/raid1/www/Hosts/bankrupt/TCRLA_Public/230406.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
L A T I N A M E R I C A
Thursday, April 6, 2023, Vol. 24, No. 70
Headlines
A R G E N T I N A
ARGENTINA: Argentina Debt Exchange Will Trigger Default
B E R M U D A
VALARIS LIMITED: Fitch Assigns 'B+' LongTerm IDR, Outlook Stable
B R A Z I L
BRAZIL: Bank Says Monetary Policy Now Requires Serenity, Patience
BRAZIL: Cuts Primary Deficit Forecast for 2023 by More Than Half
DEXCO SA: Fitch Affirms 'BB+' LongTerm IDRs, Alters Outlook to Neg
C O L O M B I A
EMPRESAS PUBLICAS DE MEDELLIN: Fitch Keeps BB+ LT IDRs on Watch Neg
G R E N A D A
GRENADA: Collects $33M From CBI Program in first 2 months of 2023
M E X I C O
FORTALEZA MATERIALES: Fitch Affirms 'BB' LT IDRs, Outlook Stable
P E R U
VOLCAN COMPANIA: Moody's Lowers CFR to B2 & Alters Outlook to Neg.
P U E R T O R I C O
NEW SECURITY: Gets OK to Hire Angel Mattei as Accountant
T R I N I D A D A N D T O B A G O
TRINIDAD & TOBAGO: Pace of Inflation Slowed in Early 2023
TRINIDAD & TOBAGO: Renters Owe HDC More Than $157 Million
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A R G E N T I N A
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ARGENTINA: Argentina Debt Exchange Will Trigger Default
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Reuters reports that Fitch Ratings cited an "imminent" default
after the country ordered public sector bodies to sell or exchange
their holdings of some sovereign dollar bonds.
A presidential decree said that public sector bodies would have to
sell or auction five local law dollar bonds maturing between 2029
and 2041, and to swap six foreign law dollar bonds for peso debt,
notes Reuters.
Fitch cut Argentina's foreign currency rating to "C" from "CCC-" on
March 24, 2023, recalls Reuters. The "C" rating reflects an
imminent default as the presidential order would involve one-sided
exchanges and forced currency conversions, Fitch said, the report
notes.
Once the exchanges are executed, the rating will be lowered to
Restricted Default, Fitch said, the report relays.
"These measures merely give the government some temporary breathing
space and fail to address the fundamental issue that the peso is
too strong," said Kimberley Sperrfechter, emerging markets
economist at Capital Economics in a note, calling it "yet another
desperate attempt to support the peso and ease pressure on FX
reserves," the report discloses.
Fitch also said Argentina's long-term local currency credit rating
is affirmed at "CCC-" as peso-denominated securities are not
affected by the decrees, but "repayment capacity remains highly
compromised," the report notes.
The International Monetary Fund said it was assessing Argentina's
debt exchange announcement in accordance with the objectives of
their $44 billion debt program, the report adds.
About Argentina
Argentina is a country located mostly in the southern half of South
America. Its capital is Buenos Aires. Alberto Angel Fernandez is
the current president of Argentina after winning the October 2019
general election. He succeeded Mauricio Macri in the position.
Argentina has the third largest economy in Latin America. The
country's economy is an upper middle-income economy for fiscal year
2019, according to the World Bank. Historically, however, its
economic performance has been very uneven, with high economic
growth alternating with severe recessions, income maldistribution
and in the recent decades, increasing poverty.
Last March 25, 2022, Argentina finalized agreement with the IMF for
a new USD44 billion Extended Funding Facility (EFF) intended to
fund USD40 billion in looming repayments of the defunct Stand-By
Arrangement (SBA), with an extra USD4 billion in up-front net
financing. This has averted the risk of a default to the IMF
and is facilitating a parallel rescheduling of Paris Club debt.
S&P Global Ratings, on March 29, 2023, lowered its long-term
foreign currency sovereign credit rating on Argentina to 'CCC-'
from 'CCC+'. S&P also affirmed its 'C' short-term foreign currency
sovereign credit rating and its 'CCC-/C' local currency ratings on
Argentina. The outlook on the long-term ratings is negative. S&P
also lowered the transfer and convertibility assessment to 'CCC-'
from 'CCC+'.
The negative outlook on the long-term ratings reflects risks
surrounding pronounced economic imbalances and policy uncertainties
before and after the 2023 national elections. Divisions across the
political spectrum constrain the sovereign's ability to implement
timely changes in economic policy. Global capital markets are
closed to Argentina. In the local market, swaps are being deployed
to manage large maturities before placing debt through traditional
auctions. The central bank continues to play a key role as a
backstop for local debt management in the secondary market. The
ongoing severe drought has exacerbated pressures in the already
disrupted foreign exchange (FX) market.
Fitch Ratings, on the other hand, downgraded Argentina's Long-Term
Foreign Currency
Issuer Default Rating (IDR) to 'C' from 'CCC-', and has affirmed
the Long-Term Local Currency IDR at 'CCC-' on March 24, 2023.
Fitch's downgrade of Argentina's rating to 'C' from 'CCC-' follows
an executive decree that forces domestic public-sector entities
into operations involving their holdings of
sovereign debt securities, which would involve unilateral exchanges
and forced currency conversion that constitute default events under
Fitch's criteria. The 'C' rating reflects Fitch's view that
default
is thus imminent. Fitch said the rating would be downgraded to
'Restricted Default' (RD) upon execution of the exchanges.
Moody's Investors Service, in September 2022, affirmed Argentina's
Ca foreign-currency and local-currency long-term issuer and senior
unsecured ratings. The outlook remains stable. The decision to
affirm the Ca ratings balances Argentina's limited market access,
weak governance, and history of recurrent debt restructurings with
recent efforts to marshal fiscal and monetary measures to start
addressing underlying macroeconomic imbalances in the context of
the IMF program that was approved in 2022, according to Moody's.
DBRS confirmed Argentina's Long-Term Foreign Currency Issuer Rating
at CCC and Long-Term Local Currency Issuer Rating at CCC (high) on
July 21, 2022.
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B E R M U D A
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VALARIS LIMITED: Fitch Assigns 'B+' LongTerm IDR, Outlook Stable
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Fitch Ratings has assigned a 'B+' first-time Long-Term Issuer
Default Rating (IDR) to Valaris Limited. The Rating Outlook is
Stable. In addition, Fitch has assigned a 'BB-'/'RR3' rating to the
company's proposed $600 million second lien secured notes. The
proceeds will be used to repay all of the existing debt and for
other general corporate purposes.
Valaris' ratings reflect the expected sharp decline in leverage in
2024 as the currently strong floating drilling rig day rates feed
into the company's next year's contract prices. Valaris' credit
profile benefits from one of the largest fleets of offshore jackups
and floaters, short-term revenue visibility due to presence of
contracts with minimum prices and volumes, and healthy liquidity.
Valaris' profile is negatively affected by high volatility in day
rates and rig utilization combined with asset-heavy business model
and high operating leverage, which together result in considerable
swings in EBITDA depending on the industry cycle. Valaris completed
a debt restructuring in April 2021, dramatically reducing its gross
debt.
KEY RATING DRIVERS
Leader in Offshore Drilling: Valaris owns 16 floating rigs,
including 11 drillships and five semisubmersible rigs, and 36
jackups. Its offshore drilling fleet is the largest globally by
number of rigs. Valaris operates in all major offshore oil and gas
basins, such as the Gulf of Mexico, Brazil, Middle East, West
Africa, the North Sea, Southeast Asia and Australia. In late
February 2023, the company had a $2.5 billion contract backlog, up
from $2.4 billion as of February 2022 and $1.0 billion at end-2020.
Valaris expects to convert around 54% of February 2023 backlog into
revenue in 2023 and 35% in 2024.
Rebound in Floater Market: As long-term forward oil prices started
to increase in 2021, market day rates for floaters began growing at
a fast pace and almost doubled between end-2020 and end-2022.
