(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated 'CCC+' and lower in emerging markets. Because many defaults are of companies in these categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)
Key Takeaways
- The number of issuers rated 'CCC+' or lower in emerging markets (EMs) rose to 23 in third-quarter (Q3) 2022 from 21 as of June 30, 2022, and now constitutes 13% of speculative-grade entities we rate in EM17*, up from 11% in the second quarter.
- Refinancing risk is a key consideration, with 41% of ratings in the 'CCC' and 'C' categories carrying a negative outlook or CreditWatch and debt of $17.1 billion nearing the 2020 peak of $18.1 billion.
- Argentina has the highest number of ratings in the 'CCC' and 'C' categories, followed by Brazil, while by sector, real estate, transportation, and utilities lead the tally.
*EM17 refers to 17 emerging economies we focus on across Latin America, Asia Pacific, and Europe, the Middle East, and Africa, considering their economic size and market relevance, where we can provide an opinion about sovereign, corporate, and bank ratings.
Two defaults and three downgrades from 'B-' in Q3 pushed the number of issuers to 23. In September, Mexico-based nonbank financial institution (NBFI) Mexarrend S.A.P.I. de C.V. was downgraded to 'CCC+' due to tight liquidity and increased refinancing risk. This followed the August downgrades of Central China Real Estate Ltd. to 'CCC+', due to inability to meet its financial commitments, and of Indonesian property company PT Kawasan Industri Jababeka Tbk. to 'CCC' due to rising refinancing risk. The two companies that we considered to be in default were Indonesian forest products company Sawit Sumbermas Sarana Tbk. PT and Mexico-based NBFI Unifin Financiera S.A.B. de C.V. (see Related Rating Actions).
Chart 1
Fewer issuers, higher debt, imply increased debt concentration risk. EM corporate debt rated 'CCC+' and lower rose to $17.1 billion as of the end of Q3 (see chart 2) approaching the $18.1 billion reached in November 2020. This was the historical peak, considering that, from August to December 2021, most of the debt was owed by a single issuer, China Evergrande Group, which was downgraded to 'CCC' in August 2021 and subsequently exited the rating category after a downgrade to 'SD' in December 2021. However, the number of issuers is now lower than in November 2020. This indicates a higher concentration risk of 'CCC' debt, which we will monitor closely. In particular, South African utility ESKOM Holdings SOC Ltd. owes 29% of the EM corporate debt rated 'CCC+' and lower, Argentinian oil and gas company YPF S.A. 17%, and Brazil-based telecommunications player Oi S.A. 15%.
Chart 2
Issuance in EMs has been modest so far this year, especially within the speculative-grade category ('BB+' and lower). As of Sept. 30, 2022, it amounted to $3.9 billion, a substantial drop from the average annual issuance of $46 billion in 2019-2022. None of the entities rated 'CCC+' or lower in the EM17 has issued debt this year.
Real estate, transportation, and utilities lead the sectors with the highest number of issuers rated 'CCC+' and lower. Although all of our ratings on transportation issuers carry stable outlooks, 75% of those on real estate issuers have negative outlooks (see chart 3). The utilities sector has the largest exposure to rated debt, although 70% of it was issued by ESKOM. This places South Africa as having the highest amount of debt rated 'CCC+' and lower carrying negative outlooks or CreditWatch (see chart 5), while Argentina tops the list in terms of issuer counts (see chart 6). About 78% of EM17 'CCC' issuers are located in Latin America.
Chart 3
Chart 4
Chart 5
Chart 6
While this year's rating-performance indicators point to more downgrades, we expect the amount of EM debt rated 'CCC+' and lower to decrease over time as a percentage of EBITDA. What's more, interest coverage appears comfortable across sectors, with the exception of telecom Oi S.A. and utility company Empresa Distribuidora Y Comercializadora Norte S.A., whose interest coverage ratios are lower than 1x.
Chart 7
Chart 8
Related Research
- Emerging Markets Monthly Highlights: Approaching The Peak Of Tightening Cycle?, Nov. 16, 2022
- Global Credit Conditions Downside Scenario: Recession Risks Deepen, Oct. 12, 2022
- Credit Conditions Emerging Markets Q4 2022: Clouds are Gathering, Sept. 27, 2022
Related Rating Actions
- Mexarrend Downgraded To 'CCC+' From 'B-' On Tight Liquidity And Higher Refinancing Risk, Still On CreditWatch Negative, Sept. 8, 2022
- Kawasan Industri Jababeka Downgraded To 'CCC' On Rising Refinancing Risk; Outlook Negative, Aug. 19, 2022
- Central China Real Estate Downgraded To 'CCC+'; Removed From CreditWatch; Outlook Negative, Aug. 16, 2022
- Unifin Financiera S.A.B. de C.V. Downgraded To 'D' On Debt Restructuring, Aug. 10, 2022
- Sawit Sumbermas Sarana Rating Lowered To 'SD' On Completion Of Cash Tender, July 18, 2022
This report does not constitute a rating action.
Emerging Markets Research: | Luca Rossi, Emerging Markets Research, Paris +33 6 2518 9258; luca.rossi@spglobal.com |
Jose M Perez-Gorozpe, Madrid +34 914233212; jose.perez-gorozpe@spglobal.com | |
Research Contributors: | Vaishali Singh, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
Nivedita Daiya, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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