“The only credit markets event for the Andean region”

200+ Senior Attendees | 25+ Expert Speakers | 100+ Sovereign, Corporate & FI Borrowers

There has never been a more important time to bring together 200+ of the Andean region’s most senior issuers, investors, bankers, rating agencies and lawyers to share knowledge, debate and network.

This unique virtual platform will bring together the leaders in the Andean capital markets community – with over 81% of the audience being director-level or above – making it a “must attend”. The event is taking place online this year, meaning that participants are able to connect with even more C-level decision-makers that they would at a physical conference in less time.

The event will bring buyers and sellers together to conduct business and shape future financing strategies; enable you to initiate an unlimited number of new business connections via the networking directory; deliver behind-the-scenes insights from global financial leaders who will answer your questions; and provide a bird’s eye view of the Andean market.

Highlights for the 2021 event:

• Understand the region’s key macro drivers which shape both sovereign and corporate debt strategies for 2021/22
• Bringing international and local investors together with Andean issuers to define and analyse the roadmap for raising capital in 2021
• Connecting recent issuers with Andean financial institutions and government bodies to understand financing needs and identify new business opportunities
• Access 200+ of the most senior regional and international issuers, investors, bankers, rating agencies and lawyers at one time
• Setup an unlimited number of virtual meetings with participants from the Andean capital markets community via our 1-2-1 networking platform
• Gain exclusive behind-the-scenes insights from the 25+ regional and international credit market leaders speaking on our expert-led panels

The entire market will be present. Use your market’s best attended event to re-engage with your existing clients, build strong business relations with your prospects and hear the region’s financial leaders speak on how they are navigating the current economic climate/share their expectations for the future.

Register online here – enter our 10% discount code FC10

Enquiries: contact Jessica Wheater on Jessica.Wheater@GFCMediaGroup.com

Visit www.BONDSANDLOANSANDES.com to view the latest brochure, agenda, speakers and companies that participate.

Sponsored Content

The event is taking place online this year, meaning that participants are able to connect with even more C-level decision-makers that they would at a physical conference in less time.

About Bonds & Loans Andes Virtual: With global travel restrictions still in place, we have received unprecedented demand from our Andean clients to provide a platform in which the community can come together, do business, and show their commitment to the market during these uncertain times. Join senior decision-makers from 200+ of the region’s leading issuers, investors, bankers, rating agencies and lawyers to share knowledge, debate and network.

With over 81% of the audience being director-level or above, it is a place where buyers and sellers will come together to conduct business and shape future financing strategies; enable you to initiate an unlimited number of new business connections via the networking directory; deliver behind-the-scenes insights from over 25 global financial leader speakers who will answer your questions; and provide a bird’s eye view of the Andean market.

Don’t miss this opportunity to join over 200 of the Andean region’s most senior investment, capital markets and finance professionals. Register online here or contact Jessica Wheater on Jessica.Wheater@GFCMediaGroup.com – use our 10% partner discount code FC10.

Visit www.BONDSANDLOANSANDES.com for more information.

GFC Media Group Press/Marketing Contact (Organizer): Jessica Wheater, Head of marketing – Bonds & Loans Andes, GFC Media Group. Tel: +44(0)20 7045 0910 / Email: Jessica.Wheater@GFCMediaGroup.com

According to Moody’s, the LifeMiles upgrade to B1 mainly reflects an improvement in its main shareholder, Avianca Holdings S.A.’s (NYSE: AVH, BVC:PFAVH) credit profile, reducing the risk of LifeMiles upstreaming extraordinary cash flows: either in the form of dividends, most likely financed with incremental debt or anticipated purchases of airline tickets. The recovery in Avianca’s liquidity follows a debt exchange concluded on December 31, 2019 and the availability of new credit facilities. Avianca’s credit profile remains weak, creating risks for LifeMiles’ credit quality and overall operation, says the ratings firm.

LifeMiles’ B1 rating also incorporates what Moody’s sees as its adequate liquidity and solid business model being the sole operator of Avianca’s frequent flyer program, its diversified and sticky base of commercial partners and co-brand credit card growth. Also reflected in the rating are the potential benefits to the company’s growth plan from improved economic dynamics in its largest markets. The corporate family rating is at the same level of the senior secured rating given that it is the only debt in the company’s capital structure.

