(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 emerging market issuers rated 'CCC+' and lower fell to 15 as of March 2024 from 16 as of December 2023 and now constitute 10% of the speculative-grade universe. The pace of defaults remains lower than in U.S. and Europe.
- Downgrade risk decreased considerably after our upgrade of Argentina in March 2024, with 33% of issuers rated 'CCC+' and lower having a negative outlook or CreditWatch, compared with 88% one quarter ago.
- Financing conditions have generally improved. However, speculative-grade market access remains challenging for issuers rated in the 'B' category and below. Recent macroeconomic and geopolitical developments could slow market activity in the second quarter.
- Our financial forecasts point to a reduction in corporate leverage in 2024-2025, albeit remaining high, together with a recovery in revenues and a slowdown in capital expenditure (capex).
The Number Of Risky Credits Dropped By One
The number of emerging market issuers rated 'CCC+' and lower fell to 15 in the first quarter of 2024 from 16 in the fourth quarter of 2023 (see chart 1). Issuers rated 'CCC+' and lower accounted for 10% of speculative-grade issuers as of March 2024, in line with the December 2023 numbers.
We added Chilean telecoms company Wom S.A. to the pool following a downgrade to 'CCC' from 'B' with a negative outlook. This was because Wom's negotiations to refinance its $348 million senior unsecured notes, due in November 2024, were moving more slowly than we expected, raising the likelihood of a debt restructuring. This happened in a context of tight market conditions and limited investor appetite. In addition, we saw a strain on Wom's liquidity from negative free operating cash flow in 2024 and upcoming capex. The company subsequently initiated a Chapter 11 Bankruptcy filing and we therefore downgraded it to 'D' (default) on April 2, 2024.
Three companies defaulted within the quarter. Brazilian transport company Gol Linhas Aereas Inteligentes S.A. (Gol) filed for Chapter 11 bankruptcy due to a heavy debt burden; high lease payments and capex; delays on the delivery of new MAX aircraft from the manufacturer; and working capital outflows. Chilean media and entertainment company Enjoy S.A. filed for a judicial reorganization following disappointing revenue and EBITDA across its casinos and hotels that led to cash flow deficits and an inability to pay debt obligations. Triggers were rising inflation and higher taxes under new municipal licenses in Chile, together with challenging capital market conditions.
Finally, we lowered the rating on Argentinian capital goods company CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. to 'SD' (selective default) after the majority of its 2027 senior secured noteholders accepted a consent solicitation for CLISA to pay all of the January 2024 coupon in kind, thereby receiving less value than the promise of the original securities. Once the distressed exchange was completed, we upgraded CLISA to 'CCC-', with a negative outlook, reflecting the company's weak liquidity position and its heavy dependence on variables outside its control to continue honoring its financial obligations.
Aside from the fact that all three companies are located in Latin America, they had also all defaulted previously. Since 2008, Gol has defaulted three times (in 2016, 2023, and 2024), Enjoy twice (in 2020 and 2024), and CLISA twice (in 2021 and 2024). The rise in re-defaulters is a common trend across geographies and is due to more entities being comfortable with a high level of leverage in their capital structures. Many of these structures were established during periods of low rates and in anticipation of borrowing costs remaining low.
The emerging markets have a lower default rate than developed regions. As of Feb. 29, 2024, the 12-month trailing speculative-grade default rate was 1.8% for the emerging markets, versus 4.8% in the U.S. and 4.11% in Europe.
Chart 1
The Negative Bias Decreased Markedly
The negative bias fell to 33% in the fourth quarter of 2024 from 88% in the fourth quarter of 2023 (see chart 2). On March 15, 2024, we raised the long-term foreign currency sovereign credit rating on Argentina to 'CCC' from 'CCC-' and revised upward our transfer and convertibility (T&C) assessment on the country accordingly. As we cap the ratings on eight risky credits at the level of Argentina's T&C assessment, we upgraded these entities as well and assigned them stable outlooks.
The stabilization of the risky credits' outlooks balanced the improved T&C conditions on the one hand, and on the other, the macroeconomic recession, with high inflation, currency depreciation, and subdued market access. The regional distribution of negative outlooks, however, has not changed materially with respect to the previous quarter, with four out of five entities located in Latin America.
Chart 2
Risky Credits' Aggregate Debt Remained Relatively Constant
Debt stood at $7.2 billion as of first-quarter 2024. The country with the highest concentration of debt is Argentina, with $6.3 billion (87.5% of total debt outstanding), largely on a stable outlook (see chart 3). Sector-wise, oil and gas tops the list, with $3.2 billion at YPF S.A. and Compania General de Combustibles S.A., again on a stable outlook (see chart 4).
Chart 3
Chart 4
Speculative-Grade Issuance Almost Tripled From The Previous Quarter
This was the result of corporate spreads falling consistently by over 110 basis points (bps; see chart 5) following lower corporate yields. The iBoxx USD Emerging Market 'CCC' annual bond yield fell to 18% as of March 2024 from 28% as of December 2023. As a result, we saw higher speculative-grade issuance than in last three quarters, albeit still far from 2019-2021 levels, and restricted to the 'BB' rating category. The last issuance rated 'CCC+' and lower was in November 2021. In this regard, it is noteworthy that speculative-grade corporate yields are still 90 bps higher than their 10-year average levels. Borrowing costs remain tight from a historical perspective.
