Fitch: Challenges Overshadow Positive Long-term Outlook for Peruvian Corporates

CHICAGO--()--Downgrades are projected to outpace upgrades by a comfortable margin in 2015, according to Fitch Ratings. Having the vision to see the positive long-term outlook for Peruvian corporates is challenging due to weak near-term economic conditions that have sapped the spending power of middle and lower income consumers during the past year. Concerns remain about how quickly corporates have adjusted to more challenging conditions both in Peru and abroad. At the end of 2014, 18% of Peruvian issuers will have a Negative Rating Outlook.

Government actions should slowly lead to improving corporate trends toward the end of 2015. Increased monetary and fiscal policy should stimulate demand for food and beverage companies such as Alicorp ('BBB'), Aje ('BB+') and Lindley ('BBB-'). These corporates also enjoy relatively easy comps versus 2014 due to sluggish economic growth in the first half of this year. Weather conditions were also poor for beverage companies earlier in 2014.

Corporates in the construction and building products sectors such as Pacasmayo ('BBB-') should benefit from the execution of infrastructure projects. Peru has put in motion a large public-private partnership infrastructure program. Proinversion, the government agency in charge of the process, has auctioned off $19 billion in concessions during 2013 and 2014.

Environmental issues and social conflicts continue to be issues that Peruvian miners need to navigate in the near term. Most have low leverage and adequate liquidity levels. Their competitive cost positions allow them to generate positive operating cash flows despite softer prices from well to oversupplied markets.

Peruvian miners are reacting to challenging external conditions to avert downgrades or Negative Outlooks. Miners such as Milpo ('BBB'), Volcan ('BBB-'), Buenaventura ('BBB'), and Hochschild ('BB+') have either eliminated or scaled backed dividends. They have also reduced exploration activities and streamlined capex to high-grade brownfield expansions and/or advanced greenfield projects that can increase output and lower costs. Tin producer Minsur ('BBB-') continues to enjoy the best market dynamics. Southern Copper ('BBB+') will benefit during 2015 and 2016 from the ramping up of copper projects such as Tia Maria and Toquepala in Peru, and Buenavista in Mexico.

Low-rated, volatile and seasonal sectors such as fishing and agriculture are expected to continue to struggle in 2015. The El Nino phenomenon has led to a reduction in the biomass, which could continue into the next fishing season. International prices for sugar remain depressed and show no signs of a meaningful recover next year. Competition will increase in the telecom sector, as two new competitors enter this market. The impact upon the rating of Telefonica del Peru, the dominant play, is limited.

Positively, with inflation slated to be close to 3%, improved demand and cost controls should translate into growing operating cash flow. This continues a trend that has led to an increase in aggregate cash flow from operations for the 22 rated Peruvian corporates to $4.8 billion in 2013 from $3.5 billion in 2009. Leverage is not projected to decline in 2015 despite operating cash flow growth, as high capex will continue to lead to negative free cash flow. Peruvian corporates' median net leverage ratio was 2.2x as of June 30, 2014.

Refinancing risk remains manageable in Peru. Corporates have been active in the international capital markets; approximately $6 billion has been raised by 16 corporates since the beginning of 2013. No rated corporate has a cross border bond falling due in 2015; Telefonica del Peru ('BBB+') is the only company with a bond maturing in 2016.

The longer-term outlook for Peruvian credits is more positive. Cash flows are growing in line with debt for nearly all of the rated corporates. As a result, the median net leverage ratio of Peruvian issuers has remained largely unchanged for the past five years at slightly above 2.0x. Future cash flow is slated to grow at a pace that should allow free cash flow to turn positive for the majority of companies. The investment level of Peruvian corporates is unparalleled in the region. Since 2011, the median Peruvian capex to depreciation ratio has been more than 2.5x, which is double the next highest reinvestment ratio in the region.

Fitch revised the Rating Outlook to Negative for four of its 22 rated corporates during 2014. The triggers for these rating actions were very issuer specific. Inkia Energy ('BB') repaid subordinated loans to its shareholder to the detriment of its senior unsecured creditors. Coazucar ('BB') was hurt by changing dynamics for sugar pricing in Peru, while Andino Investment Holding ('BB-') saw its business position weaken in the Callao port and Grupo Embotellador Atic ('BB+') had weak cash flow generation in key markets such as Peru, Colombia and Brazil. No Peruvian corporate issuer was upgraded during the past year. Maestro ('B'), a leader in the home improvement retail segment, was placed on Positive Rating Watch during September following its acquisition by the Chilean retailer, Falabella ('BBB+'). Fitch downgraded Maestro earlier in the year due to its poor operational performance.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Joe Bormann, CFA
Managing Director
Corporates, Latin America
+1 312-368-3349
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Josseline Jenssen
Director
+51-1-372-0681
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Joe Bormann, CFA
Managing Director
Corporates, Latin America
+1 312-368-3349
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Josseline Jenssen
Director
+51-1-372-0681
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com