Colombian Corporates Face Liquidity Challenges, with Deleveraging Not Expected Until 2018

Colombian financial services companies are facing a treacherous environment with multiple headwinds that are hurting cash flow and leading to increased leverage, according to Fitch Ratings. A new report from the ratings agency says that cash from operations contracted more than 25% in 2015.

While lower dividends did relieve pressure somewhat in this area, the effect was not great enough to stave off average negative cash flow among Colombian corporates, says Fitch. As a result, positive free cash flow is not expected this year.

Facing such pressures, leverage has been on upward trend throughout 2016. Fitch figures credit market factors as having caused total debt/EBITDA and net debt/EBITDA to rise to 2.7 times and 2.3 times, respectively, in 2015. That was up from 2.2 times and 1.7 times in 2014. The pace continues this year, and the firm doesn’t expect deleveraging until 2018.

“There are many obstacles to liquidity for Colombian corporates,” said Julian Robayo, associate director at Fitch Ratings. “Some include adverse external trading conditions, inflationary pressures, higher debt service cost, volatile foreign exchange rates and a slowdown in consumption. Additionally, tax reform may hurt corporates, and return on investment.”

In addition, Fitch found that nearly half (43%) of corporates in Colombia face foreign exchange risk because they hold large amounts of debt in U.S. dollars or simply due to their cash flow exposure. Their exposure to refinancing risk, however, remains limited given the long-term nature of debt profiles and access to local bond markets through 2017.