Floater utilization has also been improving. Fitch does not assume
any significant growth in market day rates in 2H23-2H24 and expects
rates to decline in 2025 based on its oil price deck. The number of
contracted floaters has been largely stagnant worldwide in
2017-2022, and Fitch expects this number to increase in 2023-2024.
Stacked floater rigs number peaked in early 2017 after oil prices
collapsed in 2014. More than half of stacked rigs as of early 2017
exited the market by end-2022. Six of Valaris' 16 floaters are
currently stacked, and this share of stacked rigs is roughly in
line with total market numbers.
Jackup Fleet Improves Stability: Valaris' jackup business enhances
stability of its cashflows. Jackup day rates are not as volatile as
those for floating rigs and global jackup utilization fell less
dramatically than floaters utilization in 2017. The higher
resilience of the jackup market is underpinned by shorter payback
for shallower offshore upstream projects. Valaris generated most of
its EBITDA from jackup segment in 2022. Fitch expects this share
will decrease in 2023-2026 as the company's floaters move away from
lower legacy day rates. Valaris also benefits from stability of its
other businesses, including bareboat charters to its JV with Saudi
Arabian Oil Company (Saudi Aramco; A/Positive) and rig management
services.
Envisaged Decline in Leverage: Valaris' rating is based on a sharp
reduction in its gross leverage that Fitch forecasts in 2024.
Valaris exited chapter 11 restructuring in April 2021, eliminating
$7.1 billion of pre-petition debt and raising a $550 bond. However,
its EBITDA leverage was 6.7x at end-2021 and 3.7x at end-2022 due
to subdued EBITDA generation driven by muted demand for offshore
drilling services over the last several years leading to
oversupplied market.
Fitch projects Valaris' EBITDA to improve to approximately $200
million in 2023 from $147 million in 2022 and reach approximately
$500 million in 2024 as Valaris starts realizing higher day rates
on the 2023 contracts from rig reactivations and active rig
contract rollovers. EBIDTA leverage is expected to decline to 3.1x
in 2023 and 1.1x in 2024 given that Fitch projects a stable gross
debt amount. Fitch expects that the company's EBITDA will start
declining in 2025 based on falling oil price assumptions.
Capex, Reactivations Weigh on FCF: Fitch expects Valaris will boost
capex to accommodate strengthening demand for offshore drilling
services. Fitch projects its annual capex including a purchase of
one new build drillship to average roughly $400 million in
2023-2024, doubling the size of 2022 capex. These numbers also
assume several rig reactivations. Valaris aims to reactivate
floaters when it can secure a contract that provides a sufficient
return on reactivation costs. Part of the reactivation costs is
subtracted from its EBITDA. As a result of elevated capex and
reactivation costs, Fitch forecasts Valaris's FCF to remain
negative until 2026.
No Dividends, Limited Buybacks: Fitch does not project any
dividends to be paid by Valaris in the medium term. The company has
an approved $100 million share buyback program and Fitch assumes it
will be fully executed in 2023. Fitch does not expect Valaris to
pay any significant dividends until its key markets recover
sustainably.
Growing JV with Aramco: Valaris has a 50% stake in an equity
method-accounted JV with Saudi Aramco called ARO. ARO is an
offshore drilling company that has contracts with Aramco. Fitch
expects ARO to be in an expansionary stage in 2023-2027 and does
not expect any dividends from it. At the same time, Fitch expects
the company to fund its capex through FCF generation and standalone
debt without any cash calls from the partners. Valaris has $0.4
billion notes receivable from ARO due 2027 and 2028. Fitch does not
forecast notes principal repayment in 2023-2026, but expects the
company to receive $25 million-$30 million of annual interest.
Bond Recoveries: The proposed $600 million notes' 'BB-'/'RR3'
rating is one notch above Valaris's IDR. This is based on
substantially better recovery prospects for the notes than what was
achieved by the unsecured bondholders during the bankruptcy two
years ago. The rating for the new notes assumes significantly lower
total drawn debt consisting of the fully drawn $375 million RCF and
the $600 million notes.
DERIVATION SUMMARY
Valaris's peers include Noble Corporation plc, Precision Drilling
Corporation (B+/Stable), KCA Deutag Alpha Limited (B+/Stable), CGG
SA (B-/Positive) and Nabors Industries, Ltd. (B-/Stable). Valaris
is similar in scale to Noble, but experiences lower margins due to
its current contract structure and higher concentration of jackups.
Noble is expected to generate more consistent FCF than Valaris
given the recent recovery and higher margin profile for floaters,
which results in modestly lower leverage, especially in the near
term.
Fitch expects Precision and KCA Deutag to generate significantly
lower revenue than Valaris and have comparable EBITDA margins in
2024-2025. Their leverage is projected to be higher, but they are
involved in the onshore drilling segment, which is more stable than
the offshore one.
Nabors has modestly larger scale than Valaris and a more
diversified and less volatile cash flow profile. Gross debt and
leverage are higher than Valaris and Nabors is subject to
meaningful near- and medium-term refinancing risks. CGG, an
offshore seismic data processing and equipment manufacturing
company, is also exposed to the volatile offshore oilfield services
market and also completed a debt restructuring in 2018. It has
higher maintenance capex requirements than Valaris and higher
expected leverage.
KEY ASSUMPTIONS
- Brent oil prices of $85/bbl in 2023, $75/bbl in 2024, $65/bbl in
2025 and $53/bbl thereafter;
- Revenue growth of 15% in 2023, 30% in 2024 followed by declines
thereafter;
- EBITDA margins growing to 10% in 2023 and into the low 20% range
in 2024-2025 while decreasing thereafter;
- Capex, including newbuilds, averaging $400 million in 2023-2025
and falling toward $150 million thereafter;
- Stock buybacks of $100 million in 2023 and no dividends paid.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Sustainably stronger offshore drilling market fundamentals,
including high day rates, longer contracts and growing backlog and
rig utilization;
- Track record of conservative financial policy that keeps gross
debt in check;
- Midcycle EBITDA leverage below 2.0x.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Deteriorating market fundamentals such as decreasing day rates
and offshore rig utilization;
- Significant increase in gross debt;
- Weakening liquidity;
- Midcycle EBITDA leverage above 3.0x.
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: Valaris will push its debt maturity from 2028
to 2030 with the proposed bond refinancing. The company's combined
negative FCF, including capex and working capital cash outflows,
will reach $400 million in 2023-2025, according to projections.
This can be covered by $724 million of cash at end-2022 and the
proposed $375 million long-term committed RCF. Valaris should have
sufficient liquidity if it maintains a disciplined approach to
discretionary cash spending.
KEY RECOVERY RATING ASSUMPTIONS
- The recovery analysis assumes Valaris would be reorganized as a
going-concern (GC) in bankruptcy rather than liquidated;
- Fitch has assumed a 10% administrative claim.
Going-Concern Approach
Valaris' GC EBITDA estimate reflects Fitch's view of a sustainable,
post-reorganization EBITDA level, upon which the agency bases the
enterprise valuation. The GC EBITDA assumption for commodity price
sensitive issuers at a cyclical peak reflects the industry's move
from top of the cycle commodity prices to mid-cycle conditions and
intensifying competitive dynamics.
The GC EBITDA assumption of $155 million equals EBITDA estimates
for the mid-point between a distress year and near-term EBITDA
expectations. This represents an emergence from a prolonged
commodity price decline. Fitch stress case assumes for Brent oil
prices are $45/b in 2023, $35/b in 2024, $45/b in 2025 and $48/b
for the long term. These prices could lead to a marked difference
in the company's cash flow generation given the impact a period of
prolonged oil prices could have for day rates and rig utilization.
The GC EBITDA assumption reflects a loss of customers and lower
margins than the near-term forecast, as E&P companies cut their
costs. The EBITDA assumption also incorporates weak offshore
drilling market fundamentals and Valaris' charters to Aramco, as
well as overall high rig supply, but improving demand.
