/raid1/www/Hosts/bankrupt/TCRLA_Public/231026.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, October 26, 2023, Vol. 24, No. 215
Headlines
A R G E N T I N A
GAUCHO GROUP: Investor Converts Portion of Debt for Equity
GAUCHO GROUP: Updates Stakeholders on Valuation of Assets
B E R M U D A
BORR DRILLING: Fitch Assigns 'B' First-Time IDR, Outlook Stable
BORR DRILLING: Moody's Assigns First Time 'B3' Corp. Family Rating
BORR DRILLING: S&P Assigns Preliminary 'B+' ICR, Outlook Stable
B R A Z I L
BRAZIL: Early Economic Indicator Declines in August
PETROLEO BRASILEIRO: Weighs Return to Venezuelan Oil Sector
C O L O M B I A
COLOMBIA: Banker Sees Risks in Rushing to Cut Rates Too Soon
RUTA AL MAR: Fitch Affirms BB+ Rating on COP522-Mil. Secured Notes
J A M A I C A
SSL: Client Funds Are Being Released
P A N A M A
GLOBAL BANK: Fitch Alters Outlook on 'BB+' LongTerm IDR to Negative
P E R U
COMPANIA DE MINAS BUENAVENTURA: Moody's Affirms 'B2' CFR
P U E R T O R I C O
PUERTO RICO AQUEDUCT: Fitch Hikes Issuer Default Rating to 'CCC'
T R I N I D A D A N D T O B A G O
TELECOMMUNICATIONS SERVICES: S&P Ups ICR to 'BB-', Outlook Stable
TRINIDAD & TOBAGO: WASA Puts Financial Strain on Taxpayers
X X X X X X X X
LATAM: T&T Calls on IMF to Reinforce Support for Suriname, Haiti
- - - - -
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A R G E N T I N A
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GAUCHO GROUP: Investor Converts Portion of Debt for Equity
----------------------------------------------------------
Gaucho Group Holdings, Inc. disclosed in a Form 8-K filed with the
Securities and Exchange Commission that an institutional investor
has elected to convert a senior secured convertible note into
shares of common stock of the Company.
The Company and the institutional investor, as holder, entered into
a Securities Purchase Agreement, dated February 21, 2023. The
Company issued to the Holder a senior secured convertible note, as
amended, and warrant to purchase 3,377,099 shares of common stock
of the Company.
On October 16, 2023, the investor elected to convert a total of
$63,228 of principal and $9,484 of premium, pursuant to the Note
into 100,000 shares of common stock of the Company at a conversion
price of $0.727 per share.
On October 19, 2023, the investor elected to convert a total of
$31,296 of principal and $4,694 of premium, pursuant to the Note
into 48,477 shares of common stock of the Company at a conversion
price of $0.742 per share.
The shares of common stock that have been and may be issued under
the Note Documents are being offered and sold in a transaction
exempt from registration under the Securities Act of 1933, as
amended. The transaction is in reliance on Section 4(a)(2) thereof
and/or Rule 506(b) of Regulation D thereunder. The Company filed a
Form D with the SEC on or about March 3, 2023.
About Gaucho Group
Headquartered in New York, NY, Gaucho Group Holdings, Inc. --
http://www.algodongroup.com-- was incorporated on April 5, 1999.
Effective Oct. 1, 2018, the Company changed its name from Algodon
Wines & Luxury Development, Inc. to Algodon Group, Inc., and
effective March 11, 2019, the Company changed its name from Algodon
Group, Inc. to Gaucho Group Holdings, Inc. Through its wholly owned
subsidiaries, GGH invests in, develops and operates real estate
projects in Argentina. GGH operates a hotel, golf and tennis
resort, vineyard and producing winery in addition to developing
residential lots located near the resort. In 2016, GGH formed a new
subsidiary and in 2018, established an e-commerce platform for the
manufacture and sale of high-end fashion and accessories. The
activities in Argentina are conducted through its operating
entities: InvestProperty Group, LLC, Algodon Global Properties,
LLC, The Algodon - Recoleta S.R.L, Algodon Properties II S.R.L.,
and Algodon Wine Estates S.R.L. Algodon distributes its wines in
Europe through its United Kingdom entity, Algodon Europe, LTD.
Gaucho Group reported a net loss of $21.83 million for the year
ended Dec. 31, 2022, compared to a net loss of $2.39 million for
the year ended Dec. 31, 2021. As of March 31, 2023, the Company had
$21.01 million in total assets, $8.60 million in total liabilities,
and $12.40 million in total stockholders' equity.
New York, NY-based Marcum LLP, the Company's auditor since 2013,
issued a "going concern" qualification in its report dated April
17, 2023, citing that the Company has a significant working capital
155 / 255 deficiency, has incurred significant losses and needs to
raise additional funds to meet its obligations and sustain its
operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
GAUCHO GROUP: Updates Stakeholders on Valuation of Assets
---------------------------------------------------------
Gaucho Group Holdings Inc. filed with the Securities and Exchange
Commission a copy of updates provided to its stockholders regarding
the Company's valuation of assets in light of Gaucho Holdings'
press release and 8K filings with the SEC on October 4, 2023.
According to the Company, Gaucho Holdings' portfolio is comprised
of substantial real estate assets in Argentina, and it is acutely
aware of the divergence between our assets' inherent value and the
present market capitalization of the Company.
Scott L. Mathis, CEO, and chairman of the board of directors of the
Company, said, "Our VINO stock is currently trading at a
significant discount relative to the intrinsic value of our real
estate assets, and we are determined to undertake necessary actions
to bridge this disparity, starting with the sale of non-core assets
and even extending to other assets if required."
"For example, despite Algodon Mansion's current book value of USD
975,000, the combined expenditure for the acquisition and extensive
renovations of the property into a celebrated 5-star luxury hotel
underscores our conviction of its true intrinsic value, currently
listed - and we believe this asset can sell for between USD 8 to 10
million. It's very important to note the primary driver for this
value discrepancy stems from the economic conditions at the time of
acquisition when the currency exchange was 3 Argentine Pesos to 1
United States Dollar. The present-day landscape showcases a
dramatically altered exchange rate, which recently reached a new
low of approximately 1,000 Argentine Pesos to 1 USD. (Given
Argentina's ongoing inflationary challenges, it is essential to
note that the US Government and the SEC have responded by
implementing stringent accounting rules. They've conservatively set
the Peso-USD exchange rate at 28 to 1, far removed from the
actual
prevailing rate.)"
"Furthermore, we believe we can sell our non-core real estate
assets in San Rafael and Cordoba, Argentina for approximately USD
2.7 million. We plan to aggressively pursue the sale of our
non-core assets, as well as our Algodon Wine Estate lots, following
the upcoming elections in Argentina, anticipating a heightened
appetite thereafter in the real estate market. By divesting these
non-core real estate assets, we can channel our energies more
effectively towards our mainstay ventures. Our ongoing efforts are
directed at unlocking the potential of these assets to amplify
stockholder value. Additionally, we have a lineup of initiatives in
the pipeline, further aiming to enhance the value for our
stockholders."
"We see Argentina on the brink of a positive catalyst. After
enduring decades of hyperinflation, rapid peso devaluation, and
lack of investor confidence, there's a noticeable shift in the
country's outlook. Argentina's upcoming election this month could
bode well for real estate and the economy. There's speculation
about Argentina potentially dollarizing its economy. Should this
materialize, banks might revert to the traditional retail banking
approach of providing mortgages a market that is currently almost
non-existent in Argentina. This shift could profoundly bolster real
estate values in the country."
"Doug Casey, a recognized authority in offshore investing, recently
shared an intriguing take on Argentina's potential future in the
wake of its elections. He remarked, it could be the most dramatic
thing that's happened politically since at least World War II.
Anywhere. Why? Because (the front runner is) an AnCap libertarian
who'd like to abolish the State or come as close as possible. If
he's elected...he'll make every move possible to eliminate-not just
reduce as many government departments as possible as quickly as
possible. And most people seem oblivious to it."
"We agree with Casey's sentiments. We believe we're on the brink of
a transformative era that might very well redefine Argentina's
economic trajectory. Our optimism drives us to intensify our
efforts in developing more real estate and acquiring
cash-flow-producing properties, available at a fraction of global
costs. We don't anticipate an overnight transition from a
struggling economy to greatness, but rather a move from challenging
to less challenging, which can significantly impact the value and
global interest in Argentine assets. We've long championed the idea
of contrarian investments, beyond the conventional sphere of
USD-based assets, especially focusing on land in Argentina, which
we firmly believe represents one of the most compelling investment
opportunities in the world today."
"We have multiple strategies in the works, all designed to
progressively boost stockholder value. Given the unfolding
political and potential economic shifts in Argentina, we
cautiously
anticipate new opportunities. We are excited about harnessing these
prospects, and we hope you'll continue to accompany us on this
opportunistic journey. Your continued support is invaluable to us,
and we are deeply grateful for the trust you place in Gaucho
Holdings."
"We remain committed to keeping you informed about our forthcoming
initiatives aimed at enhancing value, and we are optimistic about
the upcoming 4th quarter, during which we anticipate heightened
sales, especially with the holiday season around the corner. Both
our Gaucho Flagship store in Miami and online platform (Gaucho.com)
are poised to benefit from this surge, not to mention the
anticipated growth in our wine and vineyard estate sales. We
eagerly look forward to sharing these milestones with you."
About Gaucho Group
Headquartered in New York, NY, Gaucho Group Holdings, Inc. --
http://www.algodongroup.com-- was incorporated on April 5, 1999.
Effective Oct. 1, 2018, the Company changed its name from Algodon
Wines & Luxury Development, Inc. to Algodon Group, Inc., and
effective March 11, 2019, the Company changed its name from Algodon
Group, Inc. to Gaucho Group Holdings, Inc. Through its wholly owned
subsidiaries, GGH invests in, develops and operates real estate
projects in Argentina. GGH operates a hotel, golf and tennis
resort, vineyard and producing winery in addition to developing
residential lots located near the resort. In 2016, GGH formed a new
subsidiary and in 2018, established an e-commerce platform for the
manufacture and sale of high-end fashion and accessories. The
activities in Argentina are conducted through its operating
entities: InvestProperty Group, LLC, Algodon Global Properties,
LLC, The Algodon - Recoleta S.R.L, Algodon Properties II S.R.L.,
and Algodon Wine Estates S.R.L. Algodon distributes its wines in
Europe through its United Kingdom entity, Algodon Europe, LTD.
Gaucho Group reported a net loss of $21.83 million for the year
ended Dec. 31, 2022, compared to a net loss of $2.39 million for
the year ended Dec. 31, 2021. As of March 31, 2023, the Company had
$21.01 million in total assets, $8.60 million in total liabilities,
and $12.40 million in total stockholders' equity.
