Moody's sees growth rate of at least three times default rate in LA

The coronavirus crisis is expected to raise the defaults rate by at least three times in Latin America. The forecast is from the risk assessment agency Moody's, which expects this indicator to rise from 2.2% in the accumulated 12 months to May for a range between 6.8% and 10.2% at the end of 2020. Two thirds of issuers accompanied by Moody's in the region are based in Argentina, Brazil and the Mexico, countries that usually concentrate most of these events in the region. But Moody's, in this crisis, also expects corporate stress to increase in other countries, including Chile, Colombia and Panama.

Specifically about Brazil, Moody's points out that the liquidity risk for non-financial companies tends to remain “low or stable” until 2021, highlighting that they now depend more on access to credit and banking relationships than fundamentals or cash generation capacity. Most companies in the Moody's sample accessed credit lines already committed or issued debt to strengthen the cash. “Since most sectors will show results of lower operating costs, maintaining robust liquidity will be essential to avoid risk of refinancing,” says Erick Rodrigues, Moody's vice president, in a note.

The agency draws attention to the electricity sector, which brings together “companies that face high liquidity risk as the pandemic hits consumption and weakens the economic activity". Distribution companies will bear the brunt of the reduction demand and the increase in defaults, but the expectation is that the cash flow gradually improve with the reduction of social distance and regulatory measures to mitigate the high financing needs. For the concessionaires of toll roads, the agency expects adequate liquidity to support the baseline scenario of a 15% drop in traffic for 2020.

Lucror Analytics, which specializes in tracking high yield debt securities, believes that, today, the possibility of a wave of relevant defaults in companies in this crisis is low compared to the global index. “Companies are better prepared. So far there has only been one episode involving Latam, but not in Brazil,” says Soummo Mukherjee, director of Lucror. “The trend is for recovery, and the companies we monitor have access to finance, even more expensive,” says the executive, stressing that the analysis does not include an eventual “second wave” of COVID-19.

The companies evaluated by these agencies are, in general, large, with access to the capital market, and therefore tend to be the survivors of the crises. THE Moody's, in a report, highlights the expectation of an increase in the number of orders for judicial reorganization of companies in Brazil, which had been going on for years when such requests broke records. But he assesses that they will be concentrated in small and medium retail companies and services.

Lucror appeared in 2010 and, three years ago, created an arm to cover these titles also in Latin America. The company accompanies 97 companies in the region, with a senior team of four analysts. And it offers a type of analysis that merges work similar to that of a rating agency, but also with recommendations, of buying, selling and maintaining paper. The company has a list of eight preferred roles in Latin America and half is Brazilian companies: Braskem, Cosan, Nexa and Rede D'Or. The other companies are Mexican Cydsa, from the chemical sector; the Peruvian SMI Pet; and Chilean Cencosud (retail) and WOM (telecommunications).

In the case of Braskem, Lucror points out that the results of the first quarter of the company were weaker in the annual comparison, but stronger in relation to the previous quarter. Leverage went from 5.84 times to 4.71 times, with generation of “robust” box. The expectation now is that the Ebitda's contraction in the year will be less than than initially expected. "This should support the company's bond prices and has the potential to avoid a risk of rating downgrade,” he says.

Cosan, on the other hand, in Lucror's analysis, presented good results in the first quarter. In liquidity terms, maintains a short-term debt coverage ratio of 4.6 times. Some of the company's business areas are affected by the crisis, such as the fuel distributor, but Cosan must mitigate these impacts by increasing the sugar production in your plants. The company's leverage in 2020 should increase, but will still remain at low levels, going from 1.4 times to 2.2 times in the end of this year.

Nexa Resources, a mining and metallurgy company whose partners are Brazilian company Votorantim and Peruvian Milpo, did not present in the first quarter major changes in sales volumes and its mining and smelting operations in Brazil they were not affected in the pandemic. The operating result was affected negatively by the drop in metal prices and a stoppage from March mining in Peru. But Lucror points to a recovery of the company in the second semester, with the achievement of production targets.

Last week, despite the crisis, Nexa raised US $ 500 million in papers with a seven-year term and a return of 6.625% - the rate represented a drop in relation to the initial expectation of 7%.

In a report released yesterday about Brazilian retailers, Fitch Ratings stated that the risk of refinancing the short-term debt of most companies accompanying is “manageable”. As of April 2020, 9 out of 12 classified companies had a debt coverage ratio maturing up to December with cash resources more than 1 time. For the agency, the ability to generate cash and the expected leverage levels for 2021 will be decisive for the ratings.

By Ana Paula Ragazzi - From São Paulo