Nonfinancial corporate defaults in Latin America are trending upward as the economic contraction caused by the coronavirus pandemic negatively affects issuer cash flow and liquidity, says Fitch Ratings. The number of defaults in 2020 is on pace to exceed that of 2019 with indications there will be more to follow, given six group-level defaults YTD (Year To Date) compared with six in all of 2019, and the high number of ratings at ‘CCC’ or below categories. Past spikes occurred from 2002 to 2003 due to Argentina’s financial crisis, and in 2013-2016, a turbulent period for the region characterized by volatile commodity prices, political instability, trade uncertainty and Brazil’s 36-month recession.
Aggregate volume of debt affected by defaults YTD totaled more than $20 billion, with LATAM Airlines being the largest with approximately $10 billion of on-balance-sheet debt as of YE 2019. Historically, there has not been significant sector concentration for defaults in the region. However, most of the defaults YTD have been in the airline, non-food retail and gaming sectors, which are highly exposed to the coronavirus pandemic due to significantly reduced demand for these non-essential products and services.
LATAM Airlines Group’s and Aerovias del Continente Americano’s (Avianca) Chapter 11 filings were triggered by severe travel restrictions imposed due to the outbreak and limited financial flexibility. Grupo Famsa’s inability to refinance maturing debt due to investor risk aversion drove it into default. Enjoy’s reorganization was due to the closure of casinos in Chile, Argentina and Uruguay following government-mandated lockdowns to slow the spread of the virus.
Default risk in LATAM remains high over the near term. Over 20 issuers with aggregate outstanding debt of approximately $32 billion as of YE 2019 currently have international ratings of ‘CCC+’ or below. Eight of these issuers are domiciled in Brazil and Mexico, the two largest economies in Latin America. Brazil and Mexico accounted for 36% and 21%, respectively, of the 78 group-level defaults in the region over the last two decades. The next largest was Argentina, which represented 17% of the cumulative defaults since 2000.
Oi’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) were downgraded to ‘CCC+’ from ‘B-’ in May due to the company’s weak operating trends and the deterioration in the Brazilian operating environment, which will hinder Oi’s return to growth. While Oi is expected to have adequate liquidity in 2020, the company’s business model and financial performance is unsustainable relative to capex requirements and debt service in 2022 and beyond. Oi has the highest amount of debt outstanding at $7.8 billion among the more than 20 rated issuers with international ratings of ‘CCC+’ or below in Fitch’s LATAM corporate portfolio.
Grupo IDESA and Grupo Posadas are currently two of the lowest-rated issuers in Fitch’s rated portfolio. Grupo IDESA’s IDR was downgraded to ‘C’ from ‘CCC-’ in late March after the company launched a tender offer to exchange its unsecured notes due in 2020 for new secured notes due in 2026, which Fitch considers a distressed debt exchange (DDE) per our DDE criteria. Grupo IDESA’s IDR will be downgraded to ‘RD’ and subsequently upgraded to a rating level reflecting the post-DDE credit profile. The Mexican chemicals company is highly-levered with more than $500 million of debt as of YE 2019.
Grupo Posadas’ ratings were downgraded to ‘C’ from ‘CC’ following its announcement in June that it will not meet its senior unsecured notes’ $15.5 million USD coupon payment due on June 30, 2020. The company also announced it does not intend to make the payment during the 30-day cure period, which will lead to a downgrade of the IDRs to ‘RD’.
For more information, see Fitch’s Special Report “Latin American Corporate Defaults: Trend Increasing Over Two Decades (2000-YTD 2020)” at www.fitchratings.com.