New York, NY-based Marcum LLP, the Company's auditor since 2013,
issued a "going concern" qualification in its report dated April
17, 2023, citing that the Company has a significant working capital
155 / 255 deficiency, has incurred significant losses and needs to
raise additional funds to meet its obligations and sustain its
operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
=============
B E R M U D A
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BORR DRILLING: Fitch Assigns 'B' First-Time IDR, Outlook Stable
---------------------------------------------------------------
Fitch Ratings has assigned Borr Drilling Limited (Borr) a
first-time Long-Term Issuer Default Rating (IDR) of 'B' with Stable
Outlook. Fitch has also assigned the upcoming notes to be issued by
Borr IHC Limited and Borr Finance LLC an expected senior secured
rating of 'B(EXP)'. The Recovery Rating is 'RR4'. The notes will be
guaranteed by Borr Drilling Limited.
Borr's IDR reflects its strong near-term revenue visibility from a
robust contracted order backlog, its high-spec jack-up fleet and
its strong relationship with key customers, which is partially
offset by exposure to Petroleos Mexicanos (PEMEX) (B+/Rating Watch
Negative). The rating further reflects high leverage with a strong
deleveraging trajectory from 2024 and a new capital structure that
Fitch expects to consist mostly of amortising debt. Borr's IDR also
incorporates a moderate scale, concentrated rig fleet of only
jack-up rigs and the inherent cyclicality of the offshore drilling
market.
Final senior secured rating is contingent on receipt of final
documentation conforming to documentation already reviewed.
KEY RATING DRIVERS
Positive Industry Trend: The jack-up rig market is showing signs of
recovery as some supply of rigs has left the market over the last
five years. Further security-of-supply concerns alongside
supportive hydrocarbon prices have resulted in renewed demand for
jack-up rigs from major producers as they look to replace reserves.
Fitch expects Borr's day rates and rig utilisation, which have been
increasing year-to-date, will continue to improve as recently
signed contracts ramp up and existing contracts expire and are
repriced.
Backlog Provides Near-Term Revenue Visibility: Borr's 2Q23 backlog
was USD1.9 billion. Of this, USD805 million is set to be realised
as revenue in 2024 and USD634 million in 2025, covering around 86%
and 62%, respectively, of its revenue forecast for these years.
This substantially reduces the downside risk to its expectation of
deleveraging and a return to positive free cash flow (FCF)
generation.
High-Spec Jackup Fleet: With an average age of around six years,
Borr's jack-up fleet is among the newest on the market. The fleet
of high-spec rigs is expected to have relatively low run-rate capex
requirements of around USD30 million-USD40 million per year, with
assets able to service complex projects in a variety of
geographies. Fitch expects the company's assets to be sought after
by customers looking to develop higher complexity shallow-water
projects where the efficiency and technical specification of rigs
is key.
No Liquidity Constraints Post-Refinancing: The contemplated
refinancing will push out all effective maturities to 2028 and
later, and Fitch expects the company's Fitch-defined FCF will
become consistently positive from 2025. This leads to a manageable
liquidity profile over its forecast, with high debt service costs
somewhat offsetting the company's otherwise strong cash-flow
generation.
Newbuild Rigs Carved Out: Borr's last two newbuild rigs are
expected to be delivered in late 2024, which will mark the end of
the company's growth cycle. Delivery of the rigs will entail
payment of a USD295 million final instalment, of which USD260
million will be financed from asset-level debt, effectively
ring-fenced from the rest of the company's debt stack, and the
remaining USD35 million will be funded internally. Fitch therefore
carves out the two newbuild rigs from its recovery analysis.
Backlog and Utilisation Volatility: Since its inception in 2017,
Borr's backlog and fleet utilisation has been volatile during
periods of weakness in the oil market. This resulted in low EBITDA
generation and negative free cash flow during 2019-2021. Current
market trends are favourable, and customers willing to accept
growing rates and longer contracts amid a backdrop of high oil
prices. Consequently, Fitch expects that day rates, utilisation,
and backlog will remain volatile across macro cycles. This is
somewhat mitigated by the roll-off of growth capex, which will help
the company preserve liquidity sources during periods of lower
EBITDA generation.
Mixed Customer Base: As of 2Q23, Borr's customer base was
diversified across geographies and customer groups, with 36% of
backlog coming from the Americas, 15% West Africa, 20% southeast
Asia, and 29% Middle East, from customers of which 37% are
international oil companies and 63% national oil companies.
There is good customer and geographic diversification, but the
company retains substantial exposure to PEMEX, which contributed
23% of 1H23 revenues, is currently in financial distress, and has
had historical instances of delayed payment to its suppliers. This
is partially offset by strong relationships with other, higher
quality customers such as Saudi Arabian Oil Company (Saudi Aramco;
A+/Stable), QatarEnergy (AA-/Positive), PTT Exploration and
Production Public Company Limited (BBB+/Stable), and European oil
majors.
DERIVATION SUMMARY
Fitch rates Borr in line with Shelf Drilling, Ltd. (B/Stable) due
to the latter's higher mid-cycle EBITDA, lower order book
volatility and higher quality customer base. This is offset by
Borr's better asset quality owing to its very young fleet and wider
geographic diversification, alongside higher profitability per
rig.
Fitch rates Borr in line with CGG SA (B/Stable) due to similar
mid-cycle EBITDA and order book volatility. However, Fitch expects
CGG to generate stronger FCF and have lower mid-cycle leverage.
This is offset by Borr's good demand prospects for the jack-up rig
market over its forecast period, alongside access to more varied
funding sources.
Fitch rates Borr one notch below Valaris Limited (B+/Stable) due to
the latter's higher mid-cycle EBITDA, stronger liquidity, and lower
mid-cycle leverage, alongside a more diversified asset base. This
is partially offset by Borr's higher EBITDA margins.
Fitch rates Borr one notch below KCA DEUTAG ALPHA LIMITED
(B+/Positive) due to the latter's more diversified business profile
with high exposure to lower-risk onshore drilling in the Middle
East, lower leverage, stronger liquidity, and larger size. This is
partially offset by Borr's higher profitability.
KEY ASSUMPTIONS
Key Assumptions Within Its Rating Case for the Issuer:
- Utilisation rate averaging 92% for 2023-2026
- Day rates averaging around USD120,000 per day for 2023-2026
- EBITDA margin averaging around 53% for 2023-2026
- Capex averaging USD222 million per year for 2023-2026
- Dividend payments commencing in 2025
- Contractual amortisation of new debt
RECOVERY ANALYSIS
Recovery Analysis Assumptions:
The recovery analysis assumes that Borr would be liquidated in a
bankruptcy rather than reorganised as a going concern (GC). This is
driven by the fact that Borr's assets are very new, with several
decades of useful life left absent large-scale investment needs.
Other oilfield services companies in its rating universe, such as
Shelf Drilling and Valaris, have assets that are older, have less
useful life left or require more substantial investments leading to
lower asset valuations, although EBITDA generation within its
forecast horizon may be similar or even higher than that of Borr.
Fitch assumes the USD150 million super senior RCF (excluding letter
of credit portion) is fully drawn. The RCF is super senior to the
senior secured bonds.
Fitch excludes assets, and debt attributable to Borr's new build
assets to be delivered in 2024 as they are not part of the
restricted group.
Fitch bases its recovery ratings on a liquidation value, which
takes into account 2Q23 reported accounts receivable of USD136
million with a 70% advance rate which takes into account the
quality of its customer base, and USD3.4 billion of net property,
plant and equipment primarily comprising the value of rigs per
third-party provider valuation report dated September 2023, with a
30% advance rate.
- After a deduction of 10% for administrative claims, and taking
into account Fitch's Country-Specific Treatment of Recovery Ratings
Criteria, its waterfall analysis generated a waterfall-generated
recovery computation (WGRC) in the 'RR4' band, indicating an
expected 'B(EXP)' instrument rating. The WGRC output percentage on
current metrics and assumptions was 50%.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- EBITDA gross leverage sustained below 2.5x
- Improvement of liquidity and reduction of gross debt with no
material near-term refinancing risk
- Sustained stronger jack-up market fundamentals, including higher
day rates, larger contracted backlog value, and longer average
contract tenor
- Increased geographical diversification of cash flows
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- EBITDA gross leverage above 3.5x on a sustained basis
- Weakening liquidity
- Deteriorating market fundamentals, including lower day rates or
rig utilisation
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity Post-Refinancing: As of end-June 2023,
Borr's liquidity was weak as short-term debt of USD97.9 million
exceeded cash of USD83.8 million and Fitch expects FCF to be
negative over the next 12 months. The prospective high-yield notes
would move maturities to 2028-2030 with manageable amortisation.
Fitch expects negative FCF in 2023 to turn positive in 2025 and
beyond as capex winds down. Liquidity is further supported by the
expected USD150 million RCF (excluding letter of credit portion).
ISSUER PROFILE
Borr is an offshore shallow-water drilling contractor to the oil
and gas industry.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery
----------- ------ --------
Borr Drilling
Limited LT IDR B New Rating
Borr Finance LLC
senior secured LT B(EXP) Expected Rating RR4
Borr IHC Limited
senior secured LT B(EXP) Expected Rating RR4
BORR DRILLING: Moody's Assigns First Time 'B3' Corp. Family Rating
------------------------------------------------------------------
Moody's Investors Service has assigned first-time ratings to Borr
Drilling Limited (Borr or the company), including a B3 corporate
family rating and a B3-PD probability of default rating. At the
same time Moody's assigned a B3 rating to the proposed backed
senior secured notes issued by Borr's wholly-owned subsidiary Borr
IHC Limited. The outlook assigned for both entities is positive.
On October 23, 2023, Borr announced the issuance of $1.5 billion
new backed senior secured notes due 2028 and 2030, along with a $50
million of new equity raise. Proceeds of both transactions will be
used mainly to refinance around $1.5 billion of outstanding
indebtedness (including accrued interest) and pay around $50
million of debt prepayment costs, fees and expenses. Moody's rating
action is predicated upon the transaction concluding successfully
and in line with the terms outlined.
RATINGS RATIONALE
Borr's CFR of B3 reflects the company's: (i) relatively large fleet
of high quality jack-up rigs with significant collateral value and
competitive advantages; (ii) significant contract backlog that
provides good earnings and cash flow visibility through 2025,
supporting an expected progressive strengthening of key credit
metrics; (iii) balanced customer mix and presence across key
hydrocarbon producing regions; (iv) positive industry fundamentals
that shall favour rigs re-contracting activity at profitable
day-rates; and (v) adequate liquidity position pro-forma for the
announced refinancing. Concurrently, the B3 rating also reflects
Borr's: (i) indirect exposure to highly volatile oil and gas
prices, along with the deeply cyclical nature of the offshore
drilling industry; (ii) some customer concentration on Petroleos
Mexicanos (PeMex, B1 negative) and (iii) still high gross leverage
of 5.4x projected at year-end 2023 due to the very high debt
quantum carried on balance sheet. In this respect, going forward
Moody's considers it key for Borr to demonstrate ability to deliver
and abide by its stated, conservative financial policies. Failure
to establish a proven track record of (i) achieving and maintaining
net leverage under 2.0x in the near term and below 1.5x through the
cycle, (ii) maintaining adequate liquidity and (iii) prudently
managing shareholder distributions, growth spending and potential
acquisitions are key risks to the current positive rating outlook.
