Category: Daily Brief

Moody’s predicts that the global speculative-grade issuer-weighted corporate default rate will climb to 4.3% by the end of this year, leaping to 10.4% a year from now. “Speculative-grade corporate default rates are expected to climb sharply throughout 2009 as our baseline forecast now incorporates a deep and protracted US recession. Corporate default rates in this cycle will likely match or exceed the peak levels reached in the previous two US recessions of 1990-91 and 2000-01,” says Moody’s director of corporate default research Kenneth Emery. The default rate edged higher to 2.8% in October, from September’s revised level of 2.7% and 1.1% a year ago. Measured on a dollar volume basis, the default rate remained unchanged at 2.4% from September’s revised level. A year ago, the global dollar-weighted bond default rate stood at 0.7%, says Moody’s. The agency’s speculative-grade corporate distress index – which measures the percentage of rated issuers that have debt trading at distressed levels – rose more than 60% from September’s 29.7% to 48.5% in October, marking the highest level since Moody’s launched the index in 1996. A year ago, the index was 4.6%. There were a total of 10 rated corporate debt defaulters in October, including one from Mexico.

While the bankruptcy of Brazilian seed company Selecta Sementes appears to be an isolated incident, more derivative and refinancing-related distress is seen coming in Brazil’s agricultural sector, say advisory experts. Beef processors and sugar and ethanol companies are particularly vulnerable, they add. Glauco Abdala, advisory specialist at Brazilian restructuring boutique Galeazzi Associados’ said recently that an abundance of credit to the sector is generating a rollover crisis at a number of agricultural companies. Generally in LatAm, currency volatility has hurt exporters’ hedging mechanisms and more fallout could still be coming, say credit analysts. “To the extent [LatAm continues to see] high volatility and capital markets remain frozen, the risks [of defaults and bankruptcies] will be higher,” says Daniel Kastholm, corporate credit analyst at Fitch. He adds while Fitch believes most of the large derivatives-related losses in the region have been announced, it is still unclear how much counterparty loss remains unreported. In Brazil, Votorantim, Sadia and Aracruz announced close to BRL5bn in losses, while in Mexico Comerci filed for bankruptcy amid derivatives implosion. Durango also filed for creditor protection. Prior to these incidents, LatAm’s most recent defaults occurred in 2003, with Durango, Avianca and Argentina’s CLISA, according to Fitch.

Creditors of Brazilian seed specialist Selecta Sementes stand to take an average haircut of around 38% on roughly $400m worth of debt following its restructuring, say people close to the matter. The private company went into bankruptcy in May following losses stemming from CBOT-traded soy options and two days ago received judicial approval to sell itself to Argentina’s Los Grobo for $55m. Total outstanding debt, which includes several facilities – local, cross-border, secured and unsecured – is being reduced to $250m, says an executive close to the workout who declines to be named. Some lenders are being paid back in full while others are taking reductions. Among the main creditors are Santander, ING, BES Investimento and Credit Suisse, which participated in an $80m secured capex facility to Selecta prior to its implosion, says the executive. The Swiss shop also had a mandate to take Selecta public on the Bovespa, though this was halted when the company ran into trouble. More than 20 other banks are also heard involved. Selecta has recently received an additional $30m line from a bank group to continue building out a seed crushing facility, which is heard paying close to Libor plus 300bp. Selecta hired Rothschild to advise it through the restructuring.