Moody's says high-yield issuers ready for tight credit conditions

Moody’s Investors Service said high-yield issuers of debt in Latin America, including non-investment grade corporates and similar issuers in the infrastructure sector, look largely ready and able to face ongoing weak credit conditions in the region, though certain factors could limit access to international capital markets.

“Most high-yield issuers in Latin America benefit from adequate debt maturity profiles and liquidity positions. While a few companies in the electricity sector face short-term refinancing risk, access to local bank funding and capital markets mitigate these risks,” Moody’s said in a report.

The rating agency stressed that overall credit conditions in Latin America were going to remain weak through 2019 and 2020 due to “global slow growth, high funding costs and market volatility."

“These conditions could hinder international capital markets access for non-investment grade infrastructure issuers,” wrote Moody’s.

“Issuers in Latin America's project and infrastructure sector, and particularly cross-border high-yield issuers, are exposed to these difficult conditions,” continued the agency. “Out of a total of 154 issuers in our portfolio, non-investment grade issuers account for 67%, or 103 issuers. However, only 15 of them are corporate infrastructure issuers with cross-border debt.”

In terms of cross-border maturities, some non-investment grade issuers could face some challenges if the difficult conditions persist past two years, Moody's added.

The agency also noted that the maturities of cross-border debt are strongly concentrated in Brazil with around 61% of total cross-border debt in its high-yield portfolio.

Roughly one-third of total cross-border debt consists of US$3.9bn in cross-border bonds maturing in 2019-21, according to the report.

High-yield issuers face a slightly more difficult time in re-financing over this period than investment-grade entities, which typically have better access to capital markets, as well as stronger financial and liquidity, said Moody's.

Aside from a few companies in the electricity sector that might face short-term re-financing challenges, Moody’s sees most high-yield firms able to generate sufficient cash flow to meet debt service obligations and maintain their credit quality, while "challenges remain" for some companies domiciled in Brazil, Argentina and Costa Rica that have relatively low cash balances with respect to cross-border maturities in 2019-21.

These include Brazilian utility firm Eletrobras, which faces US$1.8bn in cross-border amortizations in 2021 alone. Another, Argentina’s EPEC, is the only example in Moody’s portfolio “that is not expected to generate strong cash flows and the company's cash balance its relatively small with respect to debt service."

Moody's did however point out that EPEC's obligations are guaranteed by the Córdoba province. “We do not expect EPEC’s credit quality to be affected in the next 12 months.”

Moody’s is also eyeing similar issues with Argentine utilities EDESA, Transportadora de Gas del Sur and Empresa Distribuidora Norte, as well as Costa Rican electric company ICE.

Growth dynamics

With respect to economic growth in Latin America, Moody’s said the growth momentum will vary by territory in 2019-20.

The agency noted that among the three G-20 countries in the region only Brazil's economy is likely to accelerate this year, with Argentina contracting again and Mexico facing a politically-linked deceleration.

Growth in Mexico should “pick up modestly in 2020,” Moody's added.

As for the global economy's expansion, Moody's sees a weak performance in 2019 due to tight market liquidity, US-China trade tensions, and a sharper-than-expected slowdown of the Chinese economy.