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COMMENTS

Credit Trends: Risky Credits: External Risks Overshadow Positive Developments In Emerging Markets

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of May 22, 2024

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Default, Transition, and Recovery: The European Speculative-Grade Default Rate Should Level Out At 3.75% By March 2025

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CreditWeek: How Are Funds Using Net Asset Value Loans?

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Default, Transition, and Recovery: Resilient Growth, Resilient Yields, And Resilient Defaults To Bring The U.S. Speculative-Grade Corporate Default Rate To 4.5% By March 2025


Credit Trends: Risky Credits: External Risks Overshadow Positive Developments In Emerging Markets

(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated 'CCC+' and lower in emerging markets. Because many defaults are of companies in these categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)

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The Number Of Risky Credits Dropped By One

The number of emerging market issuers rated 'CCC+' and lower fell to 15 in the first quarter of 2024 from 16 in the fourth quarter of 2023 (see chart 1). Issuers rated 'CCC+' and lower accounted for 10% of speculative-grade issuers as of March 2024, in line with the December 2023 numbers.

We added Chilean telecoms company Wom S.A. to the pool following a downgrade to 'CCC' from 'B' with a negative outlook. This was because Wom's negotiations to refinance its $348 million senior unsecured notes, due in November 2024, were moving more slowly than we expected, raising the likelihood of a debt restructuring. This happened in a context of tight market conditions and limited investor appetite. In addition, we saw a strain on Wom's liquidity from negative free operating cash flow in 2024 and upcoming capex. The company subsequently initiated a Chapter 11 Bankruptcy filing and we therefore downgraded it to 'D' (default) on April 2, 2024.

Three companies defaulted within the quarter. Brazilian transport company Gol Linhas Aereas Inteligentes S.A. (Gol) filed for Chapter 11 bankruptcy due to a heavy debt burden; high lease payments and capex; delays on the delivery of new MAX aircraft from the manufacturer; and working capital outflows. Chilean media and entertainment company Enjoy S.A. filed for a judicial reorganization following disappointing revenue and EBITDA across its casinos and hotels that led to cash flow deficits and an inability to pay debt obligations. Triggers were rising inflation and higher taxes under new municipal licenses in Chile, together with challenging capital market conditions.

Finally, we lowered the rating on Argentinian capital goods company CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. to 'SD' (selective default) after the majority of its 2027 senior secured noteholders accepted a consent solicitation for CLISA to pay all of the January 2024 coupon in kind, thereby receiving less value than the promise of the original securities. Once the distressed exchange was completed, we upgraded CLISA to 'CCC-', with a negative outlook, reflecting the company's weak liquidity position and its heavy dependence on variables outside its control to continue honoring its financial obligations.

Aside from the fact that all three companies are located in Latin America, they had also all defaulted previously. Since 2008, Gol has defaulted three times (in 2016, 2023, and 2024), Enjoy twice (in 2020 and 2024), and CLISA twice (in 2021 and 2024). The rise in re-defaulters is a common trend across geographies and is due to more entities being comfortable with a high level of leverage in their capital structures. Many of these structures were established during periods of low rates and in anticipation of borrowing costs remaining low.

The emerging markets have a lower default rate than developed regions. As of Feb. 29, 2024, the 12-month trailing speculative-grade default rate was 1.8% for the emerging markets, versus 4.8% in the U.S. and 4.11% in Europe.

Chart 1

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The Negative Bias Decreased Markedly

The negative bias fell to 33% in the fourth quarter of 2024 from 88% in the fourth quarter of 2023 (see chart 2). On March 15, 2024, we raised the long-term foreign currency sovereign credit rating on Argentina to 'CCC' from 'CCC-' and revised upward our transfer and convertibility (T&C) assessment on the country accordingly. As we cap the ratings on eight risky credits at the level of Argentina's T&C assessment, we upgraded these entities as well and assigned them stable outlooks.

The stabilization of the risky credits' outlooks balanced the improved T&C conditions on the one hand, and on the other, the macroeconomic recession, with high inflation, currency depreciation, and subdued market access. The regional distribution of negative outlooks, however, has not changed materially with respect to the previous quarter, with four out of five entities located in Latin America.

Chart 2

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Risky Credits' Aggregate Debt Remained Relatively Constant

Debt stood at $7.2 billion as of first-quarter 2024. The country with the highest concentration of debt is Argentina, with $6.3 billion (87.5% of total debt outstanding), largely on a stable outlook (see chart 3). Sector-wise, oil and gas tops the list, with $3.2 billion at YPF S.A. and Compania General de Combustibles S.A., again on a stable outlook (see chart 4).

Chart 3

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Chart 4

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Speculative-Grade Issuance Almost Tripled From The Previous Quarter

This was the result of corporate spreads falling consistently by over 110 basis points (bps; see chart 5) following lower corporate yields. The iBoxx USD Emerging Market 'CCC' annual bond yield fell to 18% as of March 2024 from 28% as of December 2023. As a result, we saw higher speculative-grade issuance than in last three quarters, albeit still far from 2019-2021 levels, and restricted to the 'BB' rating category. The last issuance rated 'CCC+' and lower was in November 2021. In this regard, it is noteworthy that speculative-grade corporate yields are still 90 bps higher than their 10-year average levels. Borrowing costs remain tight from a historical perspective.

