Moody’s has cut Industrias Unidas’ (IUSA) $200m in guaranteed senior unsecured notes due 2016 to Caa2 from Caa1 and also downgraded the corporate family rating to Caa1 from B3. It is keeping the ratings on review for possible downgrade amid weak liquidity, high refinancing risk and poor sales and profit performance. As of September 30, IUSA’s consolidated cash position covered only 10% of consolidated short term debt, amounting to about $270m, says Moody’s. Over 75% of short term debt was related to asset backed bank credit facilities available to IUSA’s US subsidiaries which expire in March and May and have not yet been renegotiated. “Moody’s believes that the elimination or reduction in size of these bank lending facilities could cause significant deterioration in IUSA’s liquidity profile, which requires external sources of funding,” says the agency. The Caa2 rating reflects Moody’s concern that the issuer and the guarantors of the notes may not have sufficient cash and operating cashflow to fund all coupon payments due over the next quarters. IUSA is one of Mexico’s largest diversified industrial groups, manufacturing copper-based and electrical products for the housing and electrical power sectors mainly in Mexico and the US.
Yearly Archives: 2008
Moody’s Upgrades Argentine Insurer
Moody’s has upgraded the financial strength rating of Sancor Seguros and subsidiary Prevencion ART to A1.ar from A2.ar and affirmed their global local currency ratings at B2 with stable outlook. The rating agency said that the upgrade of Sancor Seguros’ and Prevencion’s national scale rating was primarily driven by improved financial performance, sound market positions, and relatively stable adjusted combined ratios for both companies. Prevencion’s standalone credit profile also benefits from the support and integration with its parent company. However, says Moody’s, the companies have relatively weak investment portfolios and capital positions. Argentina’s elevated sovereign risk and poor operating environment are also major constraints to both companies’ credit profiles, Moody’s says.
Cemex Pays up to Extend Loans
Mexico’s Cemex is paying a significant premium to term out as much as $4.7bn in loans by 1-2 years, following downgrade to junk amid looming nearby debt maturities. The refinance involves bilaterals and part of a 2006 Rinker acquisition facility. Bankers on the deal say the company hopes to close renegotiations by the end of the year, but will likely end up finalizing the process early in 2009, since credit committees are all but closed for calendar 2008. On the $6bn acquisition facility, Cemex is asking lenders to extend maturities for a portion of the B tranche with a value of $1.5bn-$2.0bn until December 2010, from a scheduled end-2009 due date. To get banks to term out 12 months, Cemex will boost total payback including margin and fees to Libor plus 200bp through 2009, and Libor plus 225bp-250bp through 2010, depending on ticket size and currency, from 40bp originally, according to a banker close to the talks. Cemex is also asking bilateral lenders at the holdco level to extend on up to $900m, while bilateral lenders to Cemex Espana are requested to refinance $1.8bn. Two new joint bilateral facilities (JBFs) – one for each borrowing entity – are being created so as to group bilats in a basket that includes different maturities and lenders. Both JBFs mature in February 2011 and carry rates equivalent to Libor plus 200bp-300bp. Most of the loans Cemex raised in 2004-2007 priced well beneath Libor+75bp. In general, the process is gaining positive momentum, though some banks are choosing not to extend and will be demanding timely payback, say people involved the deal. BBVA, Citi, HSBC, RBS and Santander are leading the refinancing.
S&P Predicts 0%-30% Ecuador Recovery
S&P has cut Ecuador to SD from CCC minus and predicts scant payback for investors still holding sovereign bonds. “The recovery rating on the global 2012s and global 2030s is 6, indicating the expectation for negligible (0%-10%) recovery in the event of a payment default,” says the agency. “The recovery rating on the global 2015s is 5, indicating the expectation for modest (10%-30%) recovery in the event of a payment default,” it adds. The downgrade follows the government’s decision not to pay $30.6m due on $510m in 2012s, which were chopped to D from C. The $650m in global 2015s fell to C from CC, while $2.7bn in global 2030s were unchanged at C. “We do not expect the government to make the next coupon payment of $135m on February 15, 2009, at which time we would revise the rating to D,” says S&P. The default by Ecuador is its second in less than 10 years and the second by a rated sovereign in 2008. S&P revised Seychelles to SD in August. S&P’s assessment is much more gloomy for investors than Fitch, which sees up to 50% payback from the 2015. It chopped the sovereign to RD from CCC, assigning 11%-30% recovery prospects to the 2012s and 2030s, 31%-50% on the 2015 and 51%-70% on pars and discounts. Fitch sees a bigger loss on the 2012s and 2030s since the government deems them “illegal” and “illegitimate.”
Other Sovereigns Unlikely to Follow Ecuador
Despite concerns that an Ecuador default sets a dangerous precedent for other sovereigns whose willingness rather that ability to pay is in question, analysts do not expect others to follow. “Investors will remain largely unconcerned about default risk in Brazil, Chile, Colombia, Mexico and Peru. Investors will likely continue to worry about Argentina and Venezuela, given their weaker institutional frameworks. However, we expect that both of these countries will continue to service their debt in 2009,” says Credit Suisse. It adds that Ecuador has been a LatAm trouble spot for a long time and is relatively small, with 1.3% of regional output and 2.5% of total population. “Collateral economic damage from the default should be small, as well as the demonstration effect, as most other countries in the region probably will not even consider the default route,” Credit Suisse adds. “No other Latin American country will follow the Ecuadorian default,” Barclays chimes in. Credit Suisse notes that defaulting LatAm governments have run into political difficulty and that not paying the debt could have negative implications for Correa’s reelection in April. Credit Suisse says some investors will likely try to take action against Ecuador in US courts, possibly also seeking to attach Ecuadorean assets abroad. Only 2015s have collective action clauses, which should complicate the restructuring process. Others are not so sure the impact is contained. “This default is significant because the country actually had the funds to make the payment but decided against it,” says Merrill Lynch. “The risk here is that other countries, such as Venezuela, may follow,” it adds.