Borr should generate Moody's-Adjusted EBITDA of $330 million in
2023 and of $530-$560 million (excluding contribution from
newbuilds outside of the new notes' restricted group) in each of
2024 and 2025, reflective of higher than historical rig utilization
and day-rates embedded in the $1.89 billion contract backlog as at
September 2023. Moody's thus expects adjusted gross leverage
(including $250 million of outstanding convertible bond) to
sensibly improve to 5.4x and 3.3x by year-end 2023 and 2024,
respectively, from pro-forma levels of 7.9x for the last twelve
months ended June 2023 (LTM June 2023), despite the $100 million
increase in reported debt pro-forma for the transaction ($1,750
million) from already substantial levels of $1,640 million as at
June 2023. Moody's projects free cash flow (FCF) to be meaningfully
negative at around $200 million in 2023 due to still subdued
operating cash flow generation, large outflows for working capital
and rig re-activation costs correlated to activity picking up. From
2024 onwards however, Moody's projects FCF to turn positive at
approximately $125 million in 2024 and well in excess of $250
million thereafter, based on around $350-$370 million of annual
funds from operations, normalizing working capital needs and lower
capital expenditure requirements. This should be more than
sufficient to cover the mandatory above-par amortization associated
with the new notes (equivalent to 6.7% of the aggregate initial
principal amount of $1.5 billion), provide flexibility for
accelerated debt repayment through the new notes' contemplated cash
sweep mechanism and ensure the retention of adequate cash balances.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
ESG considerations have a discernible impact on the current rating,
which is lower than it would have been if ESG risks did not exist.
The negative impact of ESG considerations on Borr's rating is
higher than for an issuer scored CIS-3 and is driven by high
environmental, social and governance risks. Borr's earnings and
cashflow generation solely depend on continued exploitation of
hydrocarbon resources, which is a source of environmental and
social risks in the context of energy transition.
Governance considerations incorporated into Borr's ratings reflect
risks primarily arising from tolerance for high leverage in the
context of inherently very volatile offshore drilling industry.
There is public commitment to a more conservative set of financial
policies, including prioritizing balance sheet strength over
shareholder remuneration and retention of cash balances that are
commensurate with the needs of the business at all times. Despite
the clearly communicated targets, track record of abiding by the
new financial policy framework remains substantially untested.
LIQUIDITY
Borr's liquidity is adequate. Moody's assessment reflects Borr's:
expected retention of cash balances commensurate with the needs of
the business at all times; projected sustained positive FCF
generation from 2024 onwards, aided by strengthening operating
cashflows and lower capital expenditure; expected reduction of
reliance on RCF drawings in tandem with return to positive FCF
generation; absence of assets readily available for disposal, as
both the existing rigs and the newbuilds Vale and Var are
encumbered; no significant debt maturities besides the manageable
mandatory amortisation of the new senior secured notes.
STRUCTURAL CONSIDERATIONS
On a pro-forma basis, Borr's capital structure will include the new
$1,500 million senior secured notes, a $150 million super senior
revolving credit facility (respectively, issued and borrowed by
Borr IHC Limited) and the existing $250 million senior unsecured
convertible bond due February 2028 (issued by Borr Drilling
Limited).
The RCF and the senior secured notes share the same security
package that include share pledge, rigs, material bank accounts,
all other assets of issuers and guarantors including equipment,
inventory, accounts receivables and intangibles and are guaranteed
on a senior secured basis by subsidiaries accounting for
approximately 94% of the consolidated EBITDA. The RCF ranks super
senior in an enforcement scenario. The senior secured notes are
rated in line with CFR at B3 because the instrument represents the
majority of the capital structure. The convertible bond ranks
behind the senior secured notes, given its status as unsecured and
unguaranteed liability subject to structural subordination.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects Moody's expectation of a significant
improvement in Borr's earnings and cashflow generation within the
next 12-18 months, resulting in progressively stronger credit
metrics versus still weak levels projected for the full-year 2023.
Moody's expects Borr to manage its balance sheet conservatively and
in line with the stated financial policies, including recourse to
active debt reduction, while continuing to secure new and
profitable rig contracts in a timely manner.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Borr's ratings could be upgraded as a result of:
-- Material reduction in gross debt from current levels so that
its credit metrics are less sensitive to a deterioration in
financial performance
-- Sustained high fleet utilization, growing revenue backlog and
visibility in an improving industry environment
-- Moody's-Adjusted Debt / EBITDA sustainedly below 3.5x and
-- Longer track record of adhering to the stated financial policy
and
-- Achievement and maintenance of a strong liquidity position
Conversely, Borr's ratings could be downgraded following:
-- Difficulty in re-contracting rigs or new contracts are signed
at lower day-rates
-- Sustained negative free cash flow generation, for instance as a
result of a deterioration in operating performance or aggressive
financial policies
-- Failure to deleverage to below 4.5x within the next 12-18
months
-- Interest coverage falling below 1.5x, or
-- A sharp decline in cash balance leading to weak liquidity
RATING METHODOLOGY
The principal methodology used in these ratings was Oilfield
Services published in January 2023.
PROFILE
Borr provides worldwide offshore contract drilling services to the
oil and gas industry. The company focusses on shallow water
operations; it owns and operates a modern fleet of 22 jack-up rigs
with two additional units scheduled for delivery by the end of
2024. In the LTM June 2023, Borr generated revenue of $616 million
and Moody's-Adjusted EBITDA of $227 million. Operational since
2018, Borr is listed on the Oslo and on the New York Stock
Exchanges. Borr had a market capitalization of $1.7 billion as of
October 23, 2023.
BORR DRILLING: S&P Assigns Preliminary 'B+' ICR, Outlook Stable
---------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B+' issuer credit
rating to Borr Drilling Ltd. and a preliminary 'BB-' rating to the
proposed senior secured notes.
The stable outlook indicates that S&P anticipates a rapid
deleveraging that will allow Borr Drilling to quickly move FFO to
debt toward 30%, and potentially above 30% from 2024, as well as a
supportive liquidity profile with no maturities in the next few
years.
S&P said, "Our analysis considers Borr Drilling's relatively small
size. With a current backlog of $1.9 billion versus $2.9 billion
for Valaris, $2.4 billion for Seadrill, and $2.3 billion for
Odfjell, and despite current revenue visibility of nearly two years
with firm contracts in place, Borr Drilling remains exposed to
volatile and unpredictable end markets where capital expenditure
(capex) on oil and gas is the key driver. Mid- to long-term
prospects are uncertain and volatile. In that context, Borr
Drilling's relatively high indebtedness compared with that of
peers, pro forma the proposed $1.5 billion debt issuance, is a
relative weakness, despite our anticipation of rapid deleveraging
once the two newbuilds are delivered (slated to happen before
year-end 2024). That said, we note the additional $50 million
equity injection, mandatory amortization, and cash flow sweep are
supporting factors. The company also displays certain key
strengths, such as a market-leading age of fleet (average of about
six years) and a 100% contracted fleet, representing operating
efficiency factors that are at least on par or superior to peers'.
In particular, margins above the peer average mitigate the overall
smaller size. The smaller size is also mitigated by sound
geographic diversity and a versatile fleet that can work in most
shallow-water oil and gas producing regions.
"Drilling market activity continues to pick up, providing tailwinds
to Borr Drilling's activity levels. We expect that the current
commodity prices, supply and demand fundamentals for crude oil, and
a renewed focus on global energy security will support a continued
gradual increase in offshore drilling spending and activity.
However, over the longer term, we believe the energy transition
will challenge the offshore drilling sector because customers may
become less willing to commit capital to multi-year greenfield
projects, due to the risk of waning oil demand. In that context,
the shallow water segment Borr Drilling focuses on is less at risk,
given a shorter payback time for oil and gas companies.
"The company should maintain high utilization and potentially
benefit from upside. Our view of the financial risk profile takes
into account the rapid deleveraging the company can achieve on the
back of contracted revenue for 2024 and 2025 and increasing day
rates in most recent contracts signed, a trend that could continue
on the back of relatively high oil and gas prices. Capex will fall
to minimum levels by 2025 because maintenance spending is
relatively low for the company's modern fleet, and volatility risk
will reduce as debt is paid down and leverage attains levels that
are more in line with that of peers.
"The stable outlook reflects our expectation that Borr Drilling
will gradually reduce its leverage amid supportive market
conditions and strong contract coverage, thus providing it with the
scope to face potential headwinds at lower points in the cycle. We
believe that Borr Drilling's young and modern fleet of rigs will
continue to achieve above-average utilization and efficiency rates.
We anticipate FFO to debt will rapidly converge toward 30% in 2024
and thereafter, which we view as commensurate with the preliminary
'B+' rating.
"We could lower our preliminary rating on Borr Drilling in the next
12 months if the expected improvement in credit measures after 2024
does not materialize, such as if FFO to debt remains materially and
sustainably below 30% or if debt to EBITDA remains sustainably
above 3x."
EBITDA interest coverage below 3x could also trigger a downgrade.
This could occur if:
-- Weaker commodity prices impair demand for offshore drilling
services, making it more challenging for the company to re-contract
its rigs at favorable day rates; and
-- Borr Drilling adopts a more aggressive financial policy on
leverage, dividends, and capex, notably increasing its fleet size
speculatively.
S&P said, "We view a positive rating action as limited in the next
12 months considering Borr Drilling's relatively small size and
focus on one asset class (shallow water jack-ups). Any upside
scenario is linked to increased scale and cash flow generation,
which would better protect the company in a downturn. In the longer
term, rating upside could also arise if the company's financial
policy targets were to become much more stringent, for example with
a capital structure that was close to being free of net debt so
that debt to EBITDA stayed below 1.5x and FFO to debt above 60% at
all points of the cycle."
===========
B R A Z I L
===========
BRAZIL: Early Economic Indicator Declines in August
---------------------------------------------------
Richard Mann at Rio Times Online reports that the IBC-Br index,
akin to a snapshot of Brazil's GDP, declined by 0.77% in August.
The drop was more than what financial experts had guessed,
according to Rio Times Online. They thought it would go down by
only 0.4%, the report notes.
The Central Bank shared these numbers, the report relays. A full
report is out for people to read, the report discloses.
Now, let's look at the year-over-year numbers, the report notes.
Economic activity in August rose by 1.28% compared to the same
month last year, the report discloses.
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.
Fitch Ratings upgraded on July 26, 2023, Brazil's Long-Term
Foreign-Currency Issuer Default Rating (IDR) to 'BB', from 'BB-',
with a Stable Outlook. The upgrade reflects better-than-expected
macroeconomic and fiscal performance amid successive shocks in
recent years, proactive policies and reforms that have supported
this, and Fitch's expectation that the new government will work
toward further improvements.
In mid-June 2023, S&P Global Ratings, revised the outlook on its
long-term global scale ratings on Brazil to positive from stable.
