BLOG — Oct 04, 2024
Assessing Credit Risk of Latin American Oil & Gas Companies Using Bond Implied Scoring
By Min Jiang and Jacob Zhang
This blog is written and published by S&P Global Market Intelligence, a division independent from S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit scores from the credit ratings issued by S&P Global Ratings.
In the corporate bond market, prices or spreads often contain critical information about credit risk of the underlying entities. They mirror the prevailing sentiment in the credit market. This insight complements other indicators like company fundamentals and stock market signals. Notably, it plays a unique role in capturing evolving market conditions, especially for private companies with outstanding debt issuances. Therefore, extracting the credit risk signals embedded in bond prices becomes crucial for developing a comprehensive view of an obligor’s credit risk profile.
However, this task is complicated by the complexities of the corporate bond market, including limited liquidity and variations across different regions and sectors. To address this, S&P Global Market Intelligence has developed the Bond Implied Scoring (BIS) model by leveraging our extensive bond pricing and sector curve data. The solution streamlines the assessment of creditworthiness for global bond issuers, enabling efficient and cost-effective evaluations. Equipped with advanced algorithms, it promptly identifies potential credit risks and offers comprehensive transparency into the underlying bond issues, empowering informed decision making.1
In this blog, we employ the BIS model to gauge the creditworthiness of a selection of large oil and gas companies in Latin America. These companies have attracted investor attention due to the recent drop in oil prices to their lowest levels since December 2021.
Figure 1 provides a snapshot of the BIS scores for six major national oil companies in Latin America from 2021 to 2024. It shows that the bond-implied scores for Empresa Nacional del Petróleo (Chile) and Petróleo Brasileiro S.A. - Petrobras (Brazil) have remained relatively stable throughout this period, with scores of “bbb-” and “bb” respectively, as of September 2024. In contrast, the model scores for the other four companies either remained consistently at high-risk levels or experienced significant deterioration over the past four years. This reflects their fragile credit risk profiles.
Figure 1. BIS credit scores for six large oil and gas companies in Latin America
Source: S&P Global Market Intelligence as of September 10, 2024. For illustrative purposes only.
To gain a deeper understanding of how BIS captures the evolution of credit risk, we further closely examine the case of Petróleos del Perú - PETROPERÚ S.A. (Peru), a company that has undergone a significant decline in creditworthiness over a specific period.
Petróleos del Perú S.A. is a government-owned refiner and fuel supplier in Peru. The company is not publicly listed and specializes in the transportation, refining, distribution, and marketing of fuels and other petroleum-derived products within the country.2 Since 2021, the company has faced deteriorating operational and financial conditions, resulting in multiple delays in the audit of its financial statements. Consequently, its credit rating3 from S&P Global Ratings has been downgraded consecutively from “BBB-” to “B” between 2021 and 2024.
Figure 2 illustrates the time-series trend of BIS credit scores alongside S&P Global Ratings for the company from March 2021 to September 2024. The BIS score has shown a consistent declining trend, reflecting a loss of market confidence due to the company’s unsustainable capital structure, operational inefficiencies, and liquidity challenges. Notably, the BIS score typically dropped in the three to twelve months leading up to each rating downgrade, demonstrating the model's capability to anticipate credit risk deterioration in a timely manner. With incorporation of bond market implied signals, the model score effectively detected early warnings of credit risk, overcoming the limitations of traditional credit risk models that rely solely on lagging company fundamentals for non-publicly listed companies.
Figure 2. Historical BIS credit scores and S&P Global Ratings’ ratings for Petroleos del Peru S.A.
Source: S&P Global Market Intelligence as of September 10, 2024. For illustrative purposes only.
To learn more about the Bond Implied Scoring Model, visit our website here.
1 For more details, please refer to the Bond Implied Scoring Model 1.0 White Paper.
2 Source: The S&P Capital IQ® Platform.
3 Credit ratings are prepared by S&P Global Ratings, which is analytically and editorially independent from any other analytical group at S&P Global.