(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.)

The number of emerging market issuers rated 'CCC+' and lower decreased to 19 in the second quarter of 2023, from 21 in the first quarter (see chart 1).  The only new addition to the risky credit cohort was Brazilian chemical company Unigel Participacoes S.A., which we had downgraded to 'CCC+' from 'B+' on debt restructuring risk.

Three issuers left the risky credit category: consumer products business China Dili Group, which requested S&P Global Ratings to withdraw the rating; Mexican chemical company Grupo IDESA, S.A. de C.V., which we had upgraded to 'B-' from 'SD' (selective default) on the completion of its distressed debt exchange; and Peruvian healthcare business Auna S.A.A., which we had upgraded to 'B' from 'CCC+' on its completed refinancing.

Downward transitions and defaults eased their pace, compared with the first quarter of 2023. Three companies defaulted in the second quarter of 2023 (versus four in the first quarter of 2023), all from a 'CC' rating level: the aforementioned Grupo IDESA; Chilean utility business Guacolda Energia S.A., which we had upgraded to 'CCC+' from 'D' following a tender offer completion; and Brazilian cement company InterCement Brasil S.A., which we had downgraded to 'SD' from 'CC' on a standstill agreement as part of a distressed debt restructuring. As was the case in the first quarter of 2023, all defaults in the second quarter happened in Latin America. Given the upcoming debt maturities, we expect defaults will remain concentrated in that region.

Issuers that were rated 'CCC+' and lower accounted for 12% of speculative-grade (SG) issuers as of June 2023. The number of SG issuers decreased to 155 in June 2023, from 160 in March 2023.

Chart 1

The negative bias for issuers rated 'CCC+' and lower remains at a high level.  79% of issuers rated 'CCC+' and lower had negative outlooks or were on CreditWatch negative in the second quarter of 2023, in line with COVID-19 records. The percentage of risky credits with a negative bias has remained relatively stable throughout the first and second quarter of 2023. This points to a high risk of downward transition (see chart 2). The only four issuers without a negative outlook or a CreditWatch negative placement are South African utility company Eskom Holdings SOC Ltd. (CreditWatch positive), Brazilian airline Gol Linhas Aereas Inteligentes S.A. (positive outlook), Indonesian real estate developer PT Kawasan Industri Jababeka Tbk. (stable outlook), and Mexican construction business Grupo GICSA S.A.B. de C.V. (stable outlook). All the 15 entities on negative outlook are located in Latin America, with nine of them based in Argentina.

Chart 2

The aggregate debt of issuers rated 'CCC+' and lower decreased to $13.5 billion in the second quarter of 2023, from $14 billion in the first quarter.  From a country perspective, Argentina has the highest debt concentration, with nine issuers on negative outlook accounting for $6.6 billion. It is followed by South Africa, with Eskom making up $5 billion of debt (see chart 3). From an industry perspective, utilities account for a total of $6.8 billion of debt, $1.9 billion of which belong to CAPEX S.A., Pampa Energia S.A., and Guacolda Energia S.A. Our outlook on all three of them is negative. Our outlook on $3.2 billion of debt in the oil and gas sector, issued by YPF S.A. and Compania General de Combustibles S.A., is also negative (see chart 4).

Chart 3

Chart 4

Issuance in emerging markets remains subdued.  Tight financing conditions with higher-for-longer interest rates force issuers to turn to financial markets exclusively for refinancing concerns. Corporate SG yields still exceed 10%, with quarterly SG issuance at $2.2 billion in the second quarter of 2023, versus $4.4 billion in the first quarter, and no issuance for entities rated 'CCC+' and lower since November 2021. The most recent coupons of fixed-rate bonds--which, on average, have accounted for 90% of SG bonds since 2010--are similar to those we saw between 2010 and 2012. Nonetheless, SG issuers were still going to market back then (see chart 5). A possible explanation is that issuers took advantage of relatively low rates (from an historical perspective) between 2019 and 2021, locking in their debt for at least five years. Bond issuances, which averaged $11 billion per quarter between 2019 and 2021, confirm this assumption.

Chart 5

Not all companies anticipated the higher-for-longer interest rate scenario, which is now materializing and will shed light on companies with unsustainable capital structures.  Emerging markets are ahead of developed countries when it comes to taming inflation. Yet, we do not expect that interest rates will normalize quickly as national central banks will keep a close eye on the Federal Reserve to avoid capital outflows. Domestic markets, therefore, will remain an active but not exhaustive source of financing for emerging market SG corporates in the third quarter of 2023.

Therefore, upcoming maturities become crucial to assess how quickly credit stress will materialize in the form of refinancing risk. Our data suggest that the maturity wall of entities rated 'CCC+' and lower will peak in 2025 and that the effect on Latin America will be more significant than on other emerging markets (see chart 6). Refinancing concerns are, therefore, not imminent for companies rated 'CCC+' and lower but will be more significant between 2025 and 2027, particularly in the utilities, oil and gas, and transportation sectors (see chart 7).

Chart 6

Chart 7

Liquidity and refinancing risk exposures will remain at the core of future rating actions in emerging markets.  The financial ratios of emerging market issuers rated 'CCC+' and lower have not moved consistently quarter on quarter (see charts 8-10). Recently added chemical company Unigel Participacoes S.A. decreased its cashflow in 2023, while significantly increasing leverage. We expect debt to EBITDA will be at 10.8x in 2023, from 2.2x in 2022, and anticipate ratios will normalize over 2024-2025. We expect Chilean media and entertainment company Enjoy S.A. will lower its leverage in 2023, increase its debt coverage ratio above 1x, and consolidate its liquidity.

Chart 8

Chart 9

Chart 10

Table 1

Emerging markets consist of Latin America (Argentina, Brazil, Chile, Colombia, Peru, Mexico); Emerging Asia (India, Indonesia, Malaysia, Thailand, Philippines, Vietnam); Europe, the Middle East, and Africa (Poland, Saudi Arabia, South Africa, Turkiye); Greater China (China, Hong Kong, Macau, Taiwan) and red-chip companies (issuers headquartered in Greater China but incorporated elsewhere).

Glossary And Abbreviations

Negative bias: Percentage of issuers with a negative outlook or CreditWatch.

Related Research

• Emerging Markets Monthly Highlights: Holding Up Despite Softening External Demand, July 19, 2023
• Credit Conditions Emerging Markets Q3: 2023 Inflation Peaked, Risks Remain, June 27, 2023
• Risky Credits: Emerging Market Default Risk Centers On Latin America, April 28, 2023

Related Rating Actions

• InterCement Brasil S.A. Downgraded To 'SD' From 'CC' Following Standstill Agreement With Debenture Holders, June 13, 2023
• Unigel Participacoes S.A. Downgraded To 'CCC+' From 'B+' And Placed On CreditWatch Negative On Debt Restructuring Risk, June 7, 2023
• Grupo Idesa Upgraded To 'B-' On Distressed Debt Exchange Completion, New Senior Secured Notes Rated 'B-', Outlook Stable, May 22, 2023
• China Dili Group 'CCC' Rating Withdrawn At The Company's Request, May 3, 2023
• Grupo Idesa Credit Rating Lowered To 'SD' And Debt Rating To 'D' From 'CC' On Distressed Exchange Completion, April 27, 2023
• Auna S.A.A. Upgraded To 'B' From 'CCC+' And Off CreditWatch Developing On Completed Refinancing, Outlook Stable, April 24, 2023
• Guacolda Energia S.A. Downgraded To 'D' From 'CC' Following Tender Offer Completion, April 12, 2023