B-Rated Latin American Corporates Would Become Insolvent Under Higher Interest Rates Says Fitch

Over one-quarter of lower-rated Latin American corporate issuers in the ‘B’ category are expected to struggle to cover interest expenses and maintenance capex in the event of a risk scenario involving a prolonged period of higher interest rates, based on YE 2022 EBITDA, says Fitch Ratings.

Fitch ran a sensitivity analysis to assess how long ‘B’ category issuers could withstand a repricing of debt to current market rates, which are at a 15-year high. The analysis also examined EBITDA pressure stemming from weaker 2023 economic performance and other factors.

The coverage ratio of EBITDA/interest expense and maintenance capex would fall below 1x for 28% of Latin American ‘B’ category corporate issuers, assuming all debt is repriced to 11% for ‘B+’ rated issuers, 12% for ‘B’ issuers and 13% for ‘B–’ issuers. Coverage falls below 1x for 38% of issuers if EBITDA declines by 10%–30%, depending on sector cyclicality, in addition to debt repricing.

Higher interest rates will weaken interest coverage among Fitch-rated leverage finance issuers in 2023, albeit by a smaller amount than 2022, due to varied levels of floating-rate debt that have already increased due to higher base rates.

Lower rated speculative-grade issuers in the ‘B’ category will likely see outsized coverage erosion given higher relative borrowing costs and weaker business profiles. Moreover, ‘BB–’ rated issuers are also vulnerable to a prolonged period of higher interest rates, especially combined with weaker EBITDA.

Median coverage for the ‘B’ category was 1.8x in 2022 and incorporated an effective average cash interest rate of 9.3%. This contrasted with current market interest rates that vary widely by country, but are generally low double-digit rates.

Related Content: Higher Rates to Further Erode Coverage Cushions for ‘B’ Rated LatAm Corporates (Nearly 40% of ‘B’ Category Issuers Fail to Cover Under a Stress Scenario)