Immediately after downgrading Colombia’s sovereign currency rating from the lowest investment grade into junk status, S&P Global Ratings has downgraded several major Colombian infrastructure enterprises out of investment grade to ‘BB+’ from ‘BBB-‘ while assigning a stable outlook:
- Ecopetrol S.A. (NYSE: EC) — Colombia’s largest petroleum company, majority owned by the government
- Grupo de Inversiones Suramericana S.A. (Grupo Sura) — Colombia’s largest Insurance conglomerate
- ISAGEN, S.A. E.S.P. — A Colombian Energy and infrastructure provider controlled by Canada’s Brookfield Asset Management
- Oleoducto Central, S.A. (OCENSA).— Oil pipeline operator affiliated with Ecopetrol
Although the following two entities have ratings above that on Colombia’s sovereign rating, S&P downgraded them to ‘BBB-‘ from ‘BBB’ while assigning a stable outlook:
- Enel Americas S.A. — Electrical utility subsidiary of European utility conglomerate Enel.S.p.A.
- Emgesa S.A. E.S.P.— Wholesale electricity provider, also a subsidiary of Enel.
The ratings on both entities are higher than on Colombia’s sovereign rating, primarily because of the potential support they would receive in case of financial distress from their parent companies — Enel SpA (BBB+/Stable/A-2) in the case of Enel Americas, and Enel Americas for Emgesa.
S&P also lowered the issue-level ratings on OCENSA parent A.I. Candelaria Spain to ‘B+’ from ‘BB-‘. The ratings firm says that this is because they still see a notch differential due to its total reliance on subordinated dividend payments from its sole investment, OCENSA, which distributes them after funding its operating and financial needs.
The latter rating action follows the failure of the government’s fiscal reform proposal amid high spending pressures, resulting in a sharply lower likelihood of Colombia improving its fiscal position following a recent and marked deterioration. Given high external vulnerability, comparably weak economic profile–balanced by adequate institutions and monetary credibility–Colombia’s debt will stabilize at around 60% of GDP during 2021-2024 and will post relatively wide fiscal deficits. These factors are no longer consistent with an investment-grade foreign currency rating (readers may refer to S&P’s “Colombia Long-Term Foreign Currency Rating Lowered To ‘BB+’ On Persistent Fiscal Weakness; Outlook Stable“, published on May 19, 2021, for further details).
This is because according to Standard & Poor, these firms continue to be exposed to Colombia’s sovereign risk given that they operate in what S&P deems highly regulated sectors (dependent on rate adjustments approved by government regulators) and that demand for their services is in some cases correlated to the country’s GDP growth pace. Consequently, S&P believes the entities could suffer from heavier regulation in a sovereign stress scenario, and wouldn’t be able to generate or maintain sufficient cash to honor their financial obligations under a sovereign default scenario.
This is the case for Ecopetrol, of which Colombia’s government is a controlling shareholder. Therefore, ratings on the company and its subsidiaries move in tandem with those on the sovereign. In S&P’s view, the final rating on Ecopetrol is capped at the level of the ‘BB+’ foreign currency rating on Colombia, given the ratings firm’s expectation that the government could have a tendency to increase taxes or dividends if it faces fiscal or external stress, which could restrict Ecopetrol’s financial flexibility. Additionally, S&P’s assessment that the company has a very strong link with the government also limits the rating. As a result of the downgrade of Ecopetrol, S&P took a similar rating action on its subsidiary, OCENSA, because the ratings agency doesn’t believe there are meaningful regulatory mechanisms or other structural barriers that restrict the parent from accessing the subsidiaries’ cash flows in a scenario of distress. In addition, Ecopetrol is OCENSA’s main client, representing more than 80% of its revenue in 2020.
A.I. Candelaria Spain
S&P also lowered the issue-level rating on Candelaria’s notes, given 100% of its equity interests in OCENSA and its total reliance on subordinated dividend payments from the latter entity, which distributes them after funding its operating and financial needs. In addition, given that OCENSA is not publicly traded, it might be difficult for Candelaria to liquidate its investment if needed, and for S&P to forecast asset valuations relative to debt with certainty. The rating on Candelaria’s notes also captures the existing governance principles contained in the shareholders’ agreement whereby Candelaria holds veto powers over OCENSA’s material decisions such as business plans, large investments, and changes to the dividends policy.
Isagen sells about 35% of its energy to distributors, which have their rates set by the regulator. Therefore, S&P says that it believes payments to Isagen–in case of a regulatory interference in distributors’ rates–could deteriorate. In addition, Isagen sells a portion of its output on the spot market, which could also be at its regulatory floor amid recession. Therefore, the sovereign rating caps the rating on Isagen, in S&P’s view.
