Fitch sees Brazil’s water companies growing in the next few years thanks to strong financials and low to moderate leverage and also because of a need for their services in the country. “Substantial improvements in credit quality have put the country’s largest water utilities in a better position to expand capacity and enhance their services. In addition, the introduction of a regulatory framework for the industry has reduced sector risk,” the agency notes. It adds that low volumetric risk and a lack of universal access to water supply and sewage collection services make expansion in the sector attractive and necessary. “With water supply and sewage collection services currently reaching only 75% and 47%, respectively, of all residences, and with only 20% of the sewage currently being treated, companies are seeking to expand their coverage, requiring large-scale investments,” says the agency. According to Ricardo Carvalho, senior director at Fitch, “strong financial profiles with low to moderate financial leverage at the water utilities should allow for higher debt levels to fund a portion of these capital investments without significantly jeopardizing the companies’ payment capacity.”
Category: Daily Brief
Base Metal Companies to Slash Capex
Fitch says in a note that it expects capital spending in the global base metals industry to fall between 5% and 15% in 2009 and between 35% and 40% in 2010. The decrease is expected to come hand in hand with weaker earnings and cashflow, despite lower production costs resulting from the drop in energy, fuel and feedstock costs. Fitch says that severe demand declines for most metals in the second half of 2008 have resulted in rising stocks and falling prices. In response, producers have been taking production off-line and slowing expansion spending, but not enough to hike prices.
Deutsche Names Trade Finance Director
Deutsche Bank has named George Lee as director of its global transaction banking trade finance and cash management corporates business in the Americas. The division encompasses Deutsche Bank’s cash management, trade finance, capital market sales and trust & securities services. Lee will be based in New York and report to Russell Graham, the global head of that division. He joins from Citi, where he was the North American head of implementations for treasury and trade solutions for the bank’s global transaction services.
Bradespar Pushes Longer Debt
Bradespar is preparing to sell this month BRL610m in 1.5-year debentures and BRL690m in 180-day promissory notes. The debentures pay 125% of DI and the promissory notes pay 113% of DI. The deal represents the first Brazilian local issue with an 18-month maturity since September, Bradespar IR manager Mauricio Leuzinger tells LatinFinance. Corporate new issue maturities have been squeezed by the crisis to 6-12 months in Brazil, from 3-5 years previously on average, with some outliers even hitting 7 years. Together, the Bradespar issues will help refinance BRL1.4bn in 180-day promissory notes taken out in June to subscribe to a portion of Vale’s follow-on equity offering. Prior to meltdown in global markets, Bradespar, the equity arm of Brazilian bank Bradesco, had planned to refinance with 3-year debentures. Bradesco and UBS are managing both local debt sales.
BBVA Continental Kicks Off DPRs
Peru’s BBVA Continental has issued a $250m 2016 bond, its first diversified payment rights (DPR) securitization offering from a new program. The notes rated A by Fitch were placed privately. Finance officials at BBVA and placement agent Sumitomo Mitsui declined to disclose the identity of the buyer or the interest rate on the bonds. DPR securitizations have become an attractive option for LatAm banks to raise capital amid the market volatility of the past 18 months. Typically the bonds, also known as MT100s, pay a spread over Libor and are placed with a single investor, often the arranging bank. The transaction follows fellow Peruvian BCP’s placement of $150m in 7-year DPR bonds last month. BBVA Continental attempted to place an MT100 issue after its program was approved last summer, but ran into unstable markets in the second half of the year.
PetroFalcon Scraps Acquisition
PetroFalcon subsidiary Vinccler Oil & Gas says it has scrapped plans to purchase a 30% stake in the license for the Cardon III natural gas block in the Gulf of Venezuela from Chevron. The company blames “tightening global capital markets and the uncertain oil and natural gas price environment” for the decision. As a result, the would-be buyer will get a reimbursement of around $5m plus expenses and interest, which would leave PetroFalcon with more than $33m in cash, it says. PetroFalcon will focus on its producing assets.
Argie Gas Regulator Detects TGN Problems
Enargas, Argentina’s national gas regulator, has asked a federal criminal court to investigate “grave irregularities” at Transportadora de Gas del Norte, according to local media and wire reports. Last week the government appointed a comptroller to oversee the company’s management for a 120-day period following the gas utility’s decision to default on a $22m debt payment. The comptroller “detected grave irregularities in the company’s books, which could constitute illegal actions,” according to a statement issued by Enargas, cited by press reports. Fitch cut TGN to D from C last week following the announcement of the default and initiation of a restructuring process for its $350m in outstanding debt.
Chavez Unveils Public Spending Dream
Venezuelan president Hugo Chavez says his government will dedicate up to $100bn to public spending between 2008-2013. But that is going to be very difficult, if not impossible, in the face of weak oil prices and lack of access to affordable external financing. “What Chavez has to do is devalue the currency, increase taxes and cut spending,” says Barclays senior LatAm economist Alejandro Grisanti. Although Chavez has not said if he will do any of that, Venezuela’s finance minister has indicated publicly that devaluation of the Bolivar cannot be discarded. Grisanti thinks that if this is true, devaluation will not take place until after the referendum that could allow Chavez to run for re-election indefinitely. There is no official date for the referendum, but it is rumored that it could happen in February.
Too Soon to be Bullish: Morgan Stanley
Morgan Stanley is not bearish on LatAm, but it says that bullishness would be premature. “I’d caution against chasing every possible sign of an upturn in either the real economy or the markets,” says Gray Newman, senior LatAm economist at Morgan Stanley. “There is simply too much that we do not yet know about the severity or the duration of the current downturn. Given the downside risks associated with being early in calling an upturn and the relatively modest costs of being late to the recovery, I would argue in favor of caution,” he adds. According to Newman, the downturn could test the region’s policy resolve and serve as the ultimate guide to whether the region is on the path to sustainable growth. His caution stems from “the asymmetry of risks in calling an inflection point,” and the economist notes that regional downturns tend to be sharp, rapid and unforgiving, while upturns are measured in years rather than months. “My best sense is that the turning point is a late 2009 event, but there is a great deal that we do not know about the severity and the duration of the current downturn,” says Newman.
Commodity Pain to Continue
The plunge in commodities like copper, iron ore and oil wreaked havoc on the LatAm companies and economies that depend on them, and the 2009 outlook offers scant consolation. Oil is this year expected to stick at the lower end of the spectrum, averaging $50-$60 per barrel, according to economists, but it may begin rebounding in 2010. “Over the next decade, the price of oil will average between $60 and $100 a barrel. It will be volatile,” says James Halloran, vice president and energy analyst at National City, a US bank with investments in Brazil. WTI closed Monday at $48.81 a barrel. Meanwhile, iron ore and metallurgical coal, used to make steel, are also down and will stay that way in 2009, according to Fitch. “Contract prices for iron ore and metallurgical coal are expected to be 20%-40% lower than last year,” says Fitch. The agency adds that global steel production fell 12.4% year-on-year in October, following a 3.2% year-over-year drop in September. “Cuts [in production] that have been announced will result in sharply lower production through the first quarter of 2009,” Fitch adds. Elsewhere, Chile in particular will be undermined by weakness in copper, which plays a key role in the country’s business cycle, says Merrill Lynch. The shop forecasts the red metal will drop 37% in 2009 versus last year’s average. Copper traded at $1.43 a pound January 5, down from about $4.00 in June.