Fitch: Argentine corporate forex exposure varies as economy fades

Wednesday, September 5, 2018

Press release from Fitch Ratings

4 September, 2018

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Chicago-04 September 2018: Argentina's ongoing financial crisis will have an adverse effect on all Argentine corporates and could lead to negative rating actions, according to Fitch Ratings. However, the currency depreciation alone will have a mixed effect due to the varying composition of debt obligations and different levels of Argentine peso-denominated revenue and cost mismatch.

We view some corporates as susceptible to material deterioration in leverage and interest coverage metrics and others as positioned for moderate improvement.

The Argentine peso has depreciated precipitously since YE 2017, losing more than half its value versus the US dollar.

Currency depreciation has led to large interest rate hikes, most recently to 60% from 45%, while much higher inflation is likely through the rest of 2018 and 2019. The economy looks set to contract in 2018 and recovery prospects are uncertain. Rising economic instability, weakening demand amid economic recession and high inflation are contributing to a more difficult operating environment for Argentine corporates. Our FX risk screener, as highlighted in special report 'Spotlight: Argentine Corporates Liquidity Health Check and FX Exposure by Issuer' evaluates exposure to the peso crisis by estimating the relative proportion of foreign currency (FC) and local currency (LC) debt, sales and operating cost. Sectors most exposed, based on cross-border debt issuance during 2017, include energy and

electric utilities, food, beverage and tobacco, real estate, and building materials and construction. However, about USD7 billion of Fitch's universe of approximately USD13 billion of cross-border bond maturities are due in 2023 or later, limiting near-term refinancing risk.

Corporates with the highest exposure include Mastellone Hermanos and Compania Latinoamericana de Infrastructura y Servicios (CLISA), which have nearly 100% and 60% of debt, respectively, denominated in US dollars. We anticipate net leverage for these companies could increase 1.0x, or more, if the peso sustains a 50% decline in value. Interest coverage could decline by at least 0.5x.

Issuers best positioned for Argentina's currency crisis have significant revenue in, or linked to, the US dollar and/or a large percentage of costs in pesos. However, uncertainty exists for energy issuers benefitting from peso depreciation due to the unknown level of hydrocarbon price increase pass-throughs to end users. Increased reliance on government subsidies to fund the deficit caused by the disparity between peso-denominated tariffs charged to end users and US dollar-linked fees paid to generation firms is a key risk for utilities. This could result in weaker ratios than currently estimated.

Credit ratings for Argentine corporates are clustered in the 'B' category with only CLISA with a Rating Watch Negative (RWN) and CGC holding a Negative Outlook. Fitch revised the Rating Outlook on 17 of 19 publicly rated nonfinancial cross-border corporate issuers to Stable from Positive following its May 2018 rating action on Argentina's Sovereign Rating. The LC IDRs of four Argentine utilities were also downgraded to 'B' with Stable Outlooks from 'BB-' with RWNs

in August 2018.

Low leverage, extended debt maturities, and a high level of US dollar-based cash, or geographic diversification, may help mitigate credit risk for some issuers. Effective hedging may also limit exposure.