One in four Fitch-rated corporates in Latin America is exposed to either a one-notch sovereign or country ceiling downgrade, while ratings for nearly one-third of issuers are vulnerable to a two-notch downgrade, according to Fitch Ratings. There are a meaningful number of Fitch-rated LATAM sovereigns with a negative outlook, due to implications from global trade tensions, slowing economic growth and subdued investment activity, and country ceilings correlate closely to sovereign ratings. However, Fitch says it would expect the effects of rating changes to differ across countries, sectors and companies, given varying levels of dependence on domestic economies.
Fitch performed a scenario analysis for Fitch-rated LATAM corporates to examine exposure to downgrades from either sovereign ratings or country ceilings, which reflect transfer and convertibility risk, of their respective countries. Sovereign ratings for Colombia, Costa Rica, Guatemala and Nicaragua are on Negative Outlook while Mexico and Brazil face diminishing economic growth expectations. Argentina was downgraded twice in August due to extreme financial instability and Mexico was downgraded in June due to a weakening macroeconomic outlook. For more information see Latin American Corporates Sovereign Ratings and Country Ceilings Exposure (How Sovereign Downgrades Affect Corporate Issuer Ratings) .
At the country level, Argentine corporates are the most exposed to sovereign and Country Ceiling downgrades due to the extremely low rating of the country, followed by Brazil, Colombia, Mexico, Peru and Chile. Approximately, 85% of Argentine corporates are constrained by either the sovereign rating or the Country Ceiling, subjecting these companies to negative rating changes. Guatemala corporates are also highly exposed due to the high percentage of corporates rated at or near the Country Ceiling.
The most exposed sectors are utilities and oil & gas due to their close linkage to federal governments. Utilities also tend to generate most of their cash flow domestically, which constrains their ratings to the Country Ceiling. Conversely, the food and beverage sector may have less exposure due to its international reach. JBS, for instance, is the world’s largest processor of fresh beef and one of the top global processors of pork and poultry, which generates approximately 80% of its consolidated EBITDA from the company’s US operations.
Material amounts of offshore cash and credit facilities, or a strong export base, are reasons issuer ratings pierce the country ceiling, as are operations in other countries that generate significant levels of cash relative to debt service. A select group of Latin American issuers have applicable country ceilings that fall in the ‘A’ category or higher due to their operations in Europe, the US, Mexico, Peru or Chile. Companies falling in this category include America Movil,Marfrig and Grupo Sura.