Recent developments are not encouraging, with U.S. macroeconomic data pointing to upward pressure on benchmarks. This will likely cause the Federal Reserve to postpone policy rate cuts in a scenario of higher-for-longer interest rates, with a strong dollar and sticky inflation. In addition, increasing geopolitical risk arising from the conflict in the Middle East could curb market exuberance. This presents a gloomier outlook for corporate issuance, especially for lower-rated issuers.

Chart 5

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Risky Credits' Fundamentals Point To A More Positive Future

This is thanks to their prudent investment decisions, even though we expect their leverage to stay high. The leverage of issuers rated 'CCC+' and lower peaked in 2023 (see chart 6). We expect to see growth in these risky credits' debt over 2024 and 2025, albeit less consistently than growth in EBITDA. Together with revenues, we expect EBITDA to rise in 2024 and 2025 after a decrease in 2023. The revenue peak will translate into higher liquidity buffers if it occurs concomitantly with a slowdown in capex, at least until 2024.

Chart 6

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Risky Credits' Financial Ratios Haven't Moved Consistently Over The Quarter

Hungarian chemicals company Nitrogenmuvek Zrt. and Argentinian utility Capex S.A. display abrupt changes in their financials, and these influence the industry financial ratios in charts 7-9. We expect Nitrogenmuvek's EBITDA to slightly increase in 2024, thanks to higher sales volumes after negative free operating cash flow in 2023. Notwithstanding Nitrogenmuvek's adequate liquidity at present, we view the company's capital structure as unsustainable due to its high debt burden and lower EBITDA generation following the introduction of a new national carbon tax in 2023. We expect the company's leverage to stay very high in 2024, at around 10x, and to rise gradually in 2025-2026.

We expect Capex to consistently lower its interest burden in 2026 owing to lower overall debt. As such, the utilities' average EBITDA interest coverage ratio will rise to around 17x in 2026 from below 8x in 2025.

Chart 7

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Chart 8

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Chart 9

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Table 1

Issuers rated 'CCC+' and lower in emerging markets
Industry Issuer Rating Outlook/CreditWatch Outlook or CreditWatch Country Region
Bank

Banco De Galicia Y Buenos Aires S.A.U.

CCC Stable Outlook Argentina Latin America
Financial institution

Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R.

CCC+ Neg/Negative Outlook Mexico Latin America
Capital goods

CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A.

CCC- Neg/Negative Outlook Argentina Latin America
Chemicals, packaging, and environmental services

Nitrogenmuvek Zrt.

CCC+ Neg/Negative CreditWatch Hungary Europe
Homebuilders/real estate

Kawasan Industri Jababeka Tbk. PT

CCC+ Stable Outlook Indonesia Asia/Pacific
Homebuilders/real estate

Grupo Gicsa S.A.B. de C.V.

CCC+ Stable Outlook Mexico Latin America
Oil and gas exploration and production

YPF S.A.

CCC Stable Outlook Argentina Latin America
Oil and gas exploration and production

Compania General de Combustibles S.A.

CCC Stable Outlook Argentina Latin America
Telecommunications

Telecom Argentina S.A.

CCC Stable Outlook Argentina Latin America
Telecommunications

Wom S.A.

CCC Neg/Negative Outlook Chile Latin America
Transportation

Aeropuertos Argentina 2000 S.A.

CCC Stable Outlook Argentina Latin America
Transportation

Investimentos e Participacoes em Infraestrutura S.A. - Invepar

CCC+ Neg/Negative Outlook Brazil Latin America
Utility

Empresa Distribuidora Y Comercializadora Norte S.A.

CCC Stable Outlook Argentina Latin America
Utility

CAPEX S.A.

CCC Stable Outlook Argentina Latin America
Utility

Pampa Energia S.A.

CCC Stable Outlook Argentina Latin America
Data as of March 31, 2024. Source: S&P Global Ratings.

Emerging markets consist of:

  • Latin America: Argentina, Brazil, Chile, Colombia, Peru, Mexico.
  • Emerging Asia: India, Indonesia, Malaysia, Thailand, Philippines, Vietnam.
  • Europe, the Middle East, and Africa: Hungary, Poland, Saudi Arabia, South Africa, Turkey.
  • Greater China: China, Hong Kong, Macau, Taiwan, and Red Chip companies (issuers headquartered in Greater China but incorporated elsewhere).

Glossary

  • Negative bias--Percentage of issuers with a negative outlook or on CreditWatch negative.

Related Research

Related Rating Actions

This report does not constitute a rating action.

Primary Credit Analyst:Luca Rossi, Paris +33 6 2518 9258;
luca.rossi@spglobal.com
Secondary Contact:Jose M Perez-Gorozpe, Madrid +34 914233212;
jose.perez-gorozpe@spglobal.com
Research Contributor:Nivedita Daiya, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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