(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated 'CCC+' or 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 emerging markets issuers rated 'CCC+' and lower decreased to 17 as of September 2023, from 19 as of June 2023. Issuers rated 'CCC+' and lower now constitute 11% of the speculative-grade universe.
- Downward transition risk is still very pronounced, with 76% of issuers rated 'CCC+' and lower either on negative outlook or on CreditWatch negative. Almost 70% of issuers that are rated 'CCC+' and lower and on negative outlook are based in Argentina.
- The current 18-month-long period of elevated financing costs is progressively eroding risky credits' financials. The ratings impact is limited for now.
Further defaults meant that the number of emerging markets issuers rated 'CCC+' and lower decreased to 17 in the third quarter of 2023, from 19 in the second quarter (see chart 1). Three companies defaulted in the third quarter. We downgraded Brazilian airline Azul S.A. to 'SD' (selective default), from 'CC', following a distressed debt exchange that resulted from the company's shrinking liquidity and challenging financial market conditions. Chilean utility Guacolda Energia S.A. defaulted for the second time in 2023, from 'CC', following a tender offer and difficult operating conditions. Greater China property developer Sunac China Holdings Ltd. defaulted from 'NR' (not rated) on a Chapter 15 bankruptcy. Year-to-date, 14 out of 15 corporate defaults in emerging markets happened in Latin America, where issuers grappled the most with refinancing concerns and precarious capital structures. We withdrew our 'CCC-/C' issuer and issue credit ratings on Colombian nonbank financial institution Credivalores - Crediservicios SAS.
Chart 1
Issuers rated 'CCC+' and lower accounted for 11% of speculative-grade issuers as of September 2023, a slight decrease from the 12% record in June 2023. The number of speculative-grade issuers declined to 153 in September 2023, from 155 in June 2023.
The negative bias for issuers rated 'CCC+' and lower decreased slightly but remains at a high level (see chart 2). 76% of issuers rated 'CCC+' and lower were on negative outlook or on CreditWatch negative in the third quarter, compared with 79% in the second quarter. This suggests a high risk of downgrades over the next few months. The only issuers that were not on negative outlook or on CreditWatch negative were South African utility ESKOM Holdings SOC Ltd. (CreditWatch positive), Brazilian airline Gol Linhas Aereas Inteligentes S.A. (positive outlook), Indonesian industrial estate developer Kawasan Industri Jababeka Tbk. PT (stable outlook), and Mexican real estate company Grupo Gicsa S.A.B. de C.V. (stable outlook). All 13 issuers 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 $12 billion in the third quarter, from $13.5 billion in the second quarter. At $6 billion, Argentina has the highest debt concentration, spread among nine issuers on negative outlook (see chart 3). Next comes South Africa, with utility ESKOM Holdings SOC Ltd. holding debt of $4 billion.
Chart 3
From a sector perspective, utilities rated 'CCC+' and lower account for $5.8 billion of debt (see chart 4). The issuers of $1.9 billion of this debt are on negative outlook and include CAPEX S.A., Pampa Energia S.A., and Guacolda Energia S.A. Oil and gas companies rated 'CCC+' and lower comprise $3.2 billion of debt. The issuers of this debt are on negative outlook and include YPF S.A. and Compania General de Combustibles S.A.
Chart 4
Issuance, especially speculative-grade issuance, remains subdued in emerging markets (see chart 5). Even though 'BB' rated issuance increased to $6.8 billion year to date, from $3.6 billion in full-year 2022, volumes are considerably lower than the average annual issuance of $39 billion over 2016-2021. The drop in issuances results from tight financing conditions and issuers' relatively low need to use financial markets for refinancing purposes. The latter is a direct consequence of record issuances over 2019-2021, when issuers locked in their debt with long maturities.
Chart 5
Financing costs in emerging markets have already been higher for longer, at least from a historical perspective. Speculative-grade yields stalled at about 10.5%. Since 2000, only the banking and currency crisis in Turkiye in 2000-2001, fiscal imbalances in Latin America in 2000-2002, and the great financial crisis in 2008-2009 induced longer periods of similarly high yields. Speculative-grade yields have exceeded 9% for 18 consecutive months since April 2022 (see chart 6) and will likely continue to do so. With U.S. nominal yields at record levels, higher-for-longer-interest rates seem to materialize in advanced economies. This will require corporates in emerging markets to adapt their capital structures to a new normal.
Chart 6
*The ICE BofA Emerging Markets Corporate Plus Index tracks the performance of U.S. dollar- and euro-denominated emerging markets non-sovereign debt publicly issued within the major domestic and eurobond markets. To qualify for inclusion in the index, the issuer must have risk exposure to countries other than members of the FX G10 (U.S., Japan, New Zealand, Australia, Canada, Sweden, U.K., Switzerland, Norway, and the eurozone), all western European countries, and territories of the U.S. and western European countries. Each security must also be denominated in USD or EUR, with a time to maturity greater than one year, and have a fixed coupon. For inclusion in the index, investment-grade rated bonds of qualifying issuers must have at least 250 million (EUR or USD) in outstanding face value, and below-investment-grade rated bonds must have at least 100 million (EUR or USD) in outstanding face value.