S&P affirmed its 'BB-/B' long- and short-term foreign and local
currency sovereign credit ratings on Brazil. S&P also affirmed its
'brAAA' national scale rating, and the outlook remains stable. The
transfer and convertibility assessment remains 'BB+'. The positive
outlook reflects signs of greater certainty about stable fiscal and
monetary policy that could benefit Brazil's still-low GDP growth
prospects. Continued GDP growth plus the emerging framework for
fiscal policy could result in a smaller government debt burden than
expected, which could support monetary flexibility and sustain the
country's net external position.
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 Inc., on August 15, 2023, upgraded Brazil's Long-Term
Foreign and Local Currency - Issuer Ratings to BB from BB (low).
At the same time, DBRS Morningstar confirmed Brazil's
Short-term Foreign and Local Currency - Issuer Ratings at R-4.
The trend on all ratings is Stable (March 2018).
PETROLEO BRASILEIRO: Weighs Return to Venezuelan Oil Sector
-----------------------------------------------------------
Richard Mann at Rio Times Online reports that Brazil's state-owned
oil company Petroleo Brasileiro S.A. or Petrobras is considering
putting money back into Venezuela.
This idea comes after the U.S. lifted its sanctions on Venezuela,
according to Rio Times Online. Petrobras' CEO, Jean Paul Prates,
made this clear at a recent event, the report notes.
He said the focus is purely on business, not on politics or
ideology, the report discloses.
About Petrobras
Petroleo Brasileiro S.A. or Petrobras (in English, Brazilian
Petroleum Corporation - Petrobras) is a semi-public Brazilian
multinational corporation in the petroleum industry headquartered
in Rio de Janeiro, Brazil. Petrobras control significant oil and
energy assets in 16 countries in Africa, the Americas, Europe and
Asia. But, Brazil represents majority of its production.
The Brazilian government directly owns 54% of Petrobras' common
shares with voting rights, while the Brazilian Development Bank
and Brazil's Sovereign Wealth Fund (Fundo Soberano) each control
5%, bringing the State's direct and indirect ownership to 64%.
A corruption scandal was uncovered in 2014 that involved
Petrobras.
The scandal related to money laundering that involved Petrobras
executives. The executives were alleged to get received kickbacks
from overpriced contracts, to the tune of about $3 billion in
total. Over a thousand warrants were issued against politicians
and businessmen in relation to the scandal. In 2016, Marcelo
Odebrecht, CEO of Odebrecht, was sentenced to 19 years in prison
after being convicted of paying more than $30 million in bribes to
Petrobras executives.
In January 2018, Petrobras agreed to pay $2.95 billion to settle a
U.S. class action corruption lawsuit. In September 2018,
Petrobras agreed to pay $853.2 million to settle with Brazilian
and
U.S. authorities.
In July 2022, Fitch Ratings affirmed Petrobras' BB- Long-Term
Issuer Default Rating. In addition, Fitch has revised the Rating
Outlook to Stable from Negative following a similar revision to
Brazil's Sovereign Rating Outlook. Also in July 2022, Egan-Jones
Ratings Company upgraded the foreign currency and local currency
senior unsecured ratings on debt issued by Petrobras to BB+ from
BB.
===============
C O L O M B I A
===============
COLOMBIA: Banker Sees Risks in Rushing to Cut Rates Too Soon
------------------------------------------------------------
globalinsolvency.com, citing Bloomberg News, reports that
Colombia's central bank could put its credibility at risk if it
rushed to cut interest rates prematurely, according to its newest
board member.
"There's a big risk in easing early then having to reverse course,"
co-director Olga Lucia Acosta said, in her first interview since
she was appointed by President Gustavo Petro last year, according
to globalinsolvency.com. Brazil, Peru and Chile are all easing
monetary policy as inflation cools across Latin America, the report
notes.
But, in Colombia, consumer price pressures have dropped more slowly
than expected over the last six months, and the bank needs to
ensure that inflation is back in its target range by the end of
2024, Acosta said, speaking at the bank's Bogota headquarters, the
report notes. The bank held its key interest rate at 13.25% at its
last meeting, defying pressure from Petro and Finance Minister
Ricardo Bonilla, who are both calling for a cut as economic growth
slows sharply, the report relays. Colombia's rate is the highest
among regional peers, the report adds.
RUTA AL MAR: Fitch Affirms BB+ Rating on COP522-Mil. Secured Notes
------------------------------------------------------------------
Fitch Ratings has affirmed P.A. Concesion Ruta al Mar's (Ruta al
Mar) UVR-denominated senior secured notes for COP522,000 million
due in 2044 at 'BB+' and 'AA(col)'. The Rating Outlook has been
revised to Negative from Stable.
RATING RATIONALE
The Negative Outlook reflects the uncertainty related to the time
and shape that the 2022 inflation catch up on tariffs could have,
as Fitch believes that the lack of a tariff catch up or a delayed
one, could negatively impact Ruta al Mar's liquidity position and
credit quality to the point that financial metrics would be
consistent with a lower rating. The project's sponsor expects to be
able to execute a tariff catch up and to receive a lost revenue
compensation payment from grantor Agencia Nacional de
Infraestructura (ANI) in the near term, although no official
announcement has been made.
The rating reflects the project's acceptable mitigation of
completion and ramp-up risks, the latter related to the expected
increase in long distance and commercial traffic. It also reflects
a rate-setting mechanism that allows for toll rates to be adjusted
annually by inflation rate. Debt structure is adequate despite some
back-loading and a bullet-payment structure for one of the senior
tranches. Fitch also views positively the presence of prepayment
mechanisms in scenarios of traffic underperformance or
outperformance, according to certain thresholds.
Fitch's rating case, which assumes no tariff catch up takes place,
shows a minimum loan life coverage ratio (LLCR) at 1.27x in 2025.
However, debt service coverage ratio (DSCR) in years 2025-2027 are
projected around 0.8x, which evidences revenue generation would not
be sufficient to cover debt service. At this moment, Fitch finds
comfort in the fact that the project's available cash from reserves
and cash balance accounts could be used to face required debt
service payments in those years.
KEY RATING DRIVERS
Completion Risk Reasonably Mitigated - Completion Risk: High
Stronger
Construction works are being performed by Construcciones El Condor
under a fixed-price date-certain engineering, procurement and
construction (EPC) contract. The works comprise the construction of
short road stretches and minor bridges, and the improvement of
existing roads. Fitch views the complexity of the construction
works as low and without a critical path. The advanced stage of
construction and remaining duration and costs to complete the works
drive a strong assessment for completion, duration and scale,
according to applicable criteria.
According to the independent engineer (IE), the EPC contractor has
the experience and the ability to successfully develop the project.
The budget is adequate and includes contingency levels that are in
the middle range compared with similar projects. The sizes of the
performance bond and the retention provision of 15.8% and 5.0% of
the EPC contract price, respectively, are sufficient to cover cost
overruns should the EPC contractor need to be replaced.
Ramp-up Risk Present Revenue Risk: Volume - Midrange
Toll-road that serves a diverse, mid-sized reference market in the
departments of Antioquia, Cordoba, Sucre and Bolivar, in Colombia
connecting the central region of Colombia with the northern coast,
serving a relevant role in the broader road network. The toll-road
is experiencing a ramp-up period as it is being enhanced with
expected improvements in average speed, time and safety for users.
The majority of its users are light vehicles, either commuters or
tourists, with a projected increase of heavier vehicles once the
works in the road are concluded. The road is expected to be a
superior alternative than competing roads given the high
specifications and average cost to end users.
Toll Tariffs Adjusted by Inflation - Revenue Risk (Price):
Midrange
Tariffs are legally adjusted by inflation on an annual basis
according to the concession agreement. Toll rates are moderate, and
differential tariffs are being applied by the government to
specific vehicle categories on some of the toll stations. During
2023, tariff inflation adjustments were frozen according to
government's Decree 050, which also states that ANI, among other
related institutions, must design and apply necessary mechanisms in
order to reinstate tariffs into 2024 expected values not later than
December 2024.
Moderately Developed Plan - Infrastructure Development and Renewal:
Midrange
The project depends on a moderately developed capital and
maintenance plan funded from project cash flows only. The plan is
to be implemented by the EPC contractor in the construction phase
and by the concessionaire in the O&M phase. The IE believes the
concessionaire has the experience and the ability to successfully
operate the project. The O&M plan, organizational structure and
budget are reasonable and in line with similar projects in
Colombia.
The structure includes a dynamic six-month, forward-looking O&M
reserve equal to the O&M costs projected to be incurred during the
next six months and a dynamic major maintenance reserve account
equivalent to the maximum six-month major maintenance payment
amount scheduled for the next 60 months.
Adequate Debt Structure - Debt Structure: Midrange
All debt is senior pari passu and is denominated either in UVR or
COP; all of the tranches are fully amortizing but one, which has a
bullet payment structure. Interest payments for all tranches are
indexed to inflation. The custom amortization profile is
back-loaded with over 50% of repayments for all tranches
concentrated on the last four years of their respective debt
tenors.
Structural features include a six-month principal and interest
prefunded debt service reserve account, a lock-up test for
dividends distribution, and mechanisms that are triggered in
scenarios in which traffic performance is either significantly
higher or lower than expected.
Financial Profile
Fitch's rating case minimum LLCR is 1.27x in 2025, which is
consistent with a lower rating, although the project sponsor
expects a tariff catch up will take place in the near term, which
would largely alleviate current liquidity concerns.
DSCR in years 2025-2027 are around 0.8x. Fitch estimates cash
shortfalls during those three years can be covered with available
cash in the form of reserves and/or cash balance accounts.
PEER GROUP
Ruta al Mar is comparable with Red de Carreteras de Occidente (RCO;
BBB/Stable) in Mexico. Although both projects have a similar mix of
light and heavy vehicle traffic, RCO is as a road network with long
track record and more diversified traffic, so deemed to have a
stronger volume risk assessment. Both projects share price,
infrastructure development and renewal and debt risk midrange
assessments. The lower volume risk, the absence of completion risk
coupled with a stronger coverage metric at 1.8x, support RCO's
higher rating.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Completion difficulties leading to delays and cost overruns
beyond those already contemplated in Fitch's scenarios;
- Tariff inflation adjustment freeze of 2023 extended into 2024;
- Tariff catch up for the 2022 inflation does not occur within the
next one to two years;
- Traffic performs materially below Fitch's rating case levels of
annual average daily traffic (AADT) 29,111 in 2023 and 29,939 in
2024;
- Deterioration of El Condor's credit quality that results in
Fitch's perception of completion risk significantly heightened;
- Removal, relocation or modification of the Caimanera toll or its
fees without compensation that mitigates the resulting loss of cash
flows.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Outlook could be stabilized if traffic overperforms Fitch's base
case expectations of 29,939 vehicles in 2024, or if tariffs fully
catch up by January 2025, resulting in a minimum LLCR of 1.4x along
with absence of pending construction works;
- Tariff inflation is effectively implemented without significant
delays in 2025;
- Compensation payments from tariff freeze are paid without
significant delays.