The assumption reflects the material decrease in the company's
liabilities as well as the material write down in the value of the
company's PP&E following the company's debt restructuring. Valaris
eliminated $7.1 billion of pre-petition debt from its balance sheet
after exiting bankruptcy procedures in 2021. During the
restructuring process, the company also wrote down the book value
of its PP&E from $10 billion to approximately $900 million.
An enterprise value multiple of 5.0x EBITDA is applied to GC EBITDA
to calculate a post-reorganization enterprise value. The choice of
this multiple considered the following factors:
The historical bankruptcy case study exit multiples for peer energy
oilfield service companies have a wide range with a median of 6.1x.
The oil field service sub-sector ranges from 2.2x to 42.5x due to
the more volatile nature of EBITDA swings in a downturn.
Fitch used a multiple of 5.0x to estimate the enterprise value of
Valaris due to concerns of a downturn with a longer duration, a
high exposure to offshore drilling rigs that can see meaningful
volatility in demand and continued capital investment to reactive
rigs.
Fitch also assumed a $50 million value from its equity stake in ARO
and notes payable to Valaris by ARO.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of
balance sheet assets that can be realized in sale or liquidation
processes conducted during a bankruptcy or insolvency proceeding
and distributed to creditors.
Fitch assigns standard discounts to the liquidation value of the
company's сash, accounts receivable, and inventory. Fitch is using
a 30% liquidation value to the company's book value given the high
uncertainty of assets valuations during a downturn.
The $375 million first-lien secured RCF is assumed to be fully
drawn upon default and is the most senior in the waterfall.
The allocation of value in the liability waterfall results in
recovery corresponding to a recovery rating of 'RR3' for proposed
$600 million second lien secured debt issuance.
ISSUER PROFILE
Valaris provides offshore drilling services to oil and gas
companies across the globe. It owns the world's largest fleet of
offshore rigs, including jackups and floaters. Valaris is
incorporated in Bermuda and headquartered in the U.S.
ESG CONSIDERATIONS
ESG CONSIDERATIONS
Valaris has an ESG Relevance Score of '4' for Waste & Hazardous
Materials Management; Ecological Impacts due to the risk that a
possible offshore oil spill may affect the drilling company. This
factor has a negative impact on the credit profile, and are
relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Recovery
----------- ------ --------
Valaris Limited LT IDR B+ New Rating
Senior Secured
2nd Lien LT BB- New Rating RR3
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B R A Z I L
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BRAZIL: Bank Says Monetary Policy Now Requires Serenity, Patience
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Reuters reports that Brazil's central bank stated that current
monetary policy requires "serenity and patience," indicating that
worsening inflation expectations justified its decision to maintain
a hawkish stance towards future steps.
In the minutes of the meeting held between March 21-22, when the
rate-setting committee known as Copom kept the benchmark rate at
13.75%, the central bank noted that the Finance Ministry's
commitment to implementing fiscal measures and the reinstatement of
fuel taxes have reduced the upside risk on short-term inflation,
according to Reuters.
However, policymakers expressed concern about inflation
expectations diverging from the targets in the longer term,
indicating that this issue, together with the risk of a more abrupt
reduction in domestic and global credit granting affecting economic
activity, was central to their policy decision debate, the report
notes.
"The monetary policy conduct, at this moment, requires serenity and
patience to incorporate the inherent delays in the inflation
control through interest rates and, therefore, to reach the goals
in the relevant monetary policy horizon," it said, the report
adds.
According to Reuters, policymakers reiterated that they would not
hesitate to resume hikes if necessary when they kept the Selic rate
at its highest level in six years last March 22, despite intense
pressure from the new government of President Luiz Inacio Lula da
Silva to reduce borrowing costs.
The decision triggered a fresh wave of criticism from leftist Lula,
frustrating part of the market expectation about the possibility of
monetary easing ahead amid cooling annual inflation, credit
deceleration, economic slowdown, and banking turmoil abroad, notes
the report.
In the minutes, policymakers said that there is no mechanical
relationship between the convergence of inflation and the
presentation of an awaited fiscal framework by the government.
Still, they stressed that a credible new rule "might result in a
more benign disinflationary process through its effect on the
expectations channel," adds the report.
About Brazil
Brazil is the fifth largest country in the world and third largest
in the Americas. Luiz Inacio Lula da Silva won the 2022
Brazilian general election. He was sworn in on January 1, 2023, as
the 39th president of Brazil, succeeding Jair Bolsonaro.
As recently reported in the Troubled Company Reporter-Latin
America, Fitch Ratings, in December 2022, affirmed Brazil's
Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB-'
with a Stable Outlook. The ratings are constrained by high
government indebtedness, a rigid fiscal structure, weak economic
growth potential, and a record of governability challenges that
have hampered efforts to address these fiscal and economic issues
and clouded policy predictability. The Stable Outlook reflects
Fitch's expectation that growth will slow in the coming year and
that recent fiscal improvement will erode under a new government,
but within a margin consistent with the current rating, and from a
better starting point than previously expected. Uncertainty is
elevated regarding the plans of the incoming government and the
extent to which these could ease or aggravate fiscal and economic
challenges. However, Fitch does not expect policies that
jeopardize broad economic stability.
Standard & Poor's affirmed its 'BB-/B' long- and short-term
foreign and local currency sovereign credit ratings on Brazil, and
the outlook remains stable (June 2022). The stable outlook
reflects S&P's base-case assumption that Brazil will maintain its
fiscal anchors over the next two years despite an increasing
interest burden, preventing significant fiscal slippage and
limiting the rise in its already high debt burden.
Moody's credit rating for Brazil was last set at Ba2 in 2018 with
stable outlook. Moody's affirmed the Ba2 issuer ratings and
senior unsecured bond ratings in April 2022.
DBRS's credit rating for Brazil is BB (low) with stable outlook
(March 2018).
BRAZIL: Cuts Primary Deficit Forecast for 2023 by More Than Half
----------------------------------------------------------------
Lachlan Williams at Rio Times Online reports that the Brazilian
government reduced to BRL107.6 billion (US$20.546 billion) the
primary deficit forecast for this year, less than half of the
BRL228.1 billion (US$43.555 billion) previously forecast, informed
the Ministry of Planning and Budget.
The revision places the primary deficit at one percent of Brazil's
Gross Domestic Product (GDP), according to Rio Times Online.
The primary deficit is the negative result of the government's
accounts, excluding interest on public debt, the report notes.
About Brazil
Brazil is the fifth largest country in the world and third largest
in the Americas. Luiz Inacio Lula da Silva won the 2022
Brazilian general election. He was sworn in on January 1, 2023, as
the 39th president of Brazil, succeeding Jair Bolsonaro.
As recently reported in the Troubled Company Reporter-Latin
America, Fitch Ratings, in December 2022, affirmed Brazil's
Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB-'
with a Stable Outlook. The ratings are constrained by high
government indebtedness, a rigid fiscal structure, weak economic
growth potential, and a record of governability challenges that
have hampered efforts to address these fiscal and economic issues
and clouded policy predictability. The Stable Outlook reflects
Fitch's expectation that growth will slow in the coming year and
that recent fiscal improvement will erode under a new government,
but within a margin consistent with the current rating, and from a
better starting point than previously expected. Uncertainty is
elevated regarding the plans of the incoming government and the
extent to which these could ease or aggravate fiscal and economic
challenges. However, Fitch does not expect policies that
jeopardize broad economic stability.
Standard & Poor's affirmed its 'BB-/B' long- and short-term
foreign and local currency sovereign credit ratings on Brazil, and
the outlook remains stable (June 2022). The stable outlook
reflects S&P's base-case assumption that Brazil will maintain its
fiscal anchors over the next two years despite an increasing
interest burden, preventing significant fiscal slippage and
limiting the rise in its already high debt burden.
Moody's credit rating for Brazil was last set at Ba2 in 2018 with
stable outlook. Moody's affirmed the Ba2 issuer ratings and
senior unsecured bond ratings in April 2022.
