NEW YORK--(BUSINESS WIRE)--Brazil's continued economic underperformance led non-financial corporate (corporate) downgrades to outpace upgrades during the second quarter 2015, according to Fitch Ratings.
For 2Q15, corporate downgrades exceeded upgrades by 2.5 to 1.0. The downgrade-to-upgrade ratio attributed to changes in the operating/industry profile was 1.7 to 1.0 (1.4 for the six months ending June 2015). Brazilian issuers drove 28% of corporatewide and 83% of Latin American corporate downgrades.
The food, beverage, and tobacco (FBT) sector led corporate downgrades in the second quarter with 21% of downgrades, primarily driven by weakness in Latin America. More than one-half of FBT downgrades were Brazilian sugar and ethanol issuers, including multiple downgrades of Tonon Bioenergia S.A. and U.S.J.-Acucar e Alcool S.A. Fitch expects prices for sugar and ethanol to remain under pressure despite improvements in ethanol industry dynamics in 2015 compared to 2014.
In addition to the FBT rating actions, weak steel demand in the region and declines in ore prices affecting their own mines' sales contributed to downgrades of steel companies CSN and Usinas, although Gerdau's investment-grade ratings have been affirmed. A weak economic environment is expected to continue for the next two years, with Fitch projecting a contraction in Brazil's economy by 1.5% in 2015 before experiencing tepid growth of 0.7% in 2016. This will continue to lead to weak domestic demand across most corporate sectors.
Independent of economic weakness in Brazil, we expect mergers and acquisition (M&A) activity to continue and potentially pick up as the year progresses, driving event risk (around 15% of downgrades and upgrades). M&A activity, including Dufry AG's announcement to acquire World Duty Free Group, Wisconsin Energy Corp.'s planned acquisition of Integrys Energy Group, and H.J. Heinz merger with Kraft Foods contributed to downgrades and upgrades in the quarter. Fitch expects consolidation activity in healthcare, energy, and FTB to continue driving event risk-related rating actions.
For more information on this topic, please see our "Corporate Upgrade/Downgrade Dashboard 2Q15, which is available on our website at www.fitchratings.com
Additional information is available on 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.
Corporate Upgrade/Downgrade Dashboard 2Q15