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LatAm high-yield burdened by upcoming maturities

Latin American high yield corporates from a number of sectors and countries face a high volume of maturing debt over the next two years. Brazilian entities are likely to suffer worse than others due to the economic climate in the country.

Jun 29, 2016 // 3:47PM

According to a note from Fitch Ratings, LatAm high yield corporates face significant number of maturities in the coming years. A wave of refinancing from the region will mean that entities will need to amend business models or capital structures to attract investment.

The note stated that refinancing risk is edging higher. Between now and the end of next year US$19bn worth of high-yield maturities is due.

“In the last few years there has been a massive amount of maturity extension,” said Alfredo Mordezki, Latin American Fixed Income Director at Santander Asset Management.

The note continued that in Brazil, which will see over US$20bn of high yield debt mature over the next two years, the problem would be exacerbated by political uncertainty.

Mordezki noted that across LatAm, corporates with refinancing risks depended on the country and the sector.

“In the sugar and ethanol sector in Brazil there have been a huge number of defaults, with about 4 or 5 companies having already filed chapter 11 or done some sort of restructuring, with significant pain on the part of the bondholders.”

He added that there would likely be problems in refinancing outstanding bonds in the sector, as it would be difficult to get the market to rollover such debt even if sugar prices recovered.

Brazilian corporates face an especially challenging situation because of the fact that GDP growth has been running at -3% for the past two years.

“This makes refinancing for certain companies especially challenging.”

The problem applies to both large and small firms. Although Oi, which is facing a €231mn maturity a month after its declared bankruptcy, is just one of the big names in Brazil struggling with this, the challenges are more severe for the country’s smaller firms.

Despite the problems faced in Brazil, there are expectations that there will be a turnaround next year. Mordezki said that this could be very positive for credits linked to domestic demand, which would profit from the recovery in their sector, and noted that this had been the case with steelmakers in Brazil.

With significant volumes of maturing debt requiring refinancing in the next few years, corporates looking to access the markets will likely have to change their business models to appeal to investors.

“Business models will have to change if they are no longer sustainable, such as in the offshore drilling sector. Companies are cutting capex, but do not look like they will recover this level of expenditure any time soon,” Mordezki said.

Even the recovery of oil prices is unlikely to lead to a sustainable improvement in the business models of such corporates. In some cases, such as with Oi, the problem lies within the company’s capital structure, which has become unsustainable.

“Such entities need to understand how to fix their capital structures through switching some debt into equity. They need to re-define leverage and their capital structure in a sustainable way,” Mordezki continued.

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