Flash Report /

Argentina corporates: Who will default and when

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    13 August 2019
    Published by

    The recent primary election (PASO) results have shaken both the equity and credit markets in Argentina. As expected, it has also 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.

    It is still too early to make any real or reasonable assessment of the current situation or what might happen next, political or economic. What is clear at this point, however, is that the economy is in disarray and it’s hard to tell where the markets will go – how low, will there be a rebound, or will there be further exacerbation of the downward trend.

    What has also been revived is the memory of the country’s past defaults. The potential scenario of the government failing to meet its obligations, the imposition of currency controls, nationalised pension system, capital markets closed for a decade for both the sovereign and corporates, and every single company (except for YPF) defaulting on their foreign currency debts.

    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 over 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 country’s heavy debt burden, inflation, rates, growth and the overall 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 (high inflation, lower economic activity/contraction, severe mismatch between revenues in ARS and debt in strong currencies etc). Within this, we highlight the country’s two largest banks: Grupo Financiero Galicia (and its subsidiaries Banco de Galicia y Buenos Aires, Tarjeta Naranja, and others) 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 to adverse energy policies (like the ones mentioned for the IPPs) as well as a reduction in business volumes as demand dwindles. While we believe that a company such as 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 a company like 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 case of the Vaca Muerta basin, the huge investments that were expected to flow in could dip, if not come to a complete halt, eliminating a large revenue stream altogether.

    Of course, all of this is based on assumptions. It is still premature to talk about attractive or even reasonable entry points for any of the credits mentioned in this report. For the time being, 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.