DBRS's credit rating for Brazil is BB (low) with stable outlook
(March 2018).
DEXCO SA: Fitch Affirms 'BB+' LongTerm IDRs, Alters Outlook to Neg
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Fitch Ratings has affirmed Dexco S.A.'s Long-Term Foreign and Local
Currency Issuer Default Ratings (IDRs) at 'BB+' and revised the
Outlook to Negative from Stable. Fitch has also affirmed Dexco's
National Scale long-term rating at 'AAA(bra)' with a Stable
Outlook.
The Negative Outlook is a result of the confluence of a material
increase in adjusted leverage, a deterioration in business
conditions and an aggressive investment cycle. Dexco's adjusted
leverage should remain temporarily above the downgrade trigger,
which is not consistent with Fitch's prior forecasts. Conversely, a
scenario in which Dexco has to honor off-balance debt is unlikely
and, excluding it, leverage is more aligned with the rating.
The company needs to capture additional cash generation from its
capex cycle in order to avoid a downgrade, while it recovers volume
and profitability in Deca and ceramic tile segments, amid weak
economic prospects. Dexco's ratings continue to reflect its strong
business position in the Brazilian wood panel and building
materials industries, and its commitment to preserve robust
liquidity.
KEY RATING DRIVERS
Economic Downturn Challenges Performance: Soft consumer demand,
high interest rates, inflationary pressures on costs and freights,
and slower global GDP growth rates challenge Dexco, interrupting
the strong momentum for the wood panel and building materials
industries in 2020/2021. Wood volume decreased by 8% in 2022,
accounting for 70% of EBITDA. In addition, the company lost market
share and profitability in Deca and ceramic tile segments, whose
volumes decreased by 20% to 22% in 2022, while gross margin shrank
in the 2H22. Fitch projects flat sales volume for wood panels in
2023 and 3.5% increase in ceramic tiles. For Deca, Fitch assumed a
10% volume decrease.
Capex Program Pressures FCF: Base case projections considered
elevated investments of BRL3 billion in 2023/2024 and dividends at
30% of net income, resulting in negative FCF in the next couple of
years. Fitch projects Dexco to generate BRL1.7 billion of EBITDA
and BRL1 billion of cash flow from operations (CFFO) in 2023, and
BRL2.0 billion and BRL1.3 billion, respectively, in 2024. This
compares with BRL1.7 billion of EBITDA and BRL690 million of CFFO
in 2022. EBITDA margins are expected to remain between 19% to 22%.
FCF is projected to be negative at BRL935 million in 2023 and BRL80
million in 2024.
Higher than Expected Leverage: Base case considers net adjusted
debt to EBITDA ratio to peak at 4.5x in 2023 and fall to around
4.0x in 2024, which compare with 4.0x in 2022 and a track record of
below 2.5x until 2021. Higher investments, softer operating cash
flow growth perspectives, and a BRL1.7 billion disbursement with
dividends and stock repurchase between 2021 and 2022 resulted in
higher indebtedness. Net debt increased to BRL4 billion at YE 2022,
from BRL2.5 billion as of December 2021, and the rating case
considers a further increase to close BRL5 billion by YE 2023.
Strong Business Position: Dexco's large operating scale, strong
product portfolio and wood self-sufficiency are key competitive
advantages that are difficult to be replicated. Dexco is the
largest Brazilian wood panel producer, with an estimated market
share of 33%. Dexco's product portfolio is also comprised of the
Deca division, which consists of sanitary products and the company
is also one of the main players in the ceramic tiles segment.
JV Off-Balance Sheet Debt: Dexco's 49% stake in dissolving pulp
producer LD Celulose will diversify its business model and
contribute to a dividends flow in hard currency in the long term.
LD Celulose has an annual production capacity of 500,000 tons of
dissolving pulp and annual EBITDA generation of approximately
BRL1.5 billion, considering full operation. Fitch's rating case
does not incorporate dividends inflow in the next four years. Fitch
includes BRL2.9 billion of off-balance sheet debt from LD Celulose
guaranteed by Dexco on leverage metrics. Excluding off-balance
sheet debt, net debt to EBITDA ratio should increase to 3.0x in
2023, from 2.4x in 2022.
Rating Above Country Ceiling: Dexco's 'BB+' FC IDR is one notch
higher than Brazil's 'BB' Country Ceiling, based on Fitch's
expectation that EBITDA from exports and the Colombian operations
would cover hard currency debt service in the next 12 months by
1.5x, in case of foreign currency issuances.
DERIVATION SUMMARY
Dexco has a weaker business risk profile than its Latin American
pulp & paper peers Celulosa Arauco y Constitucion S.A. (FC IDR
BBB/Stable), Eldorado Brasil Celulose S.A. (FC IDR BB/Stable),
Empresas CMPC (FC IDR BBB/Stable), Klabin S.A. (FC IDR BB+/Stable)
and Suzano S.A. (FC IDR BBB-/Stable). These peers all have greater
operating scale, strong revenue flow from the pulp division and a
more export-oriented business profile. Dexco, on the other hand, is
more exposed to demand from the local market than its peers, which
makes it more vulnerable to the domestic macroeconomic conditions.
Dexco's rating equals Klabin's given a track record of more
conservative capital structure and Negative Outlook on the IDRs
reflects the expectation of higher leverage in the next two years.
Dexco is rated one notch above Eldorado, as the latter has only one
pulp mill and ongoing litigation issues at its controlling
shareholders.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Rating Case for the Issuer:
- Wood sales volume of 2.9 million cubic meters in 2023 and in
2024;
- Deca division sales volume of 21.1 million items in 2023 and 24
million items in 2024;
- Ceramic tiles sales volume of 19 million sqm in 2023 and 22
million sqm in 2024;
- Investments of BRL4.2 billion during 2023-2025;
- Dividends limited to 30% of net income.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A positive rating action is not expected in the medium term. The
Outlook Negative could be revised to Stable if Dexco's CFFO
generation is stronger, allowing a quicker net debt reduction.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Perception that net adjusted debt/EBITDA ratio will remain above
3.0x;
- EBITDA margin recurrently below 18%;
- Additional and material capital injections at the JV LD
Celulose;
- A downgrade on Brazil's Country Ceiling or a worsening in
offshore structural enhancements would result in a similar rating
action on Dexco's FC IDR.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Dexco has historically maintained strong cash
reserves, and Fitch expects the company to preserve an extended
debt amortization profile. At YE 2022, Dexco had BRL1.8 billion of
cash and marketable securities and BRL5.8 billion of total debt.
The company faces BRL910 million of debt maturities in 2023, and
BRL994 million in 2024. Dexco's financial flexibility is enhanced
by its multiple access to financing, potential sale of forestry
assets, if necessary, and a BRL500 million unused revolving credit
facility. The accounting value of Dexco's biological assets was
about BRL1.9 billion as of Dec. 31, 2022. Debt is denominated in
local currency with a competitive cost.
ISSUER PROFILE
Dexco is the leading wood panel producer in Brazil, with 3.5
million cubic meters of annual domestic production and 0.3 million
cubic meters in Colombia. Dexco is also one of the largest
producers of sanitary ware and metals in Brazil, the second largest
shower producer, and one of the main ceramic tile producers.
SUMMARY OF FINANCIAL ADJUSTMENTS
- Fitch excludes from EBITDA: asset impairment, results from asset
sale, biological asset's fair value variation and impact from
business restructuring.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Dexco S.A. LT IDR BB+ Affirmed BB+
LC LT IDR BB+ Affirmed BB+
Natl LT AAA(bra) Affirmed AAA(bra)
===============
C O L O M B I A
===============
EMPRESAS PUBLICAS DE MEDELLIN: Fitch Keeps BB+ LT IDRs on Watch Neg
-------------------------------------------------------------------
Fitch Ratings has maintained the Rating Watch Negative (RWN) on
Empresas Publicas de Medellin E.S.P.'s (EPM) 'BB+' Foreign and
Local Currency Issuer Default Ratings (IDRs) and its 'AAA(col)'
National Scale Long-Term rating. Additionally, the RWN on EPM's
'BB+' senior unsecured debt ratings and on the 'bbb-' standalone
credit profile (SCP) has been maintained. Finally, Fitch maintained
EPM Inversiones S.A.'s 'AAA(col)' National Scale Long-Term rating
on RWN and affirmed the National Short-Term rating at 'F1+(col)'.
