times last year from 2.5 times in 2010, Fitch said in a June 25 report.
Petrobras’s ratio of adjusted net debt to operating Ebitdar climbed to 3.5 times at the end of last year from two times in 2010, according to Fitch. The outlook on its BBB rating, the second-lowest investment grade, was lowered to negative in June by S&P. Moody’s cut the outlook on the company’s A3 ranking in December, citing rising debt levels.
State-controlled Petrobras plans to spend $236.5 billion in the five years through 2016 to develop fields off the coast of Brazil containing 50 billion barrels of crude.
Gol was cut to B-, six steps below investment grade, with a negative outlook in April by Fitch as the currency’s plunge over the past year eroded earnings. The real sank 12.2 percent in the past three months, the most in emerging markets.
The company’s leverage surged to 32.3 times last year from 3.7 times in 2010, compared with an average of 4.3 times for Latin American companies that share its credit grade.
“Sectors with persistent weak fundamentals, such as steel and oil services, are particularly exposed to deterioration of credit metrics,” Barbara Mattos, an analyst at Moody’s, wrote in a report to clients dated July 23. “We expect any upward rating movement to be fairly limited over the next 12 months, given the difficulties companies will have improving their profitability and reducing leverage amid the current macroeconomic environment.”
On June 6, S&P lowered the outlook on the government’s BBB credit rating to negative, citing slower growth in Latin America’s biggest economy.
Gross domestic product will expand just 2.21 percent in 2013, according to a central bank survey, down from forecasts of 4 percent a year ago. The economy grew 0.87 percent last year. Moody’s, S&P and Fitch have already reduced the rankings of Brazilian companies 52 times this year while handing out 38 upgrades.
About 20 percent of non-financial corporate issuers in Brazil rated by Moody’s have negative outlooks or are on review for a rating downgrade, compared with just 6 percent in line for upgrades.
The real’s slump is benefiting companies that generate hard-currency revenue by reducing costs locally and making goods more competitive abroad, according to Shamaila Khan, an emerging-market money manager at AllianceBernstein LP, which oversees about $444 billion of assets.
“The question is, is there real credit deterioration at the corporate level?” Kahn said in a telephone interview from New York. “Margins are holding up pretty well, and that’s really what matters from a fixed-income perspective.”
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries slipped nine basis points, or 0.09 percentage point, to 227 basis points at 11:58 a.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
Brazil’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, fell two basis points to 180 basis points.
Yields on interest-rate futures contracts due in January climbed five basis points to 8.95 percent.
Brazil’s total debt as a percentage of gross domestic product has swelled to 68.5 percent, the highest among so-called BRIC nations including Russia, India and China, according to the International Monetary Fund.
“The whole leverage concept extends from the sovereign,” Mizuho’s Grauer said. “You’re seeing it on the growth side — the denominator is shrinking.”