The rating of the term loan takes into consideration its secured position within the capital structure of the company and the existence of a mandatory prepayment clause that obliges the use of a percentage of excess cash to pay down the term loan. This clause partly offsets the risk of cash leakage at LifeMiles before fulfilling its debt payment obligations. In addition, LifeMiles liquidity policy of maintaining a minimum cash balance equivalent to six months of rewards plus two quarters of debt service also mitigates this risk.

Avianca successfully completed the exchange of substantially all its senior notes due 2020 for new senior notes due 2023 easing its short-term liquidity pressure. In addition, Avianca was able to obtain new financing of $250 million USD from its shareholders (United Airlines Inc. (NASDAQ: UAL) and Kingsland Holdings Limited) and $125 million from Citadel Advisors LLC and a group of Latin American investors. At the same time, Avianca successfully renegotiated its operating and financial leases and extended their contract period, resulting in a more manageable capital structure.

The stable outlook reflects Moody’s view that the company will maintain adequate liquidity and credit metrics.

LifeMiles has a strong business model that leverages unrelated commercial partnerships (including co-branded credit card agreements with the largest banks in its core markets), but its single largest contributor to gross billings are miles sold to Avianca and its air partners, accounting for 32% of gross billings. As such, if Avianca were to face operating problems this would hamper LifeMile’s operation as customers’ interest in purchasing, adding or converting LifeMiles miles into Avianca’s air tickets would decline. Furthermore, if Avianca liquidity were to deteriorate, it may require LifeMiles to upstream dividends—most likely financed with debt as done in the past—resulting in higher leverage. Moody’s estimates that, absent additional indebtedness, LifeMiles’ adjusted debt/EBITDA would gradually decline from 2.8 times as of September 30, 2019 to below 2.5 times by year-end 2021.

Moody’s believes that LifeMiles has adequate liquidity. The company cash and cash equivalents of $65 million USD as of September 31, 2019 can cover 1.3x its short-term debt. In addition, LifeMiles benefits from a five-year $20 million committed revolving credit facility, which is currently undrawn. LifeMiles has posted negative free cash flow (defined as cash from operations minus dividends and capex) in 2017, 2018 and over the twelve months ended September 31, 2019 resulting from the high dividend payout.

LifeMiles’ largest contributors to gross billings are its financial partners, which include credit card co-brands (47%) and airlines (32%), Avianca being its largest customer, responsible for approximately 27% of gross billings. Around 80% of accrued miles are redeemed, with 90% being redeemed into air tickets. The 10% balance is redeemed into hotel nights, merchandise and other rewards. LifeMiles benefits from Avianca’s leading market position in Colombia and Central America.

LifeMiles has around 9.5 million members, more than 100 mileage agreements with financial institutions, and more than 723,000 co-branded credit cards. The number of members has grown steadily at a 9.9% CAGR in the last five years. LifeMiles’ largest market is Colombia where it generates 52% of its gross billings. It also operates in Peru, Costa Rica, El Salvador, Honduras, Guatemala, and the US; each of which contributes less than 10% to gross billings. Moody’s forecasts the Colombian economy will grow by 3.3% in 2020. Similarly, Moody’s estimates that, in Colombia, private consumption will grow by 3.5% in 2020 and 3.6% in 2021.

An upgrade is unlikely in the short term due to LifeMiles indirect exposure to Avianca’s operation and weak credit profile. Longer term, the ratings could be upgraded if the company were to maintain strong liquidity and credit metrics combined with an improvement in Avianca’s credit profile. An upgrade would also require strong ring-fencing provisions that limit cash upstream to shareholders, as well as the maintenance of adequate liquidity and profitability. Quantitatively, an upgrade would require LifeMiles to maintain its adjusted debt/EBITDA lower than 2.5 times on a sustained basis.

The ratings could be downgraded if the company’s profitability or credit metrics worsen, with an adjusted debt/EBITDA ratio remaining above 3.5:1. A deterioration in the company’s liquidity or profitability, or a change in the company’s financial policy leading to excessive cash distribution to shareholders can lead to a downgrade. Also, a weakening on Avianca’s credit profile or repetitive amendments to the loan agreement such that the mandatory prepayment provisions are waived or canceled, and excess cash flow is not used to pay down debt could result in a downgrade.

