(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+' and lower has decreased to 13 as of September 2024, or 9.6% of the speculative-grade universe. Four of the 13 risky credits have a negative outlook.
- Financing conditions loosened further in the second quarter, spurring some 'CCC+' and lower rated issuance for the first time since November 2021. Risky credits tapped the market for refinancing purposes, and should be able to keep doing so provided macroeconomic and political uncertainties and geopolitical risks do not worsen.
- Forecasted financial ratios point to gradual deleveraging and a pick-up in liquidity profiles and interest coverage ratios. But this will be to the detriment of capital expenditure in 2025-2026.
Emerging market issuers rated 'CCC+' and lower declined to 13 in third-quarter 2024, from 15 in the second quarter (chart 1). These issuers, known as risky credits, accounted for 9.6% of speculative-grade issuers as of September 2024, slightly lower than in June (10.5%) and lower than a year ago. This was mostly due to a decrease in speculative-grade issuers.
Brazil-based Azul S.A. (transport sector) joined the risky credits list when S&P Global Ratings downgraded it to 'CCC+' from 'B-' and assigned a negative outlook to the long-term rating. This reflected softer-than-expected first-half 2024 results caused by the depreciation of the Brazilian real and a reduction in capacity and yields. This widened its free operating cash flow (FOCF) deficit for the year and weakened its liquidity.
We withdrew our 'CCC+' global scale rating on Mexico-based Grupo GICSA (real estate) at the issuer's request.
Three risky credits defaulted between July and September 2024. We downgraded CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. (Argentina; capital goods) to 'SD' from 'CC' on the missed interest payment on its $358 million senior secured notes. The devaluation of the Argentine peso in 2024 increased the company's interest burden because most of its debt was denominated in foreign currency. Moreover, high inflation dented CLISA's EBITDA margin.
Mexico-based Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R. (a nonbank financial institute) defaulted from 'CC' because it failed to make an interest payment on its $352 million unsecured notes due February 2025. Liquidity pressures, portfolio quality deterioration, and higher funding costs all eroded its already weak margins.
Also in Mexico, Grupo Idesa S.A. de C.V. (chemicals) received a 97.3% approval from bondholders on its cash tender offer on the full principal amount of its 6.5% senior notes due October 2028 (20% below par as proposed by the company). We viewed the proposed tender offer as tantamount to a default because creditors received less than originally promised. The chemical industry has been suffering from oversupply in Asia and high inventory, leading to weaker prices. Combined with subdued demand, this has weakened the company's cash flow and coverage ratios; our rating shifted rapidly from 'B-' to 'CCC+' to 'CCC' and finally to 'SD' in the space of one month. We subsequently withdrew the rating at the issuer's request.
With three months to go, eight emerging markets entities had defaulted, compared to 10 in 2023. Emerging markets currently display a lower default rate than developed regions. As of August 2024, the 12-month trailing speculative-grade default rate was 1.6% for emerging markets compared to 4.75% in Europe and 4.29% in the U.S. (12-month trailing speculative-grade default rates for the U.S. and Europe are through Sept. 30, 2024, and are preliminary and subject to change).
Chart 1
The negative bias for 'CCC+' and lower rated issuers slightly increased to 31% in third-quarter 2024 from 27% in the second quarter (chart 2). This was mostly as a result of the lower number of risky credits, with issuers with a negative outlook remaining at four. The regional distribution of negative outlooks is concentrated in Latin America, with three out of the four located in Brazil. On the other hand, the negative bias of 'B-' rated companies decreased to 0%, from 25% in the previous quarter. Indeed, two 'B-' rated companies had a negative outlook as of last quarter: Brazil-based Usina Coruripe Acucar e Alcool (consumer products) and China-based Xinhu Zhongbao Co. Ltd. (real estate). We revised our outlook on the former to stable on lower refinancing risk, triggered by improving sugar crushing volumes and cash costs. We downgraded the latter to 'CCC-' from 'B-', because of heightened refinancing risk for upcoming offshore bond maturities, before we withdrew all our ratings at the company's request.
Chart 2
The aggregate debt of issuers rated 'CCC+' and lower decreased slightly to $8.1 billion as of third-quarter 2024. Argentina has the highest concentration of debt at over $6 billion and the issuers mostly have a stable outlook (chart 3). Sector-wise, Oil and Gas tops the list with $3.2 billion from YPF S.A. and Compania General de Combustibles S.A., both with a stable outlook (chart 4).
Chart 3
Chart 4
Speculative grade issuance remained strong (chart 5). Issuance was $6.2 billion in the third quarter, 6% higher than the second quarter, and the highest quarterly amount since third-quarter 2021. Issuance was buoyed by historically low corporate spreads: the High-Yield Fred Index decreased by 20 bps in the quarter to reach 350 bps, significantly below its 10-year average of 600 bps. Both benchmark and corporate yields decreased, with the 'CCC' iBoxx annual yield time series attaining 14.5% in September 2024, from 15.9% in June 2024. Speculative-grade issuance is still centered on the 'BB' category, with some market interest in 'B' rated issuance.
The third quarter marked the first 'CCC+' and lower issuance since November 2021. Three Argentinian companies (Pampa Energia S.A., YPF, and Transportadora de Gas del Sur S.A. (TGS)) tapped the international market for refinancing purposes for a cumulative $1.4 billion at an average 8.6% yield-to-maturity with a seven-year tenor. The Fed's monetary easing will likely bring capital inflows and further yield compression. However, political and macroeconomic uncertainty, coupled with geopolitical risk, could create bouts of future market volatility.
