News Column

Fitch: Latin American Leveraged Finance Stable Despite Challenging Environment

June 26, 2014



CHICAGO--(BUSINESS WIRE)-- Latin American leveraged finance activity is expected to remain robust despite challenging market conditions for the weakest credits, an increase in defaults, and other industry and country-specific difficulties, according to a new Fitch Ratings report.

'Credit protection measures have stayed relatively unchanged for Latin America high-yield corporates despite tepid economic growth of 4% in the region,' said Joe Bormann, a Managing Director at Fitch. 'Conditions will not turn around quickly. Fitch projects GDP growth of only 3.9% in Latin America in 2014 and 4% in 2015. Corporate are adjusting capex to account for slower growth. Many 'BB' credits and a select group of 'B' rated corporates have accessed the market to lower refinancing risk.'

Capital markets have been challenging for Latin America 'B' corporates since market conditions slowed for emerging market corporates in June 2013. Since then, these credits have raised only USD8.1 billion in the cross border market - excluding PDVSA USD5 billion notes - representing a 32% decrease from the same period in 2013. Investors remain concerned about the small size of most 'B' issuances, which lowers liquidity in the secondary market.

Default activity in the first half of 2014 consists of Sifco, a Brazilian supplier to the automobile industry, and Aralco, a sugar and ethanol producer located in Brazil. This pace is on par with 2013 when Fitch rated six Latin America high-yield corporates that defaulted. Four of these companies -- Axtel, Corporacion GEO, Urbi Desarrollos Urbanos, and Desarrolladora Homex -- were domiciled in Mexico, while Sidetur was a Venezuela steel producer and OGX Petroleo e Gas Participacoes S.A. was a Brazilian oil and gas company.

Following Aralco's default, credit conditions remain difficult for Brazilian sugar and ethanol producers. Operating cash flows are weak, as record sugar levels have resulted in low global sugar prices. Capital expenses are high and free cash flow is negative. Companies that tapped the market recently such as Virgolino (GVO) and Tonon had to settle for very high coupon levels.

In Argentina and Venezuela, inflation is very high, capital markets access is limited, and governments continue to control foreign exchange access. The Argentine peso and Venezuelan Bolivar devalued sharply as the governments sought to lower the differential between the formal and informal exchange rates and curtail the outflow of U.S. dollars. Corporate defaults could occur in 2014 if conditions deteriorate.

For more information, a special report titled 'Latin America Leveraged Finance Stats Quarterly' is available on the Fitch Ratings web site at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: Latin America Leveraged Finance Stats Quarterly (Fourth-Quarter 2013)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749776

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings, Inc.

Joe Bormann, CFA, +1-312-368-3349

Managing Director

joe.bormann@fitchratings.com

Fitch Ratings, Inc.

70 W Madison Street Chicago, IL 60602

or

Paula Bunn, +55 11 4504-2600

Analyst

Paula.bunn@fitchratings.com

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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