LifeMiles Ltd. is a coalition loyalty program and the sole operator of Avianca’s frequent flyer program. LifeMiles has 586 active commercial partnerships that allow its members to accrue and redeem miles for different products and services such as airline tickets, hotels, and rental cars among others. LifeMiles is 70% owned by Avianca Holdings S.A. and 30% owned by Advent International. LifeMiles reported gross billings of $331 million over the twelve months ended September 30, 2019.

The capital securities are Basel III-compliant, and their terms and conditions have been defined so as to qualify the notes for treatment as Tier 2 capital pursuant to Colombian regulations.

Ratings Rationale

The Ba3(hyb) rating assigned to the new Tier 2 subordinated notes is positioned two notches below the ba1 adjusted baseline credit assessment (adjusted BCA) of Bancolombia in line with Moody’s standard notching guidance for contractual non-viability subordinated debt with a full or partial principal write-down triggered at or close to the point of non-viability.

The rating reflects the risk of a full or partial write-down of principal in the event that (1) the bank’s regulatory Basic Solvency ratio (equivalent to the CET1 ratio) falls below 4.5% (which Moody’s considers to be below the point of non-viability) on either an individual (i.e. treating the bank’s Central American subsidiaries as investments) or fully consolidated basis; or (2) the regulators determines that the Basic Solvency ratio needs to be restored to 6.0%. The notes will only be written down in an amount sufficient to restore the Basic Solvency ratio to 6% under either circumstance. In practice however, they will automatically be fully written down if the basic solvency ratio falls below 4.5% as the par amount of the notes equals just about 1% of current risk-weighted assets.

The notes will rank:

1. junior to all present and future senior indebtedness of the issuer
2. junior to all other present or future “preferred” subordinated indebtedness
3. pari passu with all other present or future unsecured Tier II subordinated indebtedness and
4. senior to securities junior to the notes as well as to all classes of capital stock of the issuers.

While Moody’s assesses the probability that Bancolombia will receive support from the Colombian government (Baa2 stable) in a stress situation as very high given the bank’s large market share of domestic deposits, this support only applies to the bank’s deposit and senior debt ratings. Moody’s does not expect that Tier II securities – which are designed to absorb losses – will benefit from government support.

Bancolombia’s ba1 baseline credit assessment (BCA) reflects the bank’s good earnings generation capacity, its improving consumer asset quality despite still high corporate loan delinquencies, and Bancolombia’s broad and stable core funding access, which partially offsets the bank’s moderate reliance on market funding. Bancolombia’s profitability has benefited from lower credit costs and a shift in loan portfolio mix towards consumer lending, as the Colombian economy recovers.

Moody’s believes Bancolombia’s exposure to environmental risks is low, consistent with its general assessment for the global banking sector. Bancolombia’s exposure to social risks is moderate, consistent with Moody’s general assessment for the global banking sector. As well, governance risks are largely internal rather than externally driven. Moody’s does not have any particular concerns with Bancolombia’s governance.

Factors that can positively or negatively affect the rating

The ratings of the Tier 2 notes are notched from Bancolombia’s adjusted BCA. As such, the ratings of the securities will move in tandem with Bancolombia’s adjusted BCA. Bancolombia’s supported ratings are positioned at the same level of sovereign bond rating and could face upward pressure if Colombia’s government bond rating is upgraded in conjunction with continued improvement in the issuers’ credit fundamentals and/or Colombia’s macroeconomic environment. However, if Colombia’s government bond rating faces downward pressures, Bancolombia’s ratings could be negatively pressured as well. The ratings could also face downward pressure if the issuers’ intrinsic credit fundamentals deteriorate unexpectedly.

Duque, a a rightwing conservative groomed for the presidency by former President Álvaro Uribe, assumes the role of head of state at a time when the nation is deeply divided over, among many issues, a peace deal that more than half of Colombians initially voted against.

Photo: President Juan Manuel Santos welcomes his successor, Iván Duque, to the Casa de Nariño. (Photo credit: Presidencia de la República / Nelson Cárdenas, SIG)

He has pledged to alter that accord, which earned outgoing President Juan Manuel Santos the Nobel Peach Prize before it was formalized in late 2016 to end more than a half century of conflict with the now-demobilized leftist guerrilla group Revolutionary Armed Forces of Colombia (FARC).