Recent developments are not encouraging, with U.S. macroeconomic data pointing to upward pressure on benchmarks. This will likely cause the Federal Reserve to postpone policy rate cuts in a scenario of higher-for-longer interest rates, with a strong dollar and sticky inflation. In addition, increasing geopolitical risk arising from the conflict in the Middle East could curb market exuberance. This presents a gloomier outlook for corporate issuance, especially for lower-rated issuers.
Chart 5
Risky Credits' Fundamentals Point To A More Positive Future
This is thanks to their prudent investment decisions, even though we expect their leverage to stay high. The leverage of issuers rated 'CCC+' and lower peaked in 2023 (see chart 6). We expect to see growth in these risky credits' debt over 2024 and 2025, albeit less consistently than growth in EBITDA. Together with revenues, we expect EBITDA to rise in 2024 and 2025 after a decrease in 2023. The revenue peak will translate into higher liquidity buffers if it occurs concomitantly with a slowdown in capex, at least until 2024.
Chart 6
Risky Credits' Financial Ratios Haven't Moved Consistently Over The Quarter
Hungarian chemicals company Nitrogenmuvek Zrt. and Argentinian utility Capex S.A. display abrupt changes in their financials, and these influence the industry financial ratios in charts 7-9. We expect Nitrogenmuvek's EBITDA to slightly increase in 2024, thanks to higher sales volumes after negative free operating cash flow in 2023. Notwithstanding Nitrogenmuvek's adequate liquidity at present, we view the company's capital structure as unsustainable due to its high debt burden and lower EBITDA generation following the introduction of a new national carbon tax in 2023. We expect the company's leverage to stay very high in 2024, at around 10x, and to rise gradually in 2025-2026.
We expect Capex to consistently lower its interest burden in 2026 owing to lower overall debt. As such, the utilities' average EBITDA interest coverage ratio will rise to around 17x in 2026 from below 8x in 2025.
Chart 7
Chart 8
Chart 9
Table 1
| Issuers rated 'CCC+' and lower in emerging markets | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Industry | Issuer | Rating | Outlook/CreditWatch | Outlook or CreditWatch | Country | Region | ||||||||
| Bank |
Banco De Galicia Y Buenos Aires S.A.U. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Financial institution |
Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R. |
CCC+ | Neg/Negative | Outlook | Mexico | Latin America | ||||||||
| Capital goods |
CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. |
CCC- | Neg/Negative | Outlook | Argentina | Latin America | ||||||||
| Chemicals, packaging, and environmental services |
Nitrogenmuvek Zrt. |
CCC+ | Neg/Negative | CreditWatch | Hungary | Europe | ||||||||
| 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 | Stable | Outlook | Argentina | Latin America | ||||||||
| Oil and gas exploration and production |
Compania General de Combustibles S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Telecommunications |
Telecom Argentina S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Telecommunications |
Wom S.A. |
CCC | Neg/Negative | Outlook | Chile | Latin America | ||||||||
| Transportation |
Aeropuertos Argentina 2000 S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Transportation |
Investimentos e Participacoes em Infraestrutura S.A. - Invepar |
CCC+ | Neg/Negative | Outlook | Brazil | Latin America | ||||||||
| Utility |
Empresa Distribuidora Y Comercializadora Norte S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Utility |
CAPEX S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Utility |
Pampa Energia S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Data as of March 31, 2024. Source: S&P Global Ratings. | ||||||||||||||
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: Hungary, Poland, Saudi Arabia, South Africa, Turkey.
- Greater China: China, Hong Kong, Macau, Taiwan, and Red Chip companies (issuers headquartered in Greater China but incorporated elsewhere).
Glossary
- Negative bias--Percentage of issuers with a negative outlook or on CreditWatch negative.
Related Research
- Global Financing Conditions: First-Quarter Issuance Surge Will Taper Off Amid Increasing Risks, April 25, 2024
- Emerging Markets Monthly Highlights: Rising Challenges To Interest-Rate Cuts, April 17, 2024
- Global Defaults Are Still High Despite Dipping In March, April 16, 2024
- Credit FAQ: The Rise of Repeat Defaulters, April 11, 2024
- Risky Credits: Silver Lining For Emerging Markets, Feb. 7, 2024
Related Rating Actions
- Wom S.A. Downgraded To 'D' On Chapter 11 Bankruptcy Filing, April 1, 2024
- Several Argentine Infrastructure And Corporate Entities Upgraded To 'CCC' On Lower Transfer And Convertibility Risks, March 18, 2024
- Argentina Long-Term Ratings Raised To 'CCC' As Debt Exchange Is Finalized; Outlook Stable, March 15, 2024
- Wom S.A. Downgraded To 'CCC' On High Refinancing Risk, Outlook Negative, March 13, 2024
- Argentine Conglomerate CLISA Upgraded To 'CCC-' From 'SD' After Conversion Of Interest Payment To Payment-In-Kind, Feb. 16, 2024
- Argentine Conglomerate CLISA Issuer Credit Rating Lowered To 'SD' Following Consent Solicitation Acceptance, Feb. 14, 2024
- Enjoy S.A. Ratings Lowered To 'D' On Judicial Reorganization Filing, Jan. 31, 2024
- Gol Linhas Aereas Inteligentes S.A. Downgraded To 'D' On Chapter 11 Bankruptcy Filing, Jan. 26, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Luca Rossi, Paris +33 6 2518 9258; luca.rossi@spglobal.com |
| Secondary Contact: | 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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