EPM's ratings reflect strong ownership and control by its owner,
the city of Medellin (BB+/Stable). EPM Inversiones' rating is
equalized with that of EPM's given the existence of legal,
operational and strategic incentives for EPM to support it.
EPM's RWN reflects continued uncertainty regarding the closure of
Ituango's blocked Auxiliary Diversion System since April 28, 2018.
The possibility of major flooding downstream from the project
exists until the deviation tunnel is closed. The resolution of the
Rating Watch may extend longer than six months given these
uncertainties.
KEY RATING DRIVERS
Strong Linkage with Parent: EPM consistently contributes
significant cash flows in the form of dividends to its parent, the
city of Medellin (BB+/Stable). These distributions comprised 24% of
the city's total revenues in 2022 and have made up an average of
21.5% of government revenues over the last five years. Under
Fitch's criteria, a government-related entity that sustainably
generates more than 10% of the government's revenues is considered
a strong linkage factor that would lead to an equalization of the
ratings.
Ituango Enters Production: The first two units of 300MW each came
online in November 2022 meeting the established regulatory
deadline. In January and February 2023, Ituango produced 252GWh and
284GWh for a market share of 3.76% and 4.58%, respectively. When
complete, the project will consist of eight 300MW units for a total
of 2.4GW, or roughly 13% of the country's current installed
capacity. Unit 3 is expected to come online in the middle of
October 2023, unit 4 at the end of October 2023 and stage 2,
consisting of units 5 through 8, in 2026 and 2027. The total
project cost is estimated to be COP19.4 trillion (~USD4.0 billion)
with an annual EBITDA of roughly COP1.2 trillion (~USD250 million).
The company is in the process of receiving construction bids for
stage 2. Overall, the project is 90.5% complete.
Fitch continues to maintain the RWN until further confirmation that
the right deviation tunnel is appropriately plugged with a 22-meter
long concrete wall inside the tunnel to stop any flow of water. The
tunnel is expected to be secured by the end of 2023 as the company
prioritizes the completion of its first two units to meet its firm
energy commitment to the system and the tunnels are not part of the
critical route to produce electricity. As of March 2023, the
company reported 85.7% progress on pre-plug 2 of the right
deviation tunnel, 96.83% on pre-plug 1 and 73.47% in overall
progress to secure the tunnel.
Moderate Leverage Expected: EPM's consolidated gross leverage,
defined as total debt to EBITDA, will average 3.1x between
2023-2026. Gross leverage is expected to be 3.2x in 2026 and net
leverage 2.9x. The deleveraging trend can be attributed to tariff
inflation adjustments at the company's distribution businesses, the
normalization of operations at Afinia and Ituango's generation
units coming online, the first two of which entered production in
November 2022. Demanding capex programs at Afinia and Ituango,
consistent dividend payments of 55% of net income to the city of
Medellin, elevated interest costs on debt and FX adjustments of
dollar-denominated debt due to Colombian peso devaluation prevent
steeper deleveraging over the rated horizon.
Afinia Grows Distribution Business: Fitch views EPM's assumption of
CaribeMar, a coastal electricity distribution company renamed
Afinia, as positive for the business and credit neutral. Afinia's
service area includes 6.7 million customers in 134 municipalities.
Fitch expects Afinia's revenue and EBITDA to be COP5.7 trillion
(~USD1.2 billion) and COP800 billion (~USD169 million) in 2023 and
to grow to COP6.7 trillion (~USD1.4 billion) and COP1.2 trillion
(~USD250 million) by 2026. Fitch estimates capex of COP5.2
trillion, or USD1.1 billion between 2023-2026. This investment will
be necessary to lower high energy losses, which stood at roughly
27% in September 2022 with the goal to lower this amount to below
20% by 2025.
Stable Cash Flow Profile: EPM has a stable and predictable cash
flow profile supported by regulated businesses in investment-grade
markets. Fitch estimates 83% of EPM's 2022 EBITDA was derived from
its energy business, where its generation segment comprised 28%;
55% was distribution and transmission, water and waste management
was 15% and gas 2%. EPM's distribution business operates in highly
regulated markets, mostly concentrated in Colombia, where it is the
largest distributor in the country, with a market share of 38.6%,
which includes newly added Afinia's 13.5% market share. EPM's
market share in transmission is smaller at 8.17%.
Regulatory Risk: Fitch considers EPM's exposure to regulatory risk
to be moderate following president Petro's attempt to control
regulations of public services in the country and potential board
member turnover at the Electricity and Gas Regulatory Commission
(CREG) in 2023 to be increasingly in the president's favor. The
administration's stated goal is to lower electricity prices for end
users following run-ups in inflation indexes used to adjust tariffs
in 2022. Given EPM's concentration in regulated businesses within
Colombia, Fitch considers the company's risk exposure to be
moderate. Moves by the administration must provide all market
players with financial sufficiency and not cause them hardship.
Nearly 30% of the group's revenue and 20% of its EBITDA are from
outside Colombia.
DERIVATION SUMMARY
EPM's ratings are linked to those of its owner, the city of
Medellin (BB+/Stable), due to the latter's strong ownership and
control over the company. The company's low business-risk profile
is commensurate with that of Grupo Energia Bogota S.A. E.S.P.'s
(BBB/Stable), Enel Americas S.A. (BBB+/Stable), AES Andes
(BBB-/Stable), Enel Colombia S.A. E.S.P. (BBB/Stable) and Promigas
(BBB-/Stable).
Fitch projects EPM's total leverage to average 3.1x over the rating
horizon and 2.8x on a net basis. This is in line with AES Andes'
expected average gross and net leverage of 3.1x and 2.9x and
Promigas', which is expected to be 3.1x and 2.9x. It is higher than
Enel Colombia's at 1.4x and 1.2x. In 2026, Fitch expects gross and
net leverage to be 3.2x and 2.9x, respectively, reflecting advances
in the Ituango project, an increase in rates at EPM's electricity
distribution businesses and the normalization of operations at
newly-acquired Afinia.
EPM also compares well with electricity generation peers that have
national ratings, namely Enel Colombia S.A. E.S.P., Isagen S.A.
E.S.P. and Celsia Colombia S.A. E.S.P., all rated 'AAA(col)'.
Similar to peers, EPM has an efficient portfolio of low-cost hydro
assets. In 2022, EPM ranked second in installed capacity behind
Enel Colombia and first in generation, ahead of Isagen and Enel
Colombia, which were second and third, respectively.
KEY ASSUMPTIONS
- Ituango units 3 and 4 come online in late 2023 and units 5
through 8 in 2026 and 2027 with no penalties or significant further
delays;
- Generation load factor of approximately 50% over the rated
horizon;
- Distribution tariffs increase at half the expected rate of
inflation from 2023-2026;
- No dividends from UNE expected over the rated horizon;
- Dividend payout of 55% of previous year's net income;
- No divestments in 2022 or the rating horizon;
- Average effective interest rates on financial debt of 14% in
2023, 11.5% in 2024, 8.4% in 2025 and 8.3% in 2026;
- Capex of COP5.7 trillion in 2022, COP7.0 trillion in 2023, COP6.7
trillion in 2024 and COP6.1 trillion in 2025;
- Electricity spot prices of COP250/KWh in 2023, COP220/KWh in
2024, and COP200/KWh in 2025 and 2026.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Although unlikely in the near term, Fitch may consider a positive
rating action if there is a positive rating action on the company's
owner, the city of Medellin;
- Fitch may consider a resolution of the RWN once the company has
secured the second deviation tunnel at its Ituango project, which
Fitch expects by YE 2023. In such a case, the Rating Outlook for
the city of Medellin would likely apply.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A negative rating action on the city of Medellin's ratings;
- An incurrence of penalties or loss of guarantees related to
delays or the materialization of significant cost overruns and
contingencies at the Ituango project that weaken the company's
liquidity.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: As of 3Q22, EPM had a cash and equivalents of
COP3.4 trillion (~USD716 million) at the group level, COP1.2
trillion (~USD252 million) of which was at the parent company. As
of 3Q22, the company had consolidated debt of COP28.1 trillion
(~USD5.9 billion), the majority of which was due in 2027 and after.
