Fitch: Non-Core Asset Sales Crucial for Brazilian Corporates into 2016

CHICAGO & NEW YORK--()--Brazilian corporates have resorted to more than USD10 billion in asset sales in 2015 to bolster capital structures and liquidity positions as the companies brace for an even tougher 2016, says Fitch Ratings. We expect continued pressure on credit metrics due to a combination of the weak Brazilian macro environment and elevated interest rates.

Companies that have made significant asset sales this year include Oi S.A. at USD6 billion, Vale S.A. at USD3 billion and Camargo Correa at USD700 million, among others. Additional non-core asset sales totaling upwards of USD10 billion are also possible during 2016 if companies such as CSN (through its units MRS and Tecar Port), Vale and others execute their divestment plans. While Fitch believes the non-core assets identified for sale have meaningful value, monetizing these assets for maximum value will be challenging in the current environment.

Corporations in Brazil entered the 2015 recession with higher leverage following a period of substantial investments, some of which are ongoing. Fitch expects a 3.6% Brazil GDP contraction during 2015 and further negative 2.5% change in 2016, with the challenging operating environment pressuring many capital structures at current rating levels. Companies have responded with a number of reactive measures, including non-core asset sales to improve leverage ratios and streamlined operations to better face the difficult trading conditions expected in 2016; capex remains relatively high.

Fitch anticipates that some asset sale negotiations will be protracted due to the recessionary environment, and some announced deals may not be successful. This could lead to new or further rating downgrades for a number of them. In some cases, such as CSN, announced asset sales could dilute companies' vertical integration and business diversification, while potentially leading to a more streamlined operating structure in others (Vale).

Rising Brazilian interest rates have exacerbated company woes, hindering the viability of companies such as CSN and Usiminas. Both have significant amounts of real-denominated debt linked to the SELIC rate, which has increased to 14.25% from 7.0% since 2013. Using total debt reported at year-end 2014, Fitch estimates that CSN's interest expense has increased by BRL640 million and Usiminas's by BRL150 million as of September 2015 from 2013.

Fitch estimates that 32% of its Brazilian portfolio now spends more than 50% of EBITDA on debt service compared with 24% at year-end 2013. The median FCF for Brazilian corporates is USD20 million, compared with negative USD47 million for companies spending more than 50% of EBITDA on debt service.

International capital markets remain closed for most companies due to concerns related to Brazil's deteriorated political and economic environment and uncertainty due to several corruption investigations. Only six issuers have been able to tap the markets in 2015 compared with 36 in 2014.

For more information on this topic, please see our special report titled "Brazilian Corporates: Higher Interest Rates Add to Woes," available on our website at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Cristina Madero, +1-312-368-2080
Associate Director
Corporate Finance
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL
or
Jay Djemal, +1-312-368-3134
Director
Corporate Finance
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Cristina Madero, +1-312-368-2080
Associate Director
Corporate Finance
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL
or
Jay Djemal, +1-312-368-3134
Director
Corporate Finance
or
Kellie Geressy-Nilsen, +1-212-908-9123
Senior Director
Fitch Wire
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com