articles Ratings /ratings/en/research/articles/221122-credit-trends-risky-credits-in-emerging-markets-downward-rating-transitions-prevail-12566037 content esgSubNav
In This List
COMMENTS

Credit Trends: Risky Credits: In Emerging Markets, Downward Rating Transitions Prevail

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of Jan. 8, 2025

COMMENTS

CreditWeek: How Will 2024's Ratings Performance Shape The Year Ahead?

COMMENTS

2023 Short-Term Corporate Default And Rating Transition Study

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of Dec. 11, 2024


Credit Trends: Risky Credits: In Emerging Markets, Downward Rating Transitions Prevail

(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.)

*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.

image

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

image

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

image

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

image

Chart 4

image

Chart 5

image

Chart 6

image

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

image

Chart 8

image

Related Research

Related Rating Actions

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

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in