The company faces scheduled maturities of COP2.8 trillion and
COP2.3 trillion in 2023 and 2024, respectively, which are
manageable. In 2022, the company secured a Club Deal committed
credit line for USD700 million for a period of five years. The
credit line carries an interest rate of the secured overnight
financing rate (SOFR) plus 2.2%, or roughly 6.75%. In January 2022,
the company received USD633 million from Mapfre as a final payment
for the Ituango insurance claim, which financed the project's capex
for 2022 and the beginning of 2023.
Historically, EPM has transferred on average between 45% and 55% of
its net income to the city of Medellin in the form of dividends.
EPM's transfers to Medellin have historically represented
approximately 20% to 30% of the city's investment budget. Although
not likely in the near term, an increase in the company's dividend
distribution policy could pressure its FCF generation, which is
already expected to continue to be negative in the near term as the
company continues to execute its investment plan.
ISSUER PROFILE
EPM was founded in Medellín, Colombia, in 1955 to provide public
utility services. Through its two main business units, the energy
business and the water business, EPM currently participates in the
generation, transmission, distribution and commercialization of
electricity, the distribution and commercialization of natural gas
and the provision of water, sewage and waste management services.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
EPM's ratings are capped by the ratings of its owner, the city of
Medellin.
ESG CONSIDERATIONS
EPM has an ESG Relevance Score of '4' for Governance Structure due
to its nature as a majority government-owned entity and the
inherent governance risk that arises with a dominant state
shareholder. This has a negative impact on the credit profile, and
is relevant to the ratings in conjunction with other factors.Unless
otherwise disclosed in this section, the highest level of ESG
credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
Empresas
Publicas
de Medellin
E.S.P. (EPM) LT IDR BB+ Rating Watch Maintained BB+
LC LT IDR BB+ Rating Watch Maintained BB+
Natl LT AAA(col)Rating Watch Maintained AAA(col)
senior
unsecured LT BB+ Rating Watch Maintained BB+
senior
unsecured Natl LT AAA(col)Rating Watch Maintained AAA(col)
EPM
Inversiones
S.A. Natl LT AAA(col)Rating Watch Maintained AAA(col)
Natl ST F1+(col)Affirmed F1+(col)
=============
G R E N A D A
=============
GRENADA: Collects $33M From CBI Program in first 2 months of 2023
-----------------------------------------------------------------
RJR News reports that the Grenada Government collected revenue
estimated at EC$171.3 million during the first two months of this
year, with $33 million coming from the Citizenship by Investment
program (CBI).
Under the CBI program, foreign investors are granted citizenship of
the island in return for making a substantial investment in the
socio-economic development of Grenada, according to RJR News.
According to the Ministry of Finance, the government's highest
revenue earning continues to come from taxes on international
transactions, followed by non-tax revenues, the report notes.
===========
M E X I C O
===========
FORTALEZA MATERIALES: Fitch Affirms 'BB' LT IDRs, Outlook Stable
----------------------------------------------------------------
Fitch Ratings has affirmed Fortaleza Materiales, S.A.P.I. de C.V.'s
(Fortaleza) Long-Term Local and Foreign Currency Issuer Default
Ratings (IDRs) at 'BB', its National Scale rating at 'A(mex)' and
its short-term rating at 'F1(mex)'. The Rating Outlook is Stable.
Fortaleza`s ratings reflects its medium-sized business scale in the
cement industry with the backbone of its operations in Mexico in
addition to operations in the U.S. and Central America, a track
record of good profitability, consistent FCF generation and
adequate credit metrics. The company still has a goal of
refinancing its short- to medium-term debt, and it should continue
to rely on its good access to the local credit market in Mexico.
KEY RATING DRIVERS
Diversified Medium-Size Player: Fortaleza's primary assets are
three cement plants in central Mexico with 3.75 million metric tons
(MT) of cement production capacity; a 55% stake in U.S.-based Giant
Cement Holding, Inc., which the company will continue to
consolidate in its results; and cement grinding facilities in
southern Mexico, Costa Rica and recently in El Salvador. Giant's
capacity is approximately 2.8 million tons. During 2022, around 78%
of Fortaleza's EBITDA was generated in Mexico, 17% in the U.S. and
5% in Central America.
Challenge to Sustain Pricing Strategy: Fortaleza is expected to
face downward pressure on its cement volumes in all of its regions
during 2023, given a weak economic environment with rising interest
rates and inflationary costs. The company efficiently increased
prices during 2022, seeking to minimize the impact of soaring oil
and overall energy prices. In Mexico, its revenues grew 12% during
the year, even with a decline of 3% in volumes. While fuel and
energy cost pressure are expected to relatively ease compared with
2022, the company will need to carry over its pricing strategy
seeking to mitigate the ongoing inflationary pressures and weak
volume.
Manageable CFFO Pressure: Fitch forecasts that Fortaleza's adjusted
EBITDA will increase to MXN3.5 billion in 2023 and MXN3.8 billion
in 2024, up from MXN3.2 billion in 2022 per the agency's
calculation (adjusted by IFRS16). This includes a challenging
scenario in terms of volumes in the U.S. and Mexico. For 2023-2024,
Fitch estimates adjusted EBITDA margin moving around 23%-24%,
better than 2022, but still lower the average of 26% during 2020
and 2021. This margin compares well with other cement players in
the region.
Deleveraging Trend: Fortaleza has a track record of positive FCF
generation that should hold for the next three years excluding any
major strategic capex plan or dividend distribution. For 2023 and
2024, Fortaleza's FCF should be around MXN166 million and MXN491
million, respectively, after average capex of MXN800 million. This
FCF is expected to drive debt repayment helping to sustain the
deleverage trend. Fitch forecasts Fortaleza's adjusted net
debt/EBITDA ratio to be around 3.2x and 2.4x by YE 2022 and 2023,
respectively.
Good Access to Local Debt Market: Fortaleza has a track record of
keeping relatively low cash balances to short-term debt
obligations, thus implying ongoing refinancing risks. The company
has demonstrated either good access to local debt and capital
markets or maintained committed credit lines, which helps to offset
this weakness compared with other companies with the same rating
and in the same sector. The increasing stake of Grupo Carso in
Fortaleza could help Fortaleza's financial flexibility in the
ongoing refinancing strategies.
Standalone Analysis: Fitch assesses Fortaleza on a standalone basis
from Grupo Carso (AAA(mex)), due to still low legal, strategic and
operational incentives/linkage between the parent and the
subsidiary. Fitch also expects the links between Elementia and
Fortaleza to continue to wane over time as debt is being repaid or
refinanced. Currently there are two financial obligations from
Elementia Materiales S.A.P.I. de C.C., that total MXN1.3 billion
and should last until mid-2024.
DERIVATION SUMMARY
Fortaleza has a similar product offering relative to regional
cement producers such as GCC, S.A.B. de C.V. (BBB-/Positive) and
Cementos Pacasmayo S.A.A (BBB-/Negative). GCC has a much stronger
business operations in US while Pacasmayo's scale is similar to
Fortaleza and also benefits from being part of one of its home
country's largest business groups, its position as a dominant
cement producer in northern Peru is an important differentiator.