CREDIT UPDATE
As of Aug. 31, 2023, construction works advance have reached 93%,
which represents a 5% delay compared to the advance considered in
the construction schedule that was restated in January 2023. No
fines or deductions have been imposed by the grantor due to the
delay. According to the IE, all pending construction works may be
executed in accordance to the construction budget. According to the
concessionaire, the construction works end date in November 2023
will not be achieved as same issues, regarding social problems and
pending permits, prevail mainly in functional units (UFs) 2, 6.3
and 7.1. The concessionaire's expectation is that it will be able
to push the project end date to December 2024.
The termination of works in the UFs is expected to happen at their
respective long-stop dates with the exception of UF2 because of
right-of-way issues and social problems, UF6.3 because of social
problems in Caimanera toll booth, and UF7.1 because of pending
permits. All of these are covered by Liability Exculpatory Events
(LEE), which release the concessionaire from any expected penalties
in the specific UFs previously mentioned. In the opinion of the IE,
the amounts yet to be disbursed from both debt and equity, shall be
sufficient to conclude construction works. The funding obligations
with respect to the equity contributions will be supported by a
cash collateral or by an Acceptable Support Instrument, as defined
in the corresponding contract.
In September 2022, the Caimanera toll booth experienced
interruptions by local communities demanding the removal of the
toll booth. This resulted in the ANI intervening to review the
situation and come up with a solution. Fitch has been informed that
ANI is analyzing where to relocate the toll booth and, in the
meantime, it is making compensation payments to the concessionaire
to cover the lost revenues.
On June 23, 2023, pursuant to Article 2 of the International
Arbitration Rules and the Concession Agreement, the concessionaire
filed a notice of dispute to ANI. Some of the reasons presented by
the concessionaire are: the lack of increase in toll rates due to
the issuance of Decree 050 of 2023, b) ANI's decision to eliminate
the definitive collection of the Caimanera toll and its indecision
regarding the new location, the lack of solution of the LEEs has
also prevented the concessionaire from delivering the works to
satisfaction and accessing the full amount of the retribution,
among others. According to the concessionaire, the dispute could
last between one and two years.
During 2022, average annual daily traffic (AADT) was 26,758, which
is 4.2% lower than Fitch base case projection of 27,944 vehicles.
As of August 2023, traffic reached an AADT of 29,226 vehicles which
represents a growth rate of 9.3% YTD and is slightly higher than
its expectation of reaching an 8.8% traffic growth during the same
period. YTD the performance has been mixed in the UFs. La Apartada
and Manguitos grew lower than expected due to the road blockages
related to the mining sector as there were disturbances that
prevented vehicles from using the road, while Caimanera, Mata de
Caña and San Carlos were favored by previous works and the
elimination in Caimanera's toll booth.
Similarly to AADT, toll collections in 2022 at COP194.2 billion
were 7% below its base case expectations, while 2023 actual
performance up to August reached COP127.1billion, 19.8% lower than
its forecast due to lower traffic performance in some UFs, the
tariff freeze and Caimanera's situation.
Expenses in 2022 and up to July 2023 were generally in line and
slightly higher than its forecasts respectively. DSCR in 2022 was
0.95x, below its base case expectation of 1.1x mainly due to less
compensation payments than expected. As of July 2023, DSCR was
0.6x, significantly below its expectation of 1.4x, primarily driven
by the tariff freeze in conjunction with traffic impact in March
and April 2023 from mining disturbances. The remaining cashflows to
pay debt service in 2022 and in 2023 came from debt and equity
drawdowns that the issuer kept doing during the respective periods
and additionally using reserves in 2023.
FINANCIAL ANALYSIS
- Base Case: Fitch's base case assumes a traffic growth rate of
9.7% in 2023, considering actual traffic performance until third
quarter. In 2024, it is assumed a traffic growth rate of 3.7%, and,
for 2024 and onwards, Fitch assumed a CAGR of 2.4% annually. 2022
tariff catch up is done in 2025 and 2026, while tariff adjustments
were projected according to Fitch's inflation assumptions (9% in
2024, 5% in 2025 and 3.5% onwards). Additionally, it is assumed
that ANI will begin to pay a lost revenues compensation from tariff
freeze until 2026 when tariffs are leveled. O&M expenses were
projected according to concessionaire's approved budget.
- Rating Case: Fitch's rating case assumes a traffic growth rate of
8.8% in 2023, considering actual traffic performance until third
quarter. In 2024, it is assumed a traffic growth rate of 2.8%and
for 2024 and onwards, Fitch assumed a CAGR of 2.3% annually. No
2022 tariff catch up and ANI's compensation payments are
considered, while tariff adjustments were projected according to
Fitch's inflation assumptions (9% in 2024, 5% in 2025 and 3.5%
onwards). O&M expenses were projected according to concessionaire's
approved budget.
The maturity in 2027 of one of the bullet debt tranches is not seen
as a concern, given that the debt structure contemplates mandatory
prepayments that are expected to reduce the outstanding balance to
a manageable amount. Also, because of the available liquidity that
could be used to cover shortfalls, to some extent, if they occur.
Fitch's base case shows a minimum LLCR at 1.55x in 2025. Fitch's
rating case shows a minimum LLCR at 1.27x in 2025, which is
consistent with a lower rating, although the project sponsor
expects this catch up and a lost revenues' compensation payment
from grantor ANI will take place and split over the next two to
three years, but no official announcement has been made as of now.
Also, DSCR in years 2025-2027 are 0.89x,0.81x, 0.74x, but cash
shortfalls are expected to be covered with project available cash
from reserves and/or cash balance accounts.
Although Fitch ran an additional traffic stress scenario, in which
DSCR in 2027 reduces to 0.70x and liquidity is depleted, becoming a
concern, because an overall reduction of traffic curve projections
of 1.3% since 2024 result in a default.
In a sensitivity scenario assuming rating case assumptions but with
2022 tariff inflation catch-up and compensation payments in 2025
and 2026, the metrics have an important improvement, with average
DSCR going from 1.34x to 1.60x, and minimum LLCR going from 1.27x
to 1.49x, which will be consistent with actual rating.
SECURITY
Ruta al Mar is a public-private partnership concession based on a
private initiative. The main purpose of the project is to develop a
primary route with high performance specifications to ensure the
Antioquia-Bolivar connection, and link the center and south of the
country with the northern coast. The project consists of the
construction, improvement and operation of a 491km long toll road
located in Antioquia, Cordoba, Sucre and Bolivar, in Colombia.
The concession has a term of 34 years, with a maximum extension of
six years and nine months more depending on reaching the net
present values of the revenues established in the concession
agreement. The road is currently in the construction phase, and
construction work is expected to be completed in 2023, with 25-30
years of O&M to follow.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
P. A. Concesion Ruta al Mar
P. A. Concesion
Ruta al Mar/Toll
Revenues - First
Lien/1 LT LT BB+ Affirmed BB+
P. A. Concesion
Ruta al Mar/Toll
Revenues - First
Lien/1 Natl LT Natl LT AA(col) Affirmed AA(col)
=============
J A M A I C A
=============
SSL: Client Funds Are Being Released
------------------------------------
RJR News reports that a number of clients with brokerage accounts
at the embattled Stocks and Securities Limited (SSL) have confirmed
with Radio Jamaica News that they have received the sums held in
their accounts.
A few of the investors say the funds were transferred to their bank
accounts, according to RJR News.
Last month, Finance Minister Dr. Nigel Clarke announced that SSL's
US$1 million insurance payout was made on September 7, the report
notes.
In addition to operational expenses at the firm, the funds would
cover Jamaican dollar payouts for clients, the report relays.
The clients also confirmed that the transfer of their brokerage
accounts to other entities is in train, the report discloses.
SSL is being managed by an interim team, as investigations continue
into the billions of dollars fleeced from the accounts of a number
of clients, including sprint legend Usain Bolt, the report relays.
The accused in the matter, Jean-Ann Panton, was remanded in custody
since June, until December, the report adds.
===========
P A N A M A
===========
GLOBAL BANK: Fitch Alters Outlook on 'BB+' LongTerm IDR to Negative
-------------------------------------------------------------------
Fitch Ratings has affirmed Global Bank Corporation's (GBC)
Long-Term (LT) Issuer Default Rating (IDR) at 'BB+'. Fitch has also
affirmed the bank's Viability Rating (VR) at 'bb+', Short-Term (ST)
IDR at 'B' and the Government Support Rating (GSR) of 'No Support'
('ns'). Fitch has also affirmed the bank's Long- and Short-Term
National Ratings at 'AA(pan)' and 'F1+(pan)', respectively. The
Rating Outlook for the LT IDR and LT National Rating has been
revised to Negative from Stable. In addition, Fitch has affirmed
GBC's international debt rating at 'BB+' and ST senior unsecured
debt rating at 'F1+(pan)'.
The Negative Outlook revision on GBC's LT IDR and LT National
Rating reflects Fitch's expectations about the potential
continuation of the pressure on the bank's credit quality over the
ratings horizon, as shown by the performance of its stage 3 loans
and restructured loans post-pandemic, amidst a slight recovery in
profitability.
KEY RATING DRIVERS
Ratings Driven by Intrinsic Creditworthiness: GBC's IDRs and
National Ratings are driven by its 'bb+' VR. GBC's VR is influenced
by Fitch's assessment of the Panamanian operating environment (OE),
currently at 'bb+' with a stable trend. GBC's ratings are also
highly influenced by the bank's business profile.
Sound Business Profile: GBC has a four-year average Total Operating
Income (TOI) of USD234 million, which Fitch expects would remain
relatively stable in the foreseeable future. Moreover, GBC has a
recognized franchise as it is the fourth largest bank in Panama by
local loans (market share: 8.1%) and the fourth in terms of
internal deposits (5.4%) as of June 2023; and also, with a top
participation in some credit segments such as agriculture,
commercial and residential mortgages.
Risk Profile: Fitch downgraded GBC's Risk Profile factor to 'bb'
from 'bb+' in order to align it to its asset quality assessment.
Fitch believes that the bank's risk framework and control reflects
the challenges in terms of credit quality management the bank
faces.
Asset Quality Under Pressure: GBC's core metric, stage 3 loans to
gross loans, has showed an upward trend, and stood at 4.5% as of
June 2023 (average 2020-2023: 3.6%); while the 90+ days past due
loans accounted for 2.5% of gross loans (average 2020-2023: 2.0%).
The reserve coverage for the stage 3 loans and 90+ days past-due
loans reached 81.8% and 148.5%, respectively. As per the
restructured loans, its share of gross loans also increased to 2.8%
(June 2022: 1.6%). In this regard, Fitch expects GBC's asset
quality would face challenges over the rating horizon as long as
these restructured loans do not perform such that could result in
metrics not commensurate with its current score. Top debtors'
concentration remained moderate as the top 20 borrowers represented
1.6x the Common Equity Tier 1 (CET1) as of June 2023.