In addition to the refinancing concerns we outlined in our previous publication (see "Risky Credits: Refinancing Struggles Keep Emerging Markets On Their Toes," July 26, 2023), tight financing conditions could negatively affect corporates, also through the increase in debt servicing costs--47% of corporates rated 'CCC+' and lower hold floating rate debt--lower capital expenditure (capex), and reduced cash flows. The pace of downgrades and defaults reduced, as evidenced by the limited number of downgrades to the 'B-' and 'CCC' categories. Given the increase in leverage, however, we could downgrade 'B' rated issuers going forward.
Protracted tight financing conditions highlight the difficult trade-off between leverage and capex that will be crucial to determine corporates' creditworthiness. This is because tight financing conditions depress consumer demand and add downward pressure on operating margins in the long term. We have progressively reviewed companies' financial forecasts to incorporate a gradual deterioration in their EBITDA interest coverage ratio and liquidity (see charts 7a-7c). If capex continues to remain at current levels in 2023, supported by a higher leverage and available liquidity, it could decrease in 2024 because interest paid on debt and depleted cash positions would likely force a deleveraging process (see chart 7d).
Chart 7a
Chart 7b
Chart 7c
Chart 7d
The financial ratios of issuers rated 'CCC+' and lower have not changed significantly quarter on quarter, but we expect some material changes (see charts 8-10). The most important ones include:
- Brazilian chemical company Unigel Participacoes S.A. will record a debt-to-EBITDA ratio of 10.8x in 2023, from 2.2x in 2022, with the ratio normalizing over 2024-2025. The company's cash flows reduced in 2023.
- Chilean media and entertainment company Enjoy S.A. will reduce its leverage in 2023, increase its interest coverage ratio above 1x, and consolidate its liquidity.
- Argentine capital goods conglomerate CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. will increase its debt stock from 2023, while funds from operations will pick up only in 2024.
- Argentine telecommunications company Telecom Argentina S.A. will increase its interest expense considerably because of the depreciation of the Argentine peso (most of the company's debt is denominated in U.S. dollar, while cash flows are denominated in the domestic currency). Debt and interest expense will exceed cash flows if the depreciation is significantly higher than inflation. This would be the case in a recession, when revenue and EBITDA would not be able to keep up with inflation.
Liquidity and refinancing risk exposures will remain at the core of our rating actions in emerging markets.
Chart 8
Chart 9
Chart 10
Table 1
| 'CCC' category in emerging markets | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Industry | Issuer name | Rating | Outlook/CreditWatch | Outlook or CreditWatch | Country | Region | ||||||||
| Bank |
Banco De Galicia Y Buenos Aires S.A.U. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Capital goods |
CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Chemicals, packaging, and environmental services |
Unigel Participacoes S.A. |
CCC- | Negative | Outlook | Brazil | Latin America | ||||||||
| Media and entertainment |
Enjoy S.A. |
CCC- | Negative | Outlook | Chile | Latin America | ||||||||
| Telecommunications |
Telecom Argentina S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Homebuilders/real estate |
Kawasan Industri Jababeka Tbk. PT |
CCC+ | Stable | Outlook | Indonesia | Asia/Pacific | ||||||||
| Homebuilders/real estate |
Grupo Gicsa S.A.B. de C.V. |
CCC+ | Stable | Outlook | Mexico | Latin America | ||||||||
| Oil and gas exploration and production |
YPF S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Oil and gas exploration and production |
Compania General de Combustibles S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Transportation |
Gol Linhas Aereas Inteligentes S.A. |
CCC+ | Positive | Outlook | Brazil | Latin America | ||||||||
| Transportation |
Aeropuertos Argentina 2000 S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Transportation |
Investimentos e Participacoes em Infraestrutura S.A. - Invepar |
CCC- | Negative | CreditWatch | Brazil | Latin America | ||||||||
| Utility |
ESKOM Holdings SOC Ltd. |
CCC+ | Positive | CreditWatch | South Africa | Eastern Europe, Middle East, and Africa | ||||||||
| Utility |
Empresa Distribuidora Y Comercializadora Norte S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Utility |
CAPEX S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Utility |
Pampa Energia S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Utility |
Guacolda Energia S.A. |
CCC- | Negative | Outlook | Chile | Latin America | ||||||||
| Data as of Sept. 30, 2023. Source: S&P Global Ratings Credit Research & Insights. | ||||||||||||||
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); and Greater China (China, Hong Kong, Macau, Taiwan, and red chip companies, which are headquartered in Greater China but incorporated elsewhere).
Glossary
Negative bias: Percentage of issuers on negative outlook or on CreditWatch negative.
Related Research
- Emerging Markets Monthly Highlights: Turbulence Abroad Will Fuel Uncertainty, Oct. 19, 2023
- Credit Conditions Emerging Markets Q4: High Interest Rates Sour The Mood, Sept. 26, 2023
- Risky Credits: Refinancing Struggles Keep Emerging Markets On Their Toes, July 26, 2023
Related Rating Actions
- Credivalores - Crediservicios SAS 'CCC-' Ratings Withdrawn At The Issuer's Request, Sept. 29, 2023
- Guacolda Energia SpA Downgraded To 'D' From 'CC' On Completion Of Tender And Exchange Offer, Aug. 16, 2023
- Brazilian Airline Azul S.A. Downgraded To 'SD' Following Distressed Debt Exchange, July 14, 2023
This report does not constitute a rating action.
| Emerging Markets Research: | Luca Rossi, Paris +33 6 2518 9258; luca.rossi@spglobal.com |
| Jose M Perez-Gorozpe, Madrid +34 914233212; jose.perez-gorozpe@spglobal.com | |
| Research Contributor: | Nivedita Daiya, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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