Fortaleza's weaker competitive position and geographic
diversification relative to major global peers, notably CEMEX,
S.A.B. de C.V. (BB+/Stable) based on scale and size of cement
operations, is a key rating differentiator.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Rating Case for the Issuer
Include:
- Cement volumes flat to marginal decline in 2023, and low single
digit increase in 2024;
- EBITDA Margin around 23%-24% in 2023 and 2024;
- Capex around MXN800 million in 2023 and 2024;
- Successful refinancing of short-term debt within local credit and
debt market.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- A larger scale and increased market position;
- EBITDA margins sustainable above 27%;
- Consolidated net debt to EBITDA sustained below 2.0x;
- Sustainable improvement in financial flexibility with stronger
liquidity position and no refinancing risks within 18-24 months.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- A weakening of operating cash flow and FCF expectations that lead
to expectations of net debt to EBITDA being sustainable over 3.5x;
- Expectations of a sharp deterioration in Mexico's economic
environment leading to a significant contraction in the EBITDA
outlook;
- Large debt-funded acquisitions;
- Perception of weaker financial flexibility and ability to
refinance short-term debt at reasonable financial costs.
LIQUIDITY AND DEBT STRUCTURE
Tight Liquidity Supported by Good Credit Access: Fortaleza faces
important debt amortizations until 2025, with MXN1.1 billion in
2023, MXN4.8 billion in 2024 and MXN2.7 billion in 2025. This
compares with cash of MXN2.0 billion as of 4Q22 and Fitch's
expected positive FCF generation of MXN166 million during 2023.
Fitch incorporates the company's ongoing access to credit market
into this analysis and its refinancing strategy over the next
two-three quarters. Fortaleza's total debt was MXN10.8 billion as
of 4Q22 and was mainly comprised of credit lines with BancoMext
(26%), Scotiabank (23%), Cebures (18%), Inbursa (16%) and Santander
(9%). The majority of the company's debt is local-currency
denominated (70%), which is in line with its operating cash flow
generation.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity.
Entity/Debt Rating Prior
----------- ------ -----
FORTALEZA
MATERIALES,
S.A.P.I.
DE C.V. LT IDR BB Affirmed BB
LC LT IDR BB Affirmed BB
Natl LT A(mex) Affirmed A(mex)
Natl ST F1(mex)Affirmed F1(mex)
senior
unsecured Natl LT A(mex) Affirmed A(mex)
senior
unsecured Natl ST F1(mex)Affirmed F1(mex)
=======
P E R U
=======
VOLCAN COMPANIA: Moody's Lowers CFR to B2 & Alters Outlook to Neg.
------------------------------------------------------------------
Moody's Investors Service has downgraded Volcan Compania Minera
S.A.A. y Subsidiarias' corporate family rating and senior unsecured
rating to B2 from B1. The outlook was changed to negative from
stable.
Downgrades:
Issuer: Volcan Compania Minera S.A.A. y Subsidiarias
Corporate Family Rating, Downgraded to B2 from B1
Senior Unsecured Regular Bond/Debenture, Downgraded to B2 from B1
Outlook Actions:
Issuer: Volcan Compania Minera S.A.A. y Subsidiarias
Outlook, Changed To Negative From Stable
RATINGS RATIONALE
The downgrade of Volcan's ratings reflects the deterioration of the
company's liquidity and credit metrics driven by negative free cash
flow expected for 2023 and 2024 and incremental debt to fund the
company's growth plan.
Moody's estimates that the company needs to raise around $270
million in debt, out of which $170 million will be incremental debt
to fund its growth plan and around $100 million to refinance debt
maturing in 2024. While the company stated that it already engaged
with market participants, Moody's believes that the announcement of
Glencore plc (Glencore, Baa1 positive), its controlling
shareholder, that it has commenced a process exploring the possible
disposal of its 23.3% economic interest in Volcan, adds uncertainty
to the already challenging operating and market environment.
Following Russia's invasion of Ukraine, the ability for Emerging
Market corporate issuers to access the international capital
markets has sharply declined and Moody's expects that these
conditions are unlikely to improve significantly in the near term.
The negative outlook reflects increasing refinancing risk related
to the company's $105 million in debt coming due in 2024 coupled
with operational challenges that will continue to pressure margins.
Based on Moody's assumption of average zinc prices of $1.3 per
pound in 2023 and $1.25 per pound in 2024, Volcan is expected to
generate negative free cash flow of $62 million in 2023 and $81
million in 2024 driven by higher capex related to the expansion of
Romina, a polymetallic project with an estimated investment of $145
million through 2024. While the growth capex is discretionary, it
is unlikely that the company will delay this investment as it is
needed to support cash flow generation from 2025 onwards.
Similar to other mining operators, Volcan is facing important
inflationary pressures with unit cost of production at $55.5/MT as
of the end of 2022, up from $52.3/MT in 2021 and $48.2/MT in 2020.
Although Volcan put in place a plan called "Volcan Avanza" to
control and reduce costs there are operational risks including
potential disruptions due to social and political turmoil in Peru,
which could affect the company's production output increasing unit
costs.
Other sources of liquidity include the company's $50 million in
committed facility fully available until October 2023, potential
assets sales and advance payments of its greenfield project Romina.
However, nothing has been closed yet.
Volcan's B2 reflects the company's operational diversification in
terms of metals produced and assets; and status as a leading
producer of zinc and silver globally, with some of the largest zinc
reserves. Volcan's B2 ratings also incorporate the company's modest
scale compared with that of its global peers and its concentration
in one country, as well as its high earnings volatility because of
its exposure to commodity prices coupled with high cost structure,
historically tight liquidity and aggressive financial policies.
Governance and Social factors are key considerations for this
rating action. Considerations include the company's aggressive
financial policies and high tolerance to refinance risk as
reflected in its Governance G-4 score. Volcan's Social score at S-4
reflects the company's geographic concentration in Peru, the
company is highly exposed to the current social unrest in the
country. Volcan's sites or operations have not been directly
affected by road blockades because these are mostly concentrated in
the central highlands of Peru. However, the immediate risk of
blockades, supply chain delays and even production stoppage would
increase if social unrest resumes.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely at this point given the negative outlook.
However, Moody´s could stabilize the outlook if there is evidence
of liquidity improvements and the company manages to secure funds
to address its negative FCF gap and debt maturities through 2024 at
least 12 months in advance. In addition, Volcan's ratings could be
upgraded if it restores its cost position to below $50/MT, enabling
the company to better weather significant declines in metal prices,
and continues to invest for growth, achieving higher scale, while
maintaining adequate liquidity. Quantitatively, an upgrade would
also require an EBIT margin above 8% and EBIT/interest expenses
above 2x on a sustained basis.
Volcan's ratings could be downgraded if the company is unable to
improve its profitability and financial profile. The ratings could
be downgraded if Volcan's liquidity deteriorates further or the
company is unable to secure the additional funding for growth capex
and address its 2024 maturities. The ratings could also suffer
negative pressure if Moody's-adjusted EBIT margin remains
persistently below 6% and interest coverage, measured as
EBIT/interest expenses remains below 1.5x.
The principal methodology used in these ratings was Mining
published in October 2021.
Volcan Compania Minera S.A.A. y Subsidiarias (Volcan) is a Peruvian
mining company that primarily produces zinc and lead concentrate
and some copper concentrate, all with high silver content. The
company operates through five operating units including seven
operating mines, five concentrator plants and one leaching plant
for silver oxide production. All of Volcan's operations are located
in Peru, and it reported revenue of $951 million for the 12 months
that ended December 2022. Volcan is a holding company listed on the
stock exchanges of Lima, Santiago and Madrid (Latibex). Since
November 2017, Glencore has held a controlling stake of 55% in
Volcan's Class A voting shares, which is equivalent to a 23.3%
economic interest in Volcan.
=====================
P U E R T O R I C O
=====================
NEW SECURITY: Gets OK to Hire Angel Mattei as Accountant
--------------------------------------------------------
New Security Investigation and Correctional Consultant, Inc.
received approval from the U.S. Bankruptcy Court for the District
of Puerto Rico to employ Angel Mattei, a practicing accountant in
San Juan, P.R.
