Category: Corporate & Sovereign Strategy

Ecuador has typically been a willingness to pay issue for bondholders, but BCP says it may soon hinge on ability to pay. “Ecuador may no longer be threatening to default, but the erosion of the country’s political and macroeconomic conditions is putting it on a trajectory where it may have no other choice,” says the Connecticut-based boutique in a report. “The situation in Ecuador is becoming ugly, as the country gears up for the Constitutional Assembly,” it adds. Besides political turmoil and the decline in President Correa’s popularity, economic growth is slowing and credit evaporating. “President Correa’s aggressive posturing, and former Finance Minister Patino’s constant threats to default, forced the banks to trim their lending activities,” says BCP. It adds that Ecuador’s balance of payments is eroding, with exports falling 2.4% y/y in Q1 despite high oil prices. BCP also notes that the Correa administration has softened its rhetoric on default and suggests it would like to reprofile the foreign debt by 2010.

Fitch has upgraded the local and foreign currency issuer default ratings (IDRs) of AES Gener to BBB minus from BB+. It also raised Gener’s senior unsecured debt rating, which consists of $400m senior notes due 2014, to BBB minus. The outlook is stable. Fitch lauds Gener’s improved financial profile and continued solid financial and operating performance and notes that it is the largest thermoelectric generation company in Chile. The rating also reflects Gener’s diversified portfolio of assets, a constructive Chilean regulatory system, and the company’s experienced management. Gener’s leverage is predicted to increase temporarily during the construction period of the Nueva Ventanas project, which is being funded with a $100m equity contribution from AES Gener and a $415m, 15-year credit non-recourse credit facility.

Fitch has cut to A minus from A the foreign currency issuer default rating of Kimberly-Clark de Mexico (KCM) as well as the senior unsecured rating on KCM’s 8.87% senior notes due 2009. The rating outlook is stable and the downgrade follows Fitch’s recent cut of the parent company to single A. “The KCM downgrade reflects the weakened ability of KMB to support KCM in the event the Mexican government imposes exchange controls that would prevent or impede the private sector’s ability to convert local currency into foreign currency or to transfer hard currency abroad,” says the agency. In 2006, KCM had $1.8bn of revenues and $620m of EBITDA, says Fitch. It ended the year with $164m of cash and marketable securities and $468m of total debt.

Fitch has upgraded Uruguay’s foreign currency sovereign issuer default rating to BB minus (stable) minus from B+. “The rating upgrade reflects Uruguay’s lower financing needs and its improving public debt dynamics as a result of higher economic growth, conservative fiscal policies, and deft liability management,” says Fitch. “The reduced financing needs of the Uruguayan government due to the full repayment of its IMF obligations and stretching of external bond maturities through liability management transactions make the country more resilient to external shocks,” says Shelly Shetty, senior director in Fitch’s sovereign group. Fitch estimates that the general government’s financing needs for 2007 have declined to 5.4% of GDP, compared to last year’s estimate of 10.6%. It also sees robust FDI flows, which are expected to reach 5.1% of GDP in 2007. Negatives in the Uruguay story include weaknesses in external solvency and liquidity indicators, as well as the level and composition of public debt. In 2006, public sector debt equaled 72% of GDP and net external debt reached 112% of broad external receipts, both above the BB median. “Improvements in currency composition of public debt as well as faster reduction in public and external indebtedness would be positive for Uruguay’s credit profile,” says Fitch.

To hear some analysts speak, you may fear that Metrofinanciera is heading for default. Critics say it is growing too fast and ultimately unsustainable. S&P recently cut the credit to B+ and its perp to CCC+, voicing concerns about the company management. But despite a highly speculative credit rating, the firm still appears to have potential. “There’s still a lot of room for improvement, particularly in communicating the strategy to the investment community,” says Eugene Popov, senior EM corporate credit analyst at Dresdner Kleinwort, which underwrote the 11.25% coupon perpetual issue in 2006. “They have some bumps on the road. It’s not smooth sailing, but it’s not a disaster,” says Philip Kibel, senior vice president at Moody’s, which rates the Sofol B1. Popov says there is a significant asset/liability mismatch, but the company is aware of it. “The way they can address this issue is by increasing the securitization of mortgage and construction loans,” says Popov. “If they run into bigger problems than it faces at the moment, there is a high probability that another Sofol or bank will be inclined to buy it out,” he adds. According to Popov, the key risk for Metrofinanciera is the overall macro situation in Mexico. “For all the shortfalls and increased credit risk profile, it’s a valid ongoing business,” says the analyst. Metrofinanciera last week announced a MXP2.15bn cross-border construction loan securitization due 2014 through Credit Suisse, with Banco Invex as trustee.

Ecuador looks set to make good on an August 15 coupon payment, but analysts do not rule out a restructuring. “The August 15 $135m coupon payment on the 2030s is likely to be honored and that the government is likely to stay current on its obligations this year,” says Goldman Sachs. “However, following the elections for the new constituent assembly on September 30 and as fiscal pressures start to mount as we enter 2008 there is the risk the government might feel tempted to pursue a non-market-based external debt restructuring,” it adds. The government is set to appoint a committee to judge the “legitimacy” of its debt and that process is likely to take some time. “A potential external debt restructuring is unlikely in the near term,” says Credit Suisse.