Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    22 August 2019
    Published by

    In Focus: Which Argentina corporates might default and when 

    The primary election (PASO) results have raised the spectre of possible defaults under a theoretical (but highly possible) victory of Alberto Fernandez as President and Cristina Fernandez de Kirchner as Vice-President in October. In this report, assuming a return to populist Kirchnerism policies, we asses those corporates that might default and when. 

    Of course, it is reasonable to assume that the smaller, weaker companies and provinces would be the first to potentially default, especially those with debt falling due soon that they cannot refinance. But if the crisis reaches a level similar to the one that took place two decades ago, we can safely assume that even stronger companies will be at risk. Much will depend on what the new government will want/be able to do with the economy. This holds true whether the next government is formed by the Fernandez-Fernandez ticket or if Mauricio Macri can pull a second term out of the proverbial hat, which would still require a full overhaul anyway. 

    We focus on two types of strong companies:

    1. Those that would be most affected by the theoretical return to Kirchnerism, when drastic measures were imposed such as the “peso-fication” and freezing of tariffs for utilities and other service providers. In this case, Argentina’s four main Independent Power Producers (IPP) Genneia, Stoneway, Albanesi and MSU Energy would most likely be forced to default if their dollar-linked, take-or-pay contracts with CAMMESA (government-owned energy and power wholesale and dispatch company) were to be repudiated or restructured in order to implement the previously mentioned policies (see more on this here);
    2. Those companies that have been operating profitably with strong operational and financial performance even under the prevailing difficult situation, but whose operations and balance sheets would be severely affected by policies under Kirchnersim, as well as by a full-blown crisis. Within this, we highlight the country’s two largest banks: Grupo Financiero Galicia (and its subsidiaries) and Banco Macro. While these banks have consolidated the market, remain well-capitalised and dominate the sector in the country, their holdings in government paper and the (likely) continuing shrinkage of the economy is a toxic formula, regardless of how strong they may be today. This is particularly so in the absence of a strong foreign “parent” that could bail them out. 

    Within the first universe, we also see Pampa Energia as being vulnerable. While we believe that Pampa could fare better than the typical integrated energy company – given the diversification of its businesses, its conservative management and its strong balance sheet – the business environment could deteriorate drastically so much so that not even these positive attributes may help Pampa avoid a default. For YPF S.A., perhaps the strongest company in Argentina given its importance for the economy (and the development of the Vaca Muerta basin), it could see business drop to a point where its finances become insufficient to avoid a default.  

    In the meantime, if investors have Argentina papers in their portfolios, we recommend choosing the stronger, more liquid credit, over those businesses that could be severely affected if a new wave of populist government actions are put in place in the next few months.

    Read the full report here

    Recap of the week’s key credit developments

    Argentina (ARGENT): Fitch and S&P both downgraded Argentina’s long-term foreign currency rating on 16 August. Fitch now rates Argentina CCC, down from B, and S&P lowered its rating to B- from B, in its second consecutive downgrade. Moody’s now has the highest rating of the main rating agencies, at B2. All three now have a negative outlook on their respective ratings. Fitch cited elevated policy uncertainty, tighter financing conditions and an expected macroeconomic environment deterioration, that increase the likelihood of a sovereign default or restructuring. S&P now expects a 2.3% contraction this year, from a previously expected 1.6%. Meanwhile the negative outlook reflects a more than 1-in-3 chance of another downgrade in the next year due to economic conditions made worse by electoral timings. The credit profile is worsened by the lower exchange rate, likely higher near-term inflation and a deepening recession.  

    Zambia (ZAMBIN): On Wednesday, the Bank of Zambia kept interest rates unchanged at 10.25%, but said that rates may be raised if inflation, reported at 8.1% for the quarter under review, remains above the target range of 6%-8%. According to the Bank’s statement, inflation is projected to remain above this target for much of its two-year forecast horizon. Supply-side factors are also contributing to inflation, potentially lowering the influence of monetary policy. Holding rates for now will help to support growth, as near-term prospects are currently weaker than at the previous MPC meeting.  

    Nostrum Oil (NOGLN): The company reported H1 19 results posting US$171mn in revenues and US$110mn in EBITDA. Operating cash flows remain robust, and fully covered interest and capex. Total debt was roughly unchanged and net leverage increased slightly to 4.6x. The company increased its cash balance to US$120mn and reiterated end-19 guidance of maintaining at least US$100mn in cash. We downgrade NOGLN 22s and 25s to Sell on the absence of positive triggers that could improve the credit outlook in the next 3-6 months. The H1 19 results and conference call did not answer the question about Nostrum’s ability to ramp up production from c30,000boepd, while Brent trading below US$60/bbl limits the company’s ability to finance an expansionary drilling programme and the second leg of a recently announced acquisition of Stepnoy Leopard licenses. 

    Grupo Kaltex, S.A. (KLTXMX): The company reported marginally stronger Q2 19 results mainly on the back of lower cotton prices, lower sales expenses from a steep reduction in personnel and positive FX result (negative a year ago). However, we reiterate Sell on the company’s bonds because we do not see a way in which Kaltex can make its principal payment in 2022 without refinancing or restructuring its debt. We believe that refinancing the bond, at least at this point, would not be possible mainly due to the cost of debt implied by where the bonds are trading. The US$320.0mn, 8.875% senior secured bonds due 2022 (B-/CC) are currently trading at cUS$73.34 (ALLQ) to yield c22.87$ (g-spread 2,141bps; z-spread 2,130bps). At these levels, the company will not be able to access the capital markets and refinancing with banks would also be prohibitive.