Fitch: Cautious Post-Election Optimism Running High in Argentine Corporates

CHICAGO--()--Fitch Ratings' analytical team, Daniel R. Kastholm, CFA, and Xavier Olave, recently visited Argentina, and their key impression from the trip is that increasing optimism prevailed within the broader business community and key market participants. In Fitch's view, 2016 will be seen as a turning point for Argentine corporates. Presidential elections are scheduled for Oct. 25, 2015 and a possible run-off taking place on Nov. 24, 2015. The three major candidates for the Presidency, Mauricio Macri, Sergio Massa, and to a lesser degree ruling party candidate Daniel Scioli, are generally perceived as more business friendly than the current administration. President Cristina Fernandez de Kircher, and Nestor Kircher before her, have ruled Argentina since 2003 based on a state-led development model that has created challenges to private business growth.

ELECTIONS COULD REPRESENT TURNING POINT FOR CORPORATES

While Fitch believes the country could be poised for a more favorable environment for business growth post-elections, the rating agency notes that significant macroeconomic, external and fiscal challenges will be awaiting the newly-elected government due to a deteriorating external environment for commodity exporters and growing inconsistency of the policy framework reflected in FX market distortions, high inflation and a rising fiscal deficits. Key policy challenges for the new administration include reaching a deal with the sovereign debt holdouts (Argentina's LTFC IDR is currently 'RD' or 'Restricted Default'), and the gradual easing of currency controls. In addition to improved policy consistency and predictability, these two items could pave the way for Argentina to be able to gain access to international financing. This first phase could then be followed by the gradual phasing out of large government subsidies.

From a corporates perspective, given the negative business environment of the last 12 years, corporates carry very low debt loads and there is need for large infrastructure investment in the country. Per the UN Economic Commission for Latin America and the Caribbean, Argentina spends only 2.9% of its GDP on infrastructure versus, for example, 4.1% in Brazil,. Under a conservative scenario, Fitch expects corporate debt refinancings could begin in 2016 with some new issuances. Starting in 2017, if currency controls are eased, the country could see significant new corporate issuances as badly needed investment in infrastructure picks up (Energy, Utilities and Construction sectors would be poised to especially benefit). Market participants indicate there is interest in gaining exposure to Argentine credit from international investors. For example, YPF S.A.'s recent reopening of its international bonds due December 2018 and April 2024 in the amount of USD500 million was oversubscribed and priced at a relatively attractive 8.875%-8.75%.

ENERGY - LOOK FOR CONTINUED PRICE STABILITY

Despite the ongoing global energy sector turmoil, Fitch believes current crude oil prices are sustainable in Argentina. Argentina's prices per barrel for light oil (Medanito) are roughly USD77/bbl and USD63/bbl for heavy oil (Escalante), which represents a price dislocation versus West Texas Intermediate (WTI) prices in the USD40-USD50/bbl range. Sector players are benefiting from prices that have been set in agreement with the government, and are meant to increase investment in domestic crude oil/natural gas production while at the same time maintaining high prices at the pump. These policies benefit both upstream and downstream market players, and are set to continue even after the elections.

Post-election, the energy sector will require large investment to explore and develop new reserves. Development of the Vaca Muerta unconventional hydrocarbons formation has been estimated to require an annual investment of USD20 billion/year for the next decade; however, currently investment is running at one-quarter of this amount (with YPF S.A. and Chevron responsible for the bulk of this). If currency controls are lifted, and after a holdouts settlement, Fitch believes Argentina is positioned to see a significant ramp-up in investment in the Energy sector.

ELECTRIC SECTOR - IN DIRE NEED OF REFORM

Given price controls enacted since 2001, the electric sector, especially at the distribution (Discos) and generation segments (Gencos), have suffered significantly. To give an example, in many cases individual electricity consumers in Buenos Aires are paying as little as USD1/month in electric bills. Discos have been forced to bear much of this burden, with minimal government support, and the system will need relief and further investment when the new administration takes office. In a best-case scenario, Fitch does not believe the price adjustments will be rapid and large, but gradual. New major investment in the sector, and possible new major corporate issuances, do not look likely in the sector until 2017 at the earliest, and only after price distortions are removed.

OTHER INFRASTRUCTURE SEGMENTS - WAIT AND SEE

The construction sector should see a slowdown during 2015 in advance of the elections. Payments from the federal and municipal governments have been recently slow, but market players are keen to maintain the status quo until the election cycle ends and the new administration takes power. In early March, the Kirchner administration declared it was asserting government control over privately operated railroad services. Rather than calling this a nationalization, this does not represent a significant event as the country's agreements with private railroad operators are typically short-term and give the government the option to reassert control of the railroads. This declaration was seen more as a publicity ploy by the government to fire-up its electoral base going into the electoral cycle (along with electing a president, congressional seats are also in play in the election).

While optimism may be running high in Argentina, Fitch cautions that unwinding macroeconomic imbalances and relative price distortions may take several years to unwind provided there is a commitment to improve the business environment for private sector-led growth.

The following are Fitch-rated corporate entities in Argentina:

Alto Palermo S.A. (Foreign currency (FC) IDR: 'CCC')

Arcor S.A.I.C. (FC IDR: 'B-'; Negative Outlook)

Arcos Dorados B.V. (FC IDR: 'BBB-'; Stable Outlook)

Capex S.A. (FC IDR: 'CCC')

Celulosa Argentina S.A. (FC IDR: 'CCC')

Compania Latinoamericana de Infraestructura y Servicios (FC IDR: CCC)

Cresud S.A.C.I.F. y A. (FC IDR: 'CCC'

Mastellone Hermanos y Sociedad Anonima (FC IDR: 'CCC')

Pan American Energy LLC (FC IDR: 'B-'; Negative Outlook)

YPF S.A. (FC IDR: 'CCC')

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

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Contacts

Fitch Ratings
Xavier Olave, +1-212-612-7895
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Daniel R. Kastholm, CFA, +1-312-368-2070
Managing Director
or
Erich Arispe, +1-212-908-9165
Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Xavier Olave, +1-212-612-7895
Associate Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Daniel R. Kastholm, CFA, +1-312-368-2070
Managing Director
or
Erich Arispe, +1-212-908-9165
Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com