At the inauguration, as reported by the Associated Press, Duque said he believes in the “demobilization, disarmament, and reinsertion of the guerrilla base” into society. As during his presidential campaign, however, he stressed that “we will make corrections” to the peace deal.” The nature of those changes will have significant political ramifications, particularly with his mentor Uribe facing a criminal investigation into allegations of witness tampering and bribery.

Duque also plans to take a more hardline approach toward fighting the last remaining guerrilla group — the National Liberation Army (ELN), which Santos began formally negotiating a peace deal with in 2017 — as well as surging coca production figures that have tested Colombia’s close relationship with the United States.

By comparison, overseeing a now-improving economy should be relatively less complicated.

Colombia’s gross domestic product (GDP) increased by just 1.8% in 2017, the lowest level since the height of the global financial crisis in 2009 and well below the potential highs above 6.5%  last registered in 2014 (and three times since 2006). Last year’s underwhelming results followed growth of just 2.0% in 2017.

But most analysts project better economic performance in 2018 and into the foreseeable future. Higher oil prices have been one key aspect of the improvement, with a return to moderate inflation rates, higher consumer confidence, and an extended interest-rate cutting cycle by the central bank also assisting in the recovery.

Estimates from leading global and financial sector analysts for growth in 2018 top out at around 3%. Other more pessimistic forecasts published this year — including those by top independent researchers in Bogotá — have set expectations closer to 2.4%.

Nevertheless, this represents a reversal of the four-year streak of falling growth rates in Colombia, and most of the same organizations expect further recovery in 2019.

Medellín-based Bancolombia, the Andean nation’s largest bank, expects just 2.6% growth this year but 3.2% growth in 2019. “We expect the macroeconomic and financial conditions for productive investment to continue improving,” said the bank in a note to investors last month.

Though higher GDP growth will ease some of the concerns that have vexed officials in Bogotá for the past two years, large challenges remain ahead.

“Among the many challenges the new administration will have to face, those concerning the economy are not minor,” stated Bancolombia in a note to investors.

Most notably, the new administration will face difficulty in abiding by the governing fiscal rule that mandates an ongoing reduction in the nation’s fiscal-deficit-to-GDP ratio.

Last year, the country was able to push this ratio below the outlined threshold of 3.6%. But this rate must drop further in 2018 and beyond, and hitting the figure last year was achieved, at least in part, due to one factor outside of the government’s control (rising global oil prices) and a one-time unexpected windfall (nearly $1.5 billion USD in telecom fines).

The significant tax reform passed in late 2016 to raise federal revenues also contributed to the results. But credit rating agency Fitch Ratings has noted that the overhaul “did not meet expectations” by “reaching just 0.4% of GDP in 2017, lower than the 0.7% of GDP originally estimated.”

Credit rating agencies in New York, as well as Bancolombia, have questioned whether the nation can continue to hit its marks after 2018.

Failing to do so would jeopardize Colombia’s investment-grade rating that the Ministry of Finance under Santos fought hard to maintain.

Prior to Duque’s inauguration, Congress proposed its version of the federal budget for 2019 and it included cuts. Now in office, Duque will have the chance to review and amend the proposal, with the final budget requiring approval from the new Congress.

But the reality of austerity may mean that Duque will walk back one of his key campaign talking points.

“There appears to be little room in the budget for the large tax cuts that Mr. Duque campaigned for,” stated Edward Glossop, Latin America economist at London-based research firm Capital Economics, in a note to investors. “Accordingly, we still think there’s a good chance that his tax plans are diluted or pushed back into 2020.”

Bancolombia, however, has looked at the still-high oil prices and noted that this new reality could lead Duque to believe tax cuts and the fiscal rule might be compatible.

“The good performance of oil prices would make the government’s budget deficit target for next year more feasible to achieve,” said Bancolombia in its analysis. “In addition, this will imply that the next administration will have a reasonable period to propose and seek approval of its tax reform agenda.”

The international investment community will be watching closely as Duque sets his economic agenda in the weeks and months to come.

New York rating agency Standard & Poor’s cut its sovereign rating for Colombia to BBB-, just one notch above junk, last December. Moody’s Investors Service, another of the big three agencies, maintained its Baa2 rating for the nation in February but did move its outlook from stable to negative.

Fitch Ratings, which affirmed its BBB rating with a