Chart 5
Risky credits projections still point to deleveraging amid prudent capital spending. Chart 6 shows that issuers rated 'CCC+' and lower will further decrease leverage ratios in 2025-2026 as EBITDA growth, triggered by sound revenues, is expected to overcome nominal debt (albeit this is still expected to rise). The peak in revenues will translate into higher liquidity for companies, plateauing between 2024 and 2025 given higher interest expenses, before normalizing in 2026. The flip side is that risky credits will likely devote a smaller portion of future revenues to capital spending compared to higher rated entities. Between 2020 and 2022 capital expenditure amounted to 16% of revenues, while now the ratio is supposed to narrow to 13% in 2024-2025.
Chart 6a
Chart 6b
Chart 6c
Chart 6d
At the sector level, risky credit financials remained reasonably stable quarter-on-quarter (charts 7-9). Below are the drivers of the most significant forecasted changes:
- Hungarian chemical company, Nitrogenmuvek Zrt., will see its EBITDA generation increase in 2024 due to higher sales volumes after negative FOCF in 2023. The latter followed the October 2023 implementation of the Hungarian government's emission trading system (ETS), which introduced a tax on free carbon dioxide emissions allowances. The company has legally challenged the ETS decree but the outcome remains highly uncertain. We lowered our rating on the company to 'CCC' from 'CCC+' given the heightened refinancing risk associated with the senior unsecured notes that mature within a year (€200 million). This represents most of Nitrogenmuvek's debt. Its leverage is expected to stay very high around 10x in 2024 and is likely to deteriorate further in 2025.
- In telecommunications, the average debt to EBITDA ratio has been heavily influenced by Oi S.A., which will likely post negative EBITDA from 2022 to 2025. We recently upgraded the company to 'CCC' from 'CCC-' when the completion of the debt exchange resulted in lower gross debt. The outlook is negative as the debt structure is, in our view, unsustainable in the short term and dependent on favorable events, such as asset sales and an operational turnaround.
Chart 7
Chart 8
Chart 9
| Emerging markets issuers rated 'CCC+' and lower | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Industry | Issuer name | Rating | Outlook/CreditWatch | Outlook or CreditWatch | Country | Region | ||||||||
| Bank |
Banco De Galicia Y Buenos Aires S.A.U. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Chemicals, packaging, and environmental services |
Nitrogenmuvek Zrt. |
CCC | Neg/Negative | Outlook | Hungary | Europe | ||||||||
| Homebuilders/real estate Co. |
PT Kawasan Industri Jababeka Tbk. |
CCC+ | Stable | Outlook | Indonesia | Asia/Pacific | ||||||||
| 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 |
Oi S.A. |
CCC | Neg/Negative | Outlook | Brazil | Latin America | ||||||||
| Telecommunications |
Telecom Argentina S.A. |
CCC | Stable | Outlook | Argentina | 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 | ||||||||
| Transportation |
Azul S.A. |
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 Sept. 30, 2024. 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; EMEA: Hungary, 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: The percentage of issuers with a negative outlook or ratings on CreditWatch negative.
Related Research
- Global Emerging Markets: Bright Spots Emerge Amid A Shifting Trade Environment, Oct. 21, 2024
- Look Forward – Emerging Markets: A Decisive Decade, Oct. 16, 2024
- The Pace of Global Corporate Defaults Slows, Oct. 16, 2024
- Emerging Markets Monthly Highlights: Navigating Risks Amid Fed Easing, Oct. 16, 2024
- Credit Conditions Emerging Markets Q4 2024: Risks Loom Amid A Fragile Stability, Sept. 15, 2024
- Risky Credits: Corporate Ratings In Emerging Markets Stabilize, July 26, 2024
Related Rating Actions
- Operadora de Servicios Mega S.A. de C.V. SOFOM E.R. Downgraded To 'SD' On Missed Interest Payment, Sept. 11, 2024
- Azul S.A. Downgraded To 'CCC+' From 'B-' On Weaker Results And Tighter Liquidity; Outlook Negative, Sept. 2, 2024
- YPF S.A.'s Proposed Senior Unsecured Notes Due 2031 Rated 'CCC', Aug. 30, 2024
- Argentine Conglomerate CLISA Downgraded To 'SD' From 'CC' On Missed Interest Payment, Aug. 27, 2024
- Pampa Energia S.A.'s Proposed Senior Unsecured Notes Rated 'CCC', Aug. 27, 2024
- Grupo IDESA Credit Rating Raised To 'CCC+' Following Cash Tender; Subsequently All Ratings Withdrawn At Issuer's Request, Aug. 9, 2024
- Grupo Idesa Credit Rating Lowered To 'SD' And Debt Rating To 'D' On Cash Tender Completion On Senior Notes, Aug. 6, 2024
- Xinhu Zhongbao Downgraded To 'CCC-' With Negative Outlook; Ratings Withdrawn At Company's Request, Aug. 6, 2024
- Grupo Gicsa S.A.B. de C.V. 'CCC+' Global Scale Rating Withdrawn At Issuer's Request, July 26, 2024
- Transportadora de Gas del Sur S.A.'s Proposed Notes Rated 'CCC'; Existing 'CCC' Ratings Affirmed; Outlook Still Stable, July 15, 2024
- S.A. Usina Coruripe Acucar e Alcool Outlook Revised To Stable On Lower Refinancing Risk; 'B-' Ratings Affirmed, July 4, 2024
This report does not constitute a rating action.
| Emerging Markets Credit 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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