Profitability Improving Gradually: GBC's profitability reinforced
its upward trend during fiscal 2023. As of June 2023, GBC's core
profitability metric, operating profit over risk-weighted assets
(RWA), remained below 1% (0.9%; average 2020-2023: 0.6%). Fitch
projects a challenging prospect for the bank's internal capital
generation under a base-case scenario of high competition, adequate
management of net interest margin, build-up of loan impairment
charges to contain loan quality pressures and a controlled
efficiency.
Downward Capitalization; with Additional Loss-Absorbing Features:
GBC's CET1 capital ratio (CET1 over RWA) decreased to 8.5% as of
June 2023 (June 2022: 10.2%) due to a high dividend distribution to
its parent company, G.B. Group Corporation. This company used these
funds to redeem a stake of its ownership. Notwithstanding this,
Fitch also considers both the bank's countercyclical buffer
(dynamic reserve) and the perpetual bond (convertible instrument
with a high trigger of Tier 1 of 6.5%), which also provide loss
absorption capacity, allowing the capitalization metric to increase
to the regulatory CAR of 13.1% (fiscal 2022: 15. 1%).
Good Funding and Liquidity but with Market-driven Challenges: Fitch
downgraded GBC's Funding and Liquidity score factor to 'bb' from
'bb+' as the agency believes that the conditions to access the debt
capital markets, which the bank is somewhat reliant on, have
deteriorated recently in view of factors such as higher interest
rates and heightened risk aversion from investors. The core ratio
for this rating factor, loans to deposits, remained relatively
stable during fiscal year 2023, but at a relatively high level of
121% as of June 2023 (June 2022: 120%), which reflects a material
dependence on alternative sources of financing beyond its deposit
base. The 20 largest depositors accounted for a moderate 16.5% of
the deposit base, with the largest of them (an institutional
client) accounting for almost 5% of total deposits.
GBC has historically demonstrated good capacity to access wholesale
funding sources such as the local and international debt capital
markets, but Fitch highlights the more challenging market
conditions at present in those funding channels.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- GBC's IDRs, VR and national ratings could be downgraded if the
bank's risk profile weakens further due to a deteriorating asset
quality;
- A decline in the operating profit to RWA ratio consistently below
0.5%, which impacts the CET1 to RWA ratio, including loss-absorbing
items, to less than 10% could downgrade the bank's IDRs, VR and
national ratings;
- GBC's IDR and VR could be downgraded if there is a downward
revision on Fitch's assessment of the OE; however, this scenario is
not currently the base case given the OE's stable outlook.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- The Negative Outlook on GBC's LT ratings would be revised to
Stable if asset quality improves such that its core metric
stabilizes at a level below 4.0%;
- Over the medium term, GBC's IDR and VR could be upgraded by an
upward revision of Fitch's assessment of the OE along with a
relevant strengthening of its financial profile; however, this
scenario is not currently the base case given the OE's stable
outlook.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The rating of the senior unsecured global debt is at the same level
as GBC's 'BB+' LT IDR, as the likelihood of default of the notes is
the same as that of the bank.
The National ST senior unsecured debt rating is at the same level
as GBC's 'F1+(pan)' National ST rating as the likelihood of default
of this debt is the same as that of the bank.
GSR: The GSR of 'ns' reflects that external support, while
possible, cannot be relied upon, given Fitch's view of Panama's
limited ability to support the banking system and
domestic-systemically important banks, primarily due to its large
size and the lack of a lender of last resort.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- The bank's LT senior unsecured debt rating, and National ST
senior unsecured debt rating would mirror any potential downgrade
on GBC's LT IDR and National ST rating, respectively;
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- The bank's LT senior unsecured debt rating would mirror any
potential upgrade on GBC's LT IDR. The bank's National ST senior
unsecured debt rating is at the highest level of the national
rating scale and, therefore, does not have upside potential.
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- There is no downside potential for GSR because this is the lowest
level in the respective scale.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- As Panama is a dollarized country with no lender of last resort,
an upgrade in GSR is unlikely.
VR ADJUSTMENTS
The bank's 'bb+' VR has been assigned above the 'bb' implied VR due
to the following adjustment reason: Business Profile (positive).
The 'bb+' Operating Environment Score has been assigned below the
'bbb' implied score due to the following adjustment reason:
Reported and future metrics (negative).
The 'bb+' Business Profile Score has been assigned above the 'b'
category implied score due to the following adjustment reason:
Market Position (positive).
The 'bb-' Capitalization & Leverage Score has been assigned above
the 'b & below' category implied score due to the following
adjustment reason: Core capital calculation (positive).
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Global Bank
Corporation LT IDR BB+ Affirmed BB+
ST IDR B Affirmed B
Natl LT AA(pan) Affirmed AA(pan)
Natl ST F1+(pan) Affirmed F1+(pan)
Viability bb+ Affirmed bb+
Government Support ns Affirmed ns
senior
unsecured LT BB+ Affirmed BB+
senior
unsecured Natl ST F1+(pan)Affirmed F1+(pan)
=======
P E R U
=======
COMPANIA DE MINAS BUENAVENTURA: Moody's Affirms 'B2' CFR
--------------------------------------------------------
Moody's Investors Service affirmed Compania de Minas Buenaventura
S.A.A.'s (Buenaventura) Corporate Family Rating and Senior
Unsecured Notes at B2. The ratings outlook remains stable.
RATINGS RATIONALE
The affirmation reflects Moody's expectation that Buenaventura's
operating cashflow will gradually improve through 2025 based on
improvements in its cost position and increased production; though,
growth capex associated with construction of San Gabriel project
will drive negative free cash flow. Nonetheless, the affirmation
considers that the company's liquidity will remain adequate
supported by Buenaventura's 19.58% stake in Sociedad Minera Cerro
Verde S.A.A. (Cerro Verde), which contributed with dividends to
Buenaventura of $137 million in 2021, $78 million in 2022 and $98
million YTD in 2023. Moody's expects the dividend level to remain
in the $100-$120 million range per year through 2025, supporting
liquidity during Buenaventura's expansion phase.
Buenaventura has an adequate liquidity supported by a cash balance
of $202 million as of June 2023, and additional $49 million in
dividends received from Cerro Verde in August 2023. These cash
sources will be sufficient to address Buenaventura's debt
maturities of $31 million per year and interest servicing needs
through the end of 2024. However, capex associated to the
construction of San Gabriel (capex estimated at $150 million in
2023, $170 million in 2024 and $118 million in 2025) will drive
negative fee cash flow burning cash in 2023 and onwards. The
current cost structure limits the company's financial flexibility;
therefore, dividends from Cerro Verde will be key in supporting the
company's growth plan and credit profile through 2025.
Moody's expects Buenaventura to gradually improve its cost position
through 2025 based on increased production, new infrastructure and
mine plan improvements in El Brocal and Uchucchacua mines, which
together will contribute 60% of the company's EBITDA, on average
through 2025. Furthermore, EBITDA generation and cost position
should improve further once San Gabriel mine is fully operational,
in the second half of 2025, as per the company's expectations.
Uchucchacua already received the pending permits and is in the
process to obtain approval from the regulator to start definitive
operations, in the meantime the mine will resume operations in the
4Q23 with a provisional permit contributing to around 15% of the
consolidated EBITDA, following a year with negative contribution.
As expected, Buenaventura did underground development and mine
preparation aiming at restarting the mine with an improved cost
position. Uchucchacua's cost applicable to sales (CAS) is expected
to improve to around $16/oz of silver, that positively compares to
the $27.45 CAS in 2021, when this mine generated negative EBITDA
and free cash flow.
El Brocal will also improve its cost position based on changes in
its mine plan and additional infrastructure including water and
ventilation systems; a new tunnel that will reduce transportation
costs, as well as higher grades in its underground mine Marcapunta,
which is expected to produce 10,000 tpd of copper by year-end 2023.
During 2023 El Brocal faced increasing costs related to the
rehabilitation following a landslide, in early 2022, that prompted
the need to use low-grade stock piles to supply the processing
plant. At the same time, Marcapunta faced inflationary pressures
and additional development costs related to the ramp up.
Orcopampa and Tambomayo mines that currently represent around 30%
of EBITDA will be fully depleted by 2025. Nonetheless, Buenaventura
expects San Gabriel (gold copper project) to ramp up in the second
half of 2025 contributing with 45% of EBITDA and 130 thousand
ounces of gold and 69 thousand ounces of silver, on average for the
first three years. At the same time, the company expects San
Gabriel to be in the 3rd quartile of the cash cost curve with a
life of mine of 14 years that would extend Buenaventura's life of
mine to 6.4 years from current 3.3 years.
In the assessment, Moody's assumes medium-term price sensitivities
of $1,400-$1,800 per ounce of gold, $18-$22 per ounce of silver and
$3-$4 per pound of copper.
The stable outlook reflects Moody's expectation that despite cash
burn and execution risk during the expansion phase, Buenaventura's
cost position, production and cash flow generation from direct
operations and affiliates will gradually improve from 2023 levels
and that liquidity will remain adequate.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade would require Buenaventura to record a sustainable
improvement in Buenaventura's cost position and consolidated
production from its direct operations, maintaining an EBIT margin,
at least around 8%, with leverage below 4x. Should the company
manage to secure sources of liquidity enough to meet the gap
related to the investment at San Gabriel, would also be positive.
Buenaventura's rating could be downgraded if the company is not
able to improve its cost position and production eroding cash flow
generation from direct operations. Negative pressure could also
arise if the company experiences any liquidity deterioration due to
lower than expected dividends distribution from Cerro Verde or
operating challenges at its mines, including delays in permits or
temporary suspensions. Quantitatively, leverage (Moody's-adjusted
debt/EBITDA) consistently above 4.5x could result in a downgrade.
The principal methodology used in these ratings was Mining
published in October 2021.
Headquartered in Lima, Peru, Buenaventura is a mining company
engaged in the exploration, mining and processing of gold, copper
silver, zinc and lead in Peru. In addition to five wholly owned and
one majority-owned mine, the company also has a 19.58% stake in
Cerro Verde, one of the world's largest copper mines; and a 40.1%
stake in Coimolache, which owns the Tantahuatay gold mine that
Buenaventura operates. Buenaventura is controlled by the Benavides
family (27% of the voting stock), and is listed on the New York
Stock Exchange and the Lima Stock Exchange. For the 12 months that
ended June 2023, the company generated $857 million in revenue with
a Moody's adjusted leverage of 2.8x.
=====================
P U E R T O R I C O
=====================
PUERTO RICO AQUEDUCT: Fitch Hikes Issuer Default Rating to 'CCC'
----------------------------------------------------------------
Fitch Ratings has upgraded Puerto Rico Aqueduct and Sewer
Authority's (PRASA) Issuer Default Rating (IDR) to 'CCC' from
'RD'.
Additionally, Fitch has affirmed the 'CCC' rating on the
authority's approximately $23.8 million revenue bonds, series A
(senior lien).
The Rating Outlook is Stable.
