Fitch: High FX Mismatch Risk for Latin America Corporates
01 July 2015 - 7:15AM
Business Wire
Link to Fitch Ratings' Report: Latin America Corporates FX
Sensitivity Analysis
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866192
There is a high foreign exchange (FX) mismatch risk for
companies in five Latin American countries, according to Fitch
Ratings. We have released our 2015 "Latin America Corporates FX
Sensitivity Analysis, which examined the impact from local currency
(LC) depreciation for Fitch-rated Latin American (LatAm)
corporates' capital structure and cash flow generation. The
analysis data has been grouped by country and also includes
individual company's FX risk exposure.
LatAm corporates exhibit a high level of foreign currency (FC)
denominated debt reliance, representing 62% of the total
outstanding debt on an aggregate basis as of September 2014. The
high cost and limited availability of hedge instruments, as well as
restrictive domestic capital market conditions, have led to high FC
mismatch risks for some issuers, especially high-yield credits.
Positively, this risk is alleviated to an extent by the issuers'
FC-based EBITDA generation and an insignificant short-term FC debt
amortization schedule during 2015.
In the region, corporates in Argentina, Mexico and Peru have the
highest currency mismatch risks. In Argentina, over 80% of the
total debt of Fitch-rated issuers was based in FC. Mexican
high-yield issuers, which account for about 55% of the total number
of rated corporates, have had limited access to the domestic
capital market, resulting in an overwhelming proportion of FC debt.
Peru's banking system is highly dollarized and hedging is almost
non-existent. About 90% of the debt of rated corporates in this
country is denominated in a FC. Positively, about half of the
issuers in Peru are exporters or sell commodity products that are
priced in U.S. dollars.
The FC debt exposure for Chile is also high, but the risk is
manageable. Exporters comprise about one-quarter of the rated
corporates in the country, resulting in an estimated FC EBITDA
proportion of about 62% on a median basis, which enables the
issuers to cope with FX risks. The median proportion of the
FC-denominated net debt was 78%.
Brazil and Colombia had relatively comfortable FC debt exposure.
Net debt denominated in a FC as proportion of total debt after
hedging in these countries was about 30% on a median basis. Brazil
corporates tend to hedge only part of their FC exposure, unlike
financial institutions, despite a relatively sophisticated
financial market. Colombian corporates, excluding big oil
producers, do not have a high portion of FC cash flow generation,
but the local banks and capital markets continue to provide ample
liquidity and long-term funding options, which help corporates
better manage the refinancing activities.
Based on a sensitivity test that resulted in a 20% depreciation
of their respective LCs, 17 out of the 178 issuers analyzed were
found to be more vulnerable to FX risk than others, as their
leverage ratio deteriorated by more than 1.0x. While some of these
companies have mitigating factors, such as solid operation and
balance sheet or a linkage to strong parent or the sovereign,
Fitch's ratings have incorporated their higher level of FX
vulnerability into the ratings. No ratings changes have occurred
from the analysis.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
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Fitch RatingsJoe Bormann, CFA, +1 312-368-3349Managing Director,
Latin America Corporates70 W. Madison StreetChicago, ILorAlvin Lim,
CFA, +1 312 368-3114Director, Latin America CorporatesDiana
Barriga, +1 312 606-2319Analyst, Latin America CorporatesPaula
Bunn, +1 55 21 4503-2639Analyst, Latin America CorporatesAlameda
Santos, 700 - 7 andarSao Paulo, sp CEP 01418-100, BrazilorFitch
WireKellie Geressy-Nilsen, +1 212 908-9123Senior Director33
Whitehall StreetNew York, NYorMedia Relations:Alyssa Castelli, New
York, +1 212-908-0540alyssa.castelli@fitchratings.com