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Argentina: Downgrading select corporates with peso poised for strong pullback

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    12 August 2019
    Published by

    Given the results of yesterday’s PASO (primary election), we are downgrading to Hold (from Buy) Argentina’s four main Independent Power Producers (IPPs): Stoneway (STNEWY), Albanesi (ALBAAR), Genneia (GNNEIA), and MSU Energy (MSUNRG). We are also downgrading  Argentina’s largest energy company, YPF (YPFDAR) to Hold. The results, with President Mauricio Macri suffering a heavy defeat, immediately brought about a strong pullback on the Argentine peso (ARS), and will likely also affect corporate bond prices negatively as the fear of a Fernandez-Fernandez victory transfers into the markets.

    Undoubtedly, the spectre of a new wave of populist/socialist policies have been raised, bringing memories of the Kirchner administration (that of Nestor, followed by that of his wife Cristina) when utilities companies’ contracts that were originally denominated or linked to the US dollar were “peso-fied” and also saw their tariffs frozen for years.

    This fear, in our opinion, is likely to affect the four main IPPs, which have thrived on the back of their dollar-linked contract and on the clean-up of the country’s government-owned energy and power wholesale and dispatch company CAMMESA. During the Kirchner days, CAMMESA was rife with corruption.

    We downgrade our Buy recommendation to Hold on the four IPPs, as we see a strong negative reaction in the markets. However, we still believe (or rather, hope) that even under a Fernandez-Fernandez victory, their contracts would be respected given that these companies provide “new and cleaner power”, which – if tampered with – would effectively cancel the possibility of further capacity expansions, dampen investment in the sector, and cause the country to reverse the shift from a new, more efficient power generation.

    We also downgrade YPF SA to Hold from Buy as this is perhaps the one corporate in Argentina that could be considered closer to a quasi-sovereign. There’s the dread of another spectre in this case: the nationalisation of YPF’s Spanish-owned part of the company (Repsol) by Cristina Kirchner, and the messy and lengthy indemnisation process that followed.

    We believe that banks could also be hit hard by the PASO results, as the central bank has limited measures to stop a run in the peso that we are already witnessing. This might prompt the central bank to raise the already-high rates, making loans even more prohibitive and investment that much more expensive, negatively affecting economic growth (see here for the macroeconomic and political implications of the PASO results).

    In our view, what is clear is that there will be strong selling even in the stronger names, because previous Kirchner experiences are enough to spook even the most optimistic investor.