Fitch Chops Venezuela to Single B
Fitch has downgraded Venezuela to B+ (stable) from BB- amid increased risk of financial and economic crisis due to a tenuous macro policy framework and concerns that a timely adjustment may not be forthcoming, particularly within the context of upcoming electoral events. “Electoral processes in 2009 and 2010 will deter the government from making difficult policy choices to address current macroeconomic imbalances,” says Fitch. It also highlights dependence on oil revenues, high inflation and an overvalued fixed exchange rate. Fitch expects Venezuela to revert to a net public external debtor in 2009, while most BB credits will remain net creditors. “In addition, the country’s international liquidity could fall below the BB median by 2010,” adds Fitch. However, it notes a comparatively low government debt burden and manageable government debt maturity profile, as well as an accumulated $18bn in liquid external financial assets in addition to international reserves of $38bn. “Government debt maturities, at 2% of GDP in 2008, are forecast to decline to less than 1% of GDP over our forecast horizon,” says Fitch.
Chile to Ease Rates in 2009
Chile is expected to begin easing rates in 2009 as GDP growth slows and inflation drops in tandem with the price of commodities. For the past three months it has kept rates unchanged at 8.25%. While Merrill Lynch expects interest rate cuts to begin in January, Morgan Stanley thinks it would be premature to start so early, but agrees that easing will start in 2009. Merrill forecasts GDP will grow 3.9% in 2008 and 2.3% in 2009. It estimates inflation will drop to 4.2% by the end of 2009 from an estimated 8.0% at end 2008. Morgan Stanley forecasts Chile’s GDP will grow by 4.0% in 2008 and 1.5% in 2009. It estimates inflation will ease to 4.5% by the end of 2009 from an estimated 8.9% in 2008.
Argentina Plans Infrastructure Boost
Argentina’s secretary of public works, Jose Francisco Lopez, says that the government will invest up to ARP57bn in 2009 in infrastructure as a countercyclical measure to jumpstart the economy. The total investment will be ARP111bn according to Lopez, who does not specify the timeframe. Financing has been secured for about ARP71bn of the total, he adds. Of the ARP57bn to be invested in 2009, almost ARP33bn will come from the government’s budget for 2009, ARP2.5bn will come from new loans from multilaterals, ARP6bn from private financing, ARP12bn from BNDES, Banco Nacion and social security administrator Anses, and ARP3.5bn will come from savings generated by the elimination of certain subsidies, Lopez says. The announcement was made during a televised conference yesterday. Barclays Capital believes that the use of additional Banco Nacion and Anses sources could potentially hurt the sovereign credit because these are being used to cover existing financing needs. “However, we think that, by and large, most of the spending to be announced is already included in current 2009 plans and thus entails no additional fiscal strains,” the shop adds.
LatAm Equities Seen Recovering in 2009
LatAm equities are poised for a 39% rally next year, according to Merrill Lynch. The shop predicts the region’s 7.0x 12-month forward P/E ratio, an 8.6% discount to other EM equities, leave the region’s indices well positioned for a pickup in coming months. LatAm corporates’ relatively low leverage will also contribute to a faster recovery for the region, says the shop, which recommends an overweight position in Brazil, a neutral position in Mexico and an underweight in Chile equities. Strong macreconomic policies and swift, effective responses to the credit crisis by central banks also bolster the region’s equity markets heading into 2009, says the shop. “Brazil is trading at an attractive 19% discount to GEM’s – back to the levels presented in February 2007 when the country was not investment grade – and presents the strongest case for valuation multiples re-rating to GEMs and developed markets, in our view,” says Merrill. Dedicated LatAm equity investors have lost almost 60% this year, according to Lipper, so the 39% rebound is only a two-thirds retracement. And the region’s markets will likely stay highly correlated to US markets, which look set for further downside as the recession gains pace, so bullishness may be premature.
Barcap Looks to Build Brazil M&A
Barclays is heard to be on the lookout for a Brazil-based M&A banker, according to Sao Paulo-based executives. Barclays’ primary focus in the region has been debt markets. But with Lehman Brothers, the UK bank has acquired investment banking capabilities in the region that include M&A. Barclays’ Brazil office today has representatives for Barclays Capital (Barcap), which focuses on debt trading, derivatives, and some bond issuance, and Barclays Global Investors, the asset management arm. Barclays says it employs some 90 people in Sao Paulo. Most investment banks with regional M&A practices tend to have at least one senior banker with a Brazil focus, given the country’s size and its cultural uniqueness. This would be one way for Barclays to enter more value added business lines within investment banking and allow it to parlay M&A expertise into financing mandates with loans and bonds, where Barclays already has a franchise. Senior Barcap executives decline to comment on the initiative.