S&P believes that Grupo Sura wouldn’t pass a Colombian sovereign default stress test scenario. The sovereign rating cap and risk to Grupo Sura in a sovereign default scenario reflect the high correlation between the company’s assets and dividends, and the country’s economy, because around 40% of assets operate mostly inside Colombia. The company is exposed to Colombia’s financial system because Grupo Sura has a stake in Bancolombia, which represents approximately 25% of the dividend stream. S&P says this limits the rating on Grupo Sura to the sovereign level because it is highly likely that a sovereign default would entail a significant shock to the country’s financial system.
S&P predicts around 35% of Enel Americas’ EBITDA to come from Colombia in 2021, followed by Brazil (about 45%), Peru (15%), and Argentina (5%). Although Enel Americas’ debt repayment capacity remains stronger than those of the sovereigns where it operates, mainly because of the potential support it would receive from its parent company Enel in case of financial distress, the company’s downgrade reflects its sensitivity to deteriorating country risks.
The rating action on Emgesa follows the one on Enel Americas, given that the former plays an important role in the latter’s strategy in Latin America. Therefore, S&P expects the latter to support Emgesa under any foreseeable circumstance, including a hypothetical sovereign default of Colombia.
Puerta de Hierro – Sociedad Concesionaria Vial Montes de María S.A.S.
S&P affirmed the rating on Puerta de Hierro as it reflects the guarantor’s creditworthiness. This is because Puerta de Hierro’s notes benefit from an irrevocable financial guarantee for interest and make-whole premium payment, in respect to the maximum guaranteed principal amount and for up to $350 million on principal from the US Government’s Development Finance Corp. (DFC). However, S&P revised downwards the project’s operations phase stand-alone credit profile to ‘bb+’ from ‘bbb-‘ because they consider the creditworthiness of the project’s main offtaker (Agencia Nacional de Infrastructura) to be one notch below its ‘BBB-‘ local currency rating on Colombia for the following reasons:
- There are no cross-default clauses linking these obligations with sovereign debt;
- S&P views the reporting of ‘Vigencias Futuras’ and other contingent liabilities as transparent because the government explicitly recognizes payment obligations and contingent liabilities that arise from this transaction. However, the government doesn’t report these 4G Highway-related obligations as sovereign debt.
The stable outlook on these entities mirrors that on Colombia. The ratings on the latter pose a limitation on credit quality of corporate and infrastructure entities, given their exposure to sovereign risk. Therefore, S&P expects the ratings on these entities to move in tandem with the sovereign ratings in the next 12 to 18 months.
The stable outlook on Enel Americas mirrors that on Brazil and Colombia, its two main markets. Ratings on Emgesa are the same as on the parent and would move in tandem with the latter.
The stable outlook on Puerta de Hierro’s notes reflects S&P’s expectation of full coverage for the debt repayment given DFC’s financial guarantee. Therefore, the outlook on project’s notes reflects that on the US rather than Colombia. Moreover, the stable outlook reflects the guarantee coverage of over 60% stemming from the appreciation of the Colombian peso.
In the next 12-18 months, S&P says it may downgrade these companies in case of a similar rating action on Colombia. The firm could lower the sovereign ratings if the potential long-term damage caused by the pandemic, other domestic developments, or new external shocks, prevent the Colombian economy from recovering in 2021 and results in lower-than-expected GDP growth in subsequent years. A perceived deterioration in Colombia’s institutional effectiveness, such as the inability to find political and social consensus to sustain growth and the country’s fiscal profile, could also translate into a downgrade.
S&P might also downgrade Enel Americas in case of a negative rating action on Brazil or if it believes that the company has become a less integral subsidiary for Enel. In such a case, they say they would also downgrade Emgesa.
S&P could lower the rating on Puerta del on Hierro in the next 12-24 months if DFC’s credit quality weakens, which could happen if S&P lowers the rating on the US or the relationship between the US government and DFC weakens.
In the next 12-18 months, S&P indicates it could upgrade these companies if it takes a similar action on the sovereign rating on Colombia, while everything else remains equal. This can occur if there is faster-than-expected economic growth, coupled with structural fiscal measures, which reduce Colombia’s fiscal financing gap, lower the debt burden, and strengthen public finances. A larger and more diverse export sector, helping to reduce external vulnerability and strengthen economic resilience, could also result in the upgrade over the middle to long term.
In the next 18 months, S&P also says it could raise the rating on Puerta de Hierro’s notes if it either raises the rating on the US or if S&P believes the relationship between the US government and DFC strengthens.