Entity/Debt Rating Prior
----------- ------ -----
Puerto Rico Aqueduct
& Sewer Authority
(PR) [General
Government] LT IDR CCC Upgrade RD
Puerto Rico
Aqueduct &
Sewer Authority
(PR) /Issuer
Default Rating –
General Government/
1 LT LT CCC Upgrade RD
Puerto Rico
Aqueduct & Sewer
Authority (PR)
/Water & Sewer
Revenues/1 LT LT CCC Affirmed CCC
The upgrade of the IDR to 'CCC' from 'RD' reflects the resolution
of PRASA's obligation related to certain Public Financing
Corporation (PFC) commonwealth appropriation bonds (the PFC
obligations). PRASA had previously failed to make timely payment on
the PFC obligations. These bonds were payable from appropriations,
and the legislature had not made the required appropriations.
However, non-payment on the PFC obligations was not considered an
event of default under the master agreement of trust (MAT) that
authorized the revenue bonds, series A so only the IDR reflected
the prior 'RD' rating. PRASA's obligation on the PFC obligations
has been formally extinguished through an approved qualifying
modification, driving the upgrade of the IDR.
While PRASA has reduced its forecast deficits as reflected in its
latest certified financial plan (CFP) dated May 20, 2023, Fitch
believes that default remains a real possibility.
PRASA's revenue defensibility and operating risk assessments,
assessed at 'bb' and 'bbb' respectively, support the financial
profile assessment of 'bb' (Fitch's lowest assessment level). The
financial profile is characterized by elevated leverage (measured
as net adjusted debt to adjusted funds available for debt service)
with a neutral liquidity profile. Leverage has been variable, but
generally declining, moving from 16.3x in fiscal 2016 (FYE June 30)
to 12.8x in fiscal 2021 (most recent available audited
information).
The revenue defensibility assessment reflects the system's
monopolistic service provision and flexibility to raise rates
within certain constraints but also considers weak service area
demographics and rates that are high for almost 60% of the service
area population. The operating risk profile is hampered by the
system's elevated investment needs and extremely weak capital
investment, even while considering the very low operating cost
burden based on volume of flows treated.
The 2023 CFP identifies significant financial needs over the next
several fiscal years (through fiscal 2028) to balance operations
and achieve the capital plan, although the identified gap has
narrowed from over $1.8 billion in the August 2018 revised
certified financial plan (the 2018 CFP) to the gap of approximately
$1.2 billion in the current CFP. This gap encompasses all
expenditure categories, including capital and required deposits.
Identified initiatives could address the gap in its entirety,
although not all actions are entirely within PRASA's control. In
the current CFP, actions identified to close the gap include
additional federal funding ($623.9 million), ongoing rate
adjustments ($327.3 million), and operating
improvements/expenditure reductions ($220.1 million).
Even if PRASA is able to achieve all the initiatives to address the
overall deficit included in the current CFP, Fitch expects leverage
to remain elevated in the context of the current business risk
profile. Assuming 100% execution of the capital plan, leverage may
rise to 18.0x over the next five years. The liquidity profile is
anticipated to remain neutral to the assessment.
SECURITY
The revenue bonds (senior lien) are secured by a gross lien of all
authority revenues related to PRASA's system, as defined in the
MAT, on parity with loans from federal lenders and senior to other
debt and expenses of PRASA.
KEY RATING DRIVERS
Revenue Defensibility - 'bb'
Monopolistic Service Provision; Weaker Service Area Demographics
Revenues are derived from PRASA's exclusive right to provide water
and sewer service to the island. PRASA's revised rate plan, enacted
for fiscal 2023, allows for annual increases between 2% and 5%
without external approval unless/until the cumulative rate increase
reaches 30%. The service area reflects weaker demographics, with a
median household income (MHI) that is 32% of the nation and an
unemployment rate that, while improving since 2016, was a still
weak 167% of the nation in 2022. Rates are unaffordable for about
58% of the service area population, assuming Fitch's standard
monthly usage of 7,500 gallons of water and 6,000 gallons of sewer.
Usage is reportedly significantly lower than Fitch's standard usage
metrics which alleviates some affordability pressure.
Operating Risk - 'bbb'
Very Low Operating Costs, Elevated Capital Needs
The system's operating cost burden is very low at approximately
$3,320 per million gallons (mg) of flows. Even when adjusting for
the system's high level of non-revenue water (estimated at nearly
65%), the operating cost burden is still very low.
Capital spending relative to depreciation has been weak, averaging
just 24% from fiscal 2017 through fiscal 2021, exacerbated in
recent years by weather events and the pandemic. Consequently, the
system's life cycle ratio has been rising, from 38% to 50% over the
same five-year period.
The current CFP outlines an approximate $6.5 billion capital
improvement plan (CIP) for fiscal 2023 through 2028. Approximately
80% of the CIP is focused on reconstruction and recovery,
compliance and mitigation and resiliency. Approximately 80% of
funding is anticipated to come from federal sources; operating
revenues and existing cash balances comprise the remainder.
Financial Profile - 'bb'
Elevated Leverage, Neutral Liquidity
System leverage remains high; historical leverage has trended
downward, approximating 12.7x in fiscal 2020 and 2021. Liquidity
has been improving and is neutral to the assessment, with current
cash on hand approximating 180 days and coverage of full
obligations of 1.6x (which does not account for all required
deposits under the MAT). PRASA has indicated it has made all
required deposits for fiscal 2023.
The FAST considers the potential trend of key ratios in a base case
and stress case over a five-year period. The stress case is
designed to impose capital costs 10% above expected base case
levels and evaluate potential variability in projected key ratios.
The FAST incorporates publicly available and/or management provided
information, primarily from the current CFP. Fitch incorporated
initiatives to address funding shortfalls as outlined in the
current CFP into the FAST.
In the base case, leverage is expected to increase to 17.2x in
fiscal 2025, then decline modestly to 16.0x in fiscal 2026. In the
stress case, the leverage is anticipated to rise to 18.0x by fiscal
2025, moderating to 16.9x in fiscal 2026. Should actions to close
the gap not be achieved, leverage could be materially higher.
Liquidity is expected to remain neutral to the assessment over the
five-year horizon.
Asymmetric Additional Risk Considerations
Information Quality: Audited financial results have been delayed
for a number of years. Although other public disclosures provide
transparency, the absence of recent audited financials is an
asymmetric risk consideration.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Expanding forecasted shortfalls in PRASA's financial
projections;
- Failure to meet obligations under the MAT.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Actual and projected leverage approximating 5.0x on a sustained
basis in Fitch's base and stress case, assuming stability in the
revenue defensibility and operating risk assessments;
- An upward revision in the operating risk assessment driven by
improved capital execution (relative to depreciation) and declining
life cycle ratio;
- Sustained improvement to the service area characteristics could
lead to an upward revision of the revenue defensibility
assessment.
PROFILE
PRASA provides water service to almost the entirety of the
commonwealth but provides sewer service to only around 60% of the
population. The service area population is approximately 3.3
million residents, and PRASA also serves a significant number of
annual visitors to the island. Due to the size and topography, the
island is divided into five service territories, each of which is
managed by an executive director.
PRASA operates a fragmented and largely localized supply of water
sources, treatment plants, and collection and delivery systems that
have been developed on a community level and with irregular funding
over the decades. Illustrating the complexity of system assets,
which is much greater than other comparable U.S. utilities of its
size, PRASA owns and operates over 110 water treatment plants, over
50 wastewater treatment plants, over 3,700 ancillary facilities
(i.e. storage tanks, pump stations and wells), eight regulated dams
and over 20,000 miles of pipelines.
System operations are subject to federal regulatory laws
administered by the U.S. Environmental Protection Agency (EPA) as
well as local statutes administered by various commonwealth
agencies. Infrastructure needs reflect the costs associated with
reconstruction and recovery costs associated with severe weather
events. Additionally, PRASA is subject to various compliance
requirements, including a 2015 consent decree and a 2006 drinking
water settlement agreement, which continue to influence capital
planning.
ESG CONSIDERATIONS
The ESG Relevance Score for Group Structure has been revised to '3'
from '4'. The revision reflects Fitch's view that the Oversight
Board lends transparency to the governance structure and limits the
influence of other governmental entities.
PRASA has an ESG Relevance Score of '4' for Water & Wastewater
Management due to the high level of non-revenue water that
significantly exceeds industry standards and presents challenges to
operations and financial performance, which has a negative impact
on the credit profile, and is relevant to the ratings in
conjunction with other factors.
PRASA has an ESG Relevance Score of '4' for Exposure to
Environmental Impacts given its exposure due to hurricane and
severe storms, which have affected operations and financial
performance, which has a negative impact on the credit profile, and
is relevant to the ratings in conjunction with other factors.
PRASA has an ESG Relevance Score of '4' for Access & Affordability
due to the high percentage of the service area population for whom
the month bill is unaffordable, which has a negative impact on the
credit profile, and is relevant to the ratings in conjunction with
other factors.
PRASA has an ESG Relevance Score of '4' for Financial Transparency
due to its delay in annual audited financial information, which has
a negative impact on the credit profile, and is relevant to the
ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
=====================================
T R I N I D A D A N D T O B A G O
=====================================
TELECOMMUNICATIONS SERVICES: S&P Ups ICR to 'BB-', Outlook Stable
-----------------------------------------------------------------
S&P Global Ratings raised its global scale issuer credit and
issue-level ratings on Telecommunications Services of Trinidad and
Tobago Ltd. (TSTT) to 'BB-' from 'B+'.
The stable outlook reflects S&P's expectation that the company will
maintain gross debt to EBITDA below 4x in the next 12-18 months.
S&P forecasts the company's improved profitability and capex plans
will allow it to generate free operating cash flow (FOCF).
TSTT's efforts to raise profitability will keep adjusted EBITDA
margins above 40% in the medium term, improving prospects for its
credit metrics.
In the last three years, TSTT implemented investments and
restructured operations to improve profitability and ensure its
long-term financial health, including:
-- An optimized mix of bundled packages to couple service
offerings;
-- A sharp reduction in labor costs, in the form of a lower
headcount; and
-- An increased optic fiber network, which allows transferring
customers from the legacy copper network to a more modern service.
In the last 12 months, TSTT benefited from implemented layoffs to
cut SG&A expenses by more than 10%, increased its fiber customer
base by double digits, and completed price adjustments. All these
factors caused a faster-than-expected strengthening of cash
generation, with adjusted EBITDA margins rising to above 40% and
positive FOCF in the last three quarters. S&P believes that the
implementation of the abovementioned measures can bolster
profitability and, in turn, credit metrics on a recurring basis.
S&P said, "We expect TSTT to maintain leverage below 4x and
continue generating FOCF for the next three years. We expect the
company to keep adjusted EBITDA margins above 40%. We also forecast
FOCF to stem from price increases, lower costs as a percentage of
revenue, and a larger fiber network that facilitates bundling.
