Fitch: No Relief for Latin America High Yield Credits in 2016

CHICAGO--()--The 50 largest Latin America leveraged finance issuers will continue to struggle during 2016, according to a new Fitch Ratings report.

'Downgrades are predicted to significantly outpace upgrades for the largest high yield Latin America corporates during 2016,' says Joe Bormann, a Managing Director at Fitch Ratings. 'Currently, 34% of the largest high yield issuers in the region have a Negative Outlook or are on Watch Negative.'

Defaults were at their highest level in more than a decade during 2015. Ceagro, Cimentos Tupi, Galvao Participacoes, GVO, IMPSA, OAS and Schahin defaulted on about USD4.5 billion of debt. Downgrades of Latin America corporates have outpaced upgrades by a ratio of 3.5x.

Latin America corporates have issued only USD34 billion of debt in the international capital markets during the first 10 months of 2015. This compares with USD71 billion during the same period in 2014. High yield issuances have dropped to USD7 billion from USD24 billion during this comparable period.

Market activity has been very selective. Only 25 issues have tapped the market in 2015, compared with more than 70 during 2014. Investors continue to shun many corporates in the 'B' category due to the small size of their issuances, which limits secondary market activity. Slow economic activity in the region has also made many corporate bond issuances unattractive.

While there was only USD6 billion of Latin America debt amortization during 2015, this figure is forecast to rise to USD14 billion in 2016 and USD28 billion in 2017. High yield issuers' debt accounts for USD5 billion of the 2016 figure and USD14 billion of 2017 obligations. During 2017, nine issuers in the speculative 'B' and lower categories face USD11 billion of debt maturities. About USD9 billion of the latter figure is PDVSA debt, which is subject to high repayment risk.

In Argentina, policy adjustments are expected to address the economy's deepening distortions and increasing imbalances. Nevertheless, the pace of change could prove to be slow, which will result in the continuation of slow economic growth and high inflation.

Brazilian high yield issuers have largely been out of the market due to the Lava Jato investigation. The high inflation and elevated interest rates will stifle economic activity. Unemployment could climb to more than 10% in 2016 from around 5% early in 2015. The economy is likely to contract in 2016 after falling by a projected level of 3% in 2015.

Upgrades are expected to be rare during the next 12 months in Peru. Sluggish economic conditions have stifled cash flow growth and continue to pressure corporate credit quality.

Among the challenges in the region, corporate credit conditions remain neutral to slightly positive in Colombia and Mexico. In Chile, corporates have struggled due to slow domestic growth rates and acquisitions throughout the region that have not panned out.

Published annually, the 'Fitch 50 Latin America' is a comprehensive report compiling organizational structure diagrams and credit agreement/indenture summaries. The structural analyses focus on detailed organizational charts that delineate structural relationships among various affiliate entities and debt issuances. Simplified, though still in-depth, the issuance summaries recap essential terms in bank agreements and bond structures such as seniority, security, guarantee, negative covenants, financial covenants, etc.

The full report is available on the Fitch Ratings web site at www.fitchratings.com or by clicking on the link.

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

Fitch 50 Latin America (Capital Structure Diagrams and Debt Document Summaries for 50 of the Largest Latin America Leveraged Credits)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874007

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Contacts

Fitch Ratings
Joe Bormann, CFA
Managing Director
+1-312-368-3349
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Joe Bormann, CFA
Managing Director
+1-312-368-3349
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com