The Debtor requires accounting services, which include the analysis
of bank accounts and accounting systems, financial consulting
services, and the filing of monthly operating reports.
The accountant will be paid $800 per month, plus reimbursement of
out-of-pocket expenses.
As disclosed in court filings, Angel Mattei is a "disinterested
person" within the meaning of Section 101(14) of the Bankruptcy
Code.
Angel L. Mattei holds office at:
Angel L. Mattei
Urb. Iglesias, 1450 Ave.
San Juan, PR 00921
Tel: (787) 789-6726
About New Security Investigation
and Correctional Consultant
New Security Investigation and Correctional Consultant, Inc. filed
its voluntary petition for relief under Chapter 11 of the
Bankruptcy Code (Bankr. D.P.R. Case No. 23-00217) on Jan. 30, 2023,
with as much as $1 million in both assets and liabilities.
Judge Maria De Los Angeles Gonzalez oversees the case.
The Debtor tapped Landrau Rivera & Assoc. as legal counsel and
Angel Mattei as accountant.
=====================================
T R I N I D A D A N D T O B A G O
=====================================
TRINIDAD & TOBAGO: Pace of Inflation Slowed in Early 2023
---------------------------------------------------------
Trinidad Express reports that the pace of inflation started to slow
from the beginning of 2023, the Central Bank said.
The Bank, in its March 31 Monetary Policy Announcement, said
Central Statistical Office data indicated that headline inflation
decelerated to 8.3 per cent in January 2023 (year-on-year) compared
with 8.7 per cent a month earlier, according to Trinidad Express.
But food inflation remained unchanged at 17.3 per cent, with slower
price increases for fish, breads and cereals, the report notes.
Core inflation (which excludes food items) slowed to 6.1 per cent
from 6.7 per cent, as price increases eased for housing,
communication and furnishings, the announcement stated, the report
relays.
The rate of price increases for building materials also
decelerated, the report discloses.
In terms of economic activity in Trinidad and Tobago, latest
estimates put growth in 2022 at around 2.5 per cent, the report
notes.
"This reflected a relatively favourable performance in the energy
sector alongside a gradual revival in non-energy production," the
report says.
Repo Rate Stays at 3.5%
"There is some early evidence of improving labour market conditions
based on observed increases in labour force participation in the
third quarter of 2022 and the decline in the number of persons
retrenched during the second half of 2022. The outlook for 2023
looks favorable, barring major external shocks," the Central Bank
stated, the report discloses.
With respect to financial indicators, liquidity remains ample and
credit buoyant while interest differentials widened, the report
relays.
Commercial banks' excess reserves at the Central Bank fell by
around $400 million, from $6.7 billion at the end of December 2022
to $6.2 billion at March 28, 2023, the Bank said, the report
discloses.
Contributing to the decline were more extensive open market
operations—net treasury bill sales of around $1 billion—and
US$300 million in foreign exchange interventions by the Central
Bank, the report says.
Financial system lending to businesses expanded by 9.8 per cent in
December 2022 (year-on-year), the report says.
"Credit growth to the construction and manufacturing sectors (18
and 11 per cent respectively) were particularly robust, while
consumer credit gathered momentum," the Bank noted.
There is evidence of a slight upward movement in domestic interest
rates in recent months; the rise in average rates on loans exceeded
those on deposits resulting in an expansion in the loan/deposit
spread by five basis points to 6.36 per cent, the Bank said, the
report discloses.
Cloudy Outlook
"In reviewing external developments, the Monetary Policy Committee
(MPC) took particular note of the recent banking problems and the
potential repercussions on global financial stability, the report
notes.
"While domestic inflation had shown signs of slowing down, the MPC
acknowledged that unanticipated external impulses and second round
effects of the adjustment to local fuel prices could temper further
reductions in inflation in the short run," it stated, the report
discloses.
The report said current buoyancy in credit was welcome in fostering
growth that was still at an early stage, but needed to be closely
monitored given the implications for demand pressures and the
quality of bank assets, the report says.
The MPC also noted the impact that the Bank's recent open market
operations had been having on financial system liquidity, the
report relays.
Taking all these factors into account, the MPC agreed to maintain
the repo rate at 3.50 per cent, the report notes.
The global economy is rebounding faster than earlier anticipated
from the Covid-19 pandemic, the Central Bank announcement said, the
report discloses.
"However, the headwinds of persistent inflation, ongoing
geopolitical tensions and fresh financial stability concerns in
early 2023 cloud the outlook, the report relays.
"The failure of a few banks in the United States as well as one
international bank prompted coordinated action by financial
authorities to avoid widespread contagion," the report notes.
The Bank noted that at the same time, monetary policy tightening
continued, albeit with a more guarded orientation on future rate
increases, the report says.
For example, in March 2023, the US Federal Reserve increased the
target range for the federal funds rate by 25 basis points to
4.75–5.00 per cent.
With some of the supply-side impulses to inflation tapering off,
there is an expectation that global inflation will moderate later
in 2023, it stated.
Energy prices have already demonstrated some softening, the report
notes.
West Texas Intermediate (WTI) crude oil prices moved from an
average of US$76.52 in December 2022 to US$67.64 per barrel at
mid-March 2023, the report says.
Natural gas prices (Henry Hub) fell from US$5.50 per mmbtu to
US$2.24 per mmbtu over this period, the Central Bank said, the
report adds.
TRINIDAD & TOBAGO: Renters Owe HDC More Than $157 Million
---------------------------------------------------------
Trinidad Express reports that the Housing Development Corporation
(HDC) says it is owed in excess of $157 million in rental arrears
with approximately 55 per cent of renters throughout the country
indebted to the corporation in some capacity.
At the Oasis Greens housing development in Chaguanas, HDC chairman
Noel Garcia says 75 per cent of its occupants were in arrears,
owing approximately $3.4 million to the corporation, according to
Trinidad Express.
But the issue of debt has spanned the entire country in communities
such as Malabar, Victoria Keyes and Edinburgh 500 with
approximately 5,500 of 10,000 renters failing to meet their payment
obligations, the report notes.
Garcia, who spoke to members of the media after an HDC key
distribution at the Corinth B Development in San Fernando, said
that come next month the corporation was prepared to take drastic
action which may entail evictions, the report relays.
Though he said the corporation would not be heartless, it would
enact a campaign to encourage people to pay their owed fees, the
report discloses.
"We will do it on a case-by-case basis but hard decisions have to
be made . . . When you are occupying a house, you are required to
pay between $800 and $1,500 in a month's rent when the market rate
of similar properties is between $3,000 and $5,000. There are
191,000 who require housing on our database and those who have been
fortunate to have received HDC houses are refusing to meet their
obligations. So come early next month we start our campaigns, and
we start at Oasis, and we are going to go throughout Trinidad," the
report notes.
". . . We will outline what the position is, we will follow up with
a letter inviting those people to come in, we are creating a
special task force to deal with this issue, and we will move to
Cypress, Edinburgh 500 and Malabar," said Garcia, the report
discloses.
He said there was a local culture of HDC occupants believing their
homes were gifted to them by the Government, the report says.
In some cases, he said recipients had neglected their payment
obligations soon after they were given keys to units, the report
notes.
He said while some were allowed to ignore these obligations,
thousands were awaiting the opportunity to be housed, the report
relays.
"People believe when they get an HDC house it is a gift, the
Government gave it to them for free and it transcends all
administrations be it the PNM, UNC, Partnership, somehow a culture
has developed that makes people believe that an HDC house is a
gift. The new board of the HDC and new managing director is
committed to change that culture and change that culture by
effort," he said, the report notes.
As he addressed 100 recipients of Housing Development Corporation
(HDC) units at the site, Minister in the Ministry of Housing and
Urban Development Adrian Leonce also pleaded with recipients to
make timely payments on their new homes, the report says.
"Pay your mortgages and pay your rent on time, please, please,
please," he said, the report adds.
*********
S U B S C R I P T I O N I N F O R M A T I O N
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