Furthermore, we believe that the company's current cash position
and funds from operations will be sufficient to cover capex, most
of which will be for the expansion of the optic fiber network, set
to reach 194,000 homes passed in the next quarter. A larger network
is a core component of the company's strategy. In our view, it will
also enhance TSTT's ability to protect its competitive position and
improve its service offering in the Trinidadian market, enabling
increases in average revenue per user (ARPU) and lowering
substitution risk from competitors.
"These factors reduce the need for incremental debt funding in the
short to medium term, leading us to expect credit metrics to keep
improving, as seen since the end of fiscal 2023. We now forecast a
quicker drop in adjusted debt to EBITDA close to 3.5x than our
previous base-case scenario. This expectation prompted us to revise
our view on TSTT's financial risk profile to a stronger category,
triggering an upgrade.
"Our rating analysis continues to consider a moderately high
likelihood of extraordinary government support, supporting TSTT's
credit quality. All of the company's operations are in Trinidad and
Tobago (T&T; BBB-/Stable/A-3), which curtails the company's
business risk profile compared with those of larger international
peers with a broader footprint. However, T&T's controlling
ownership of TSTT is a credit strength, in our view. The rating on
the company is one notch above its 'b+' stand-alone credit profile,
stemming from its strong link with the government, along with its
large share of the domestic telecom market. These factors explain
our view of the likelihood of government support in the event of
financial distress.
"The stable outlook on our rating on TSTT reflects our expectation
that it will maintain gross debt to EBITDA below 4x in the next
12-18 months. We forecast the company's improved profitability and
capex plans will result in FOCF generation. These metrics are tied
to the company's measures to sustain adjusted EBITDA margins above
40%. At the same time, the outlook reflects our view that TSTT will
protect its competitive position in T&T amid the expansion of its
fiber network."
S&P could lower the ratings on TSTT during the next 12 months if
adjusted debt to EBITDA rises above 4x and the company fails to
generate FOCF consistently. This could occur in any of the
following scenarios:
-- Profitability weakens, or the company fails to retain a
sufficient number of customers while transitioning to fiber and
bundling, reducing EBITDA.
-- TSTT incurs additional debt for a much larger-than-expected
capex or due to any deviation from its currently supportive
financial policy.
A downgrade could also result if the likelihood of extraordinary
government support under a stress scenario diminishes, in S&P's
view. A negative rating action is also possible if it was to
downgrade T&T by two or more notches.
Although unlikely, S&P could upgrade TSTT during the next 12 months
in any of the following scenarios:
-- Adjusted debt to EBITDA falls below 2.5x, while the company
generates sizable FOCF, resulting in adjusted FOCF to debt above
10% consistently, and an ample liquidity headroom.
-- An upgrade of T&T by two or more notches, or the likelihood of
extraordinary government support to the company increases, in S&P's
view.
An upgrade would require a strengthening of the company's market
position in T&T, so that its revenue and subscriber base is
comparable to those of larger international peers with a broader
geographic footprint.
TRINIDAD & TOBAGO: WASA Puts Financial Strain on Taxpayers
----------------------------------------------------------
Vishanna Phagoo at Trinidad Express reports that the Water and
Sewerage Authority (WASA) continues to be largely responsible for
the operating deficit of public utilities in this country,
accounting for 66.6 per cent or $1,196.7 million of the total last
year, the 2023 review of the economy has stated.
WASA was also the beneficiary of $1,290 million which was the
largest transfer of central government funding, according to
Trinidad Express.
But the current transfers were used for interest payments on loans
and salaries and fees, the report relays0.
"The main contributors to WASA's outturn were the shortfall in
budgeted Operating Revenue of $89.3 million combined with increased
Operating Expenditure resulting from higher than budgeted
employment costs and payments made to supplier/contractors for
desalinated water, the purchase of materials and chemicals, road
restoration, security services and rental/leases," it stated, the
report discloses.
Capital expenditure by public utilities increased by 16.8 percent
or $515.1 million from $441 million owing to increased spending on
capital projects by WASA, the Telecommunications Services of T&T
and the Airports Authority of T&T, the report notes.
WASA's capital transfers stood at $29.2 million which were used for
principal repayments of loans and capital projects undertaken by
the government, the report says.
In the 2023/2024 budget, the ministry was allocated $2,826,724,000.
The allocation was contested during the Standing Finance Committee
where line minister Marvin Gonzales was asked to justify the
expenditure within the authority, the report relays. Road
rehabilitation, water trucking services, reduction in WASA's
National Insurance Scheme (NIS) - a payment under the National
Insurance Board-legal fees, contractors and settle of claims, the
report discloses.
WASA and its Road Reinstatements
The actual spend for road rehabilitation was $40 million in 2022,
but in the last fiscal term, it was decreased to $19 million,
Gonzales was asked about the reduction and to advise if there are
quality assurance certifications conducted by contractors when
repairs the roads, the report notes.
Gonzales said the reduction is a direct result in the success of
the pipeline replacements conducted by the authority in the country
under the Community Water Improvement Program and leak detection
strategies by WASA, the report relays.
"There is absolutely no need to continue with budgeting at $19, $20
or $30 million for road restoration," said Gonzales, the report
discloses.
He added that the state of the roads has been brought to the
attention of WASA's management, the report discloses.
"While yes, I recognise that tremendous work was done with respect
to the reduction of leaks and replacement of aging infrastructure,
that much more needs to be done with respect to doing urgent and
proper road restoration," the report relays.
But during the budget debate on September 30, Gonzales said the
ministry and WASA have recognised the institutional flaws in WASA's
management of road improvements and so a decision was made to allow
for experienced road pavers to conduct road rehabilitation and
restoration to allow WASA to focus on providing a reliable water
supply, the report notes.
Gonzales also assured that there is collaboration between WASA and
the Ministry of Works and Transport to carry out roadworks, the
report relays.
Reliable Water Supply to Come, But Water Trucks Still Needed
Despite working towards eradicating the leak backlog that plagues
T&T that will result in a steady water supply from WASA, the need
for water trucks is still prevalent, especially with the shutdowns
of the water treatment and desalination plants, the report notes.
For the year so far, the Caroni Water Treatment Plant underwent
emergency repairs since its 48-inch pipeline had a leak affecting
over 200,000 customers while the Pt Lisas Desalination facility
-under the Desalination Company of T&T (Desalcott)- was shut down
early last month affecting upwards of 250,000 customers, the report
discloses.
Adding to that, the Pt Lisas facility was shut down and will remain
down for nine days, the report relays. Desalcott supplies 40
million gallons daily to WASA, the report discloses.
Although during the budget debate, Gonzales said the leak backlog
will be an issue of the past by November, he revealed that the
procurement to obtain six additional water trucks will be completed
by year-end, the report says.
"Because we cannot be entering into expensive contractual
arrangements which would result in increasing operational
resources," the report relays.
Even though unsteady water supplies are not restricted to certain
areas in the country, the water trucks are, since they are the only
supply to those without WASA infrastructure, the report notes.
For this issue, $18 million was designated, the report says.
"In addition to the allocation made by the Ministry of Finance,
WASA does use its internal financial resources to meet some of its
contractual obligations," the report relays.
Why did WASA's NIS Contribution Drop by Over $25 Million?
Gonzales said it is believed in 2024, major cost-cutting progress
will be made with the restructuring of WASA, but there is
uncertainty about this, the report relays.
The decrease, however, is a result of the savings expected from
salaries, cost of living allowances and personal expenditure, the
report notes.
Asked if this overall decrease is a reflection of fewer employees
at WASA, especially with fewer NIS contributions which can be
attributed to people going home, Gonzales said, "I cannot send home
any WASA employee, the report discloses. The Board of
Commissioners has a responsibility to implement the restructuring
of WASA; the government in its budgeting exercise, is anticipating
that there might be cost savings under this item," the report
notes.
Gonzales also could not share how many employees may be affected as
it can come across as speculative, the report says.
Let's Talk WASA's Fees and Debts
WASA's fees, inclusive of legal fees and settlement of claims, $16
million was spent for the fiscal year 2023 and $29.4 million was
spent in 2022 out of a budget of $101 million, respectively, the
report discloses.
He added that WASA is encouraged to keep up with its collection,
but to also settle its debts, because though the Finance Ministry
gives some financial support, the authority has the responsibility
to help meet some of its obligations, the report says.
Asked if WASA's legal fees correlates with Gonzales' suggestion to
customers to claim of right against authority if it is responsible
for damage as a result of negligence, they should seek legal
counsel, he said no, the report relays.
These comments were made to the media at the inaugural Caribbean
Regional Conference on Water Loss hosted by the Ministry of Public
Utilities' in March, the report notes.
"WASA has a very large litigation portfolio, unfortunately, and it
is anticipated that this $15 million allocated under this
particular line will be utilised to pay legal fees incurred by the
authority in its management of its litigation portfolio," the
report discloses.
Referring to the $16 million in fees, an itemised list was given
which included minor equipment purchases, administration, current
transfers and subsidies, households and other transfers, the report
says.
The allocation for settlement of claims this fiscal year is $37
million, the report notes.
Gonzales said, "In addition to government subvention to WASA, it is
also responsible for collecting rates from the provision of its
services and WASA collects somewhere in the region of $800 million
in rates," the report adds.
===============
X X X X X X X X
===============
LATAM: T&T Calls on IMF to Reinforce Support for Suriname, Haiti
----------------------------------------------------------------
Shweta Sharma at Trinidad and Tobago Newsday reports that Central
Bank Governor Dr Alvin Hilaire has called on IMF constituency
members to reinforce support for Suriname and Haiti.
Hilaire spoke at the IMF and World Bank annual constituency meeting
on October 12, in Marrakesh, Morocco, according to Trinidad and
Tobago Newsday.
In a release, Hilaire was reported as calling for continued support
for these countries through the IMF's program arrangement, the
report notes.
This comes as Suriname is undergoing the IMF's review process for
its extended fund facility while Haiti grapples with domestic
security concerns, the report says.
He also advocated for a well-funded Caribbean Technical Assistance
Centre (CARTAC).
"TT has significantly benefited from the fund's capacity
development through CARTAC. We continue to advocate for a
well-funded CARTAC even if it means that the fund has to provide
more of its own resources to ensure that CARTAC remains viable and
nimble to the needs of the beneficiary countries," he said, the
report discloses.
Hilaire added that while TT is grateful for the resources donated
by other countries, having to depend on donors can leave the
country in a situation where training is limited by insufficient
funds, the report says.
He also called for a review of the IMF's quota system that does not
dilute the quota shares of small developing states and the
expansion of the Resilience and Sustainability Trust (RST) in a way
that better addresses the needs of Caribbean countries, the report
relays.
"We support the efforts to expand the scope of RST. We take note
that Barbados and Jamaica have availed themselves of this facility,
which currently seeks to address long-term challenges of pandemic
preparedness and climate vulnerabilities. However, in other
Caribbean countries there are additional long-term macro-critical
challenges that need to be addressed," he said, the report relays.
"The link to having an upper credit tranche program and the
limited effective funds available given our small share of the
quota can be seen as deterrents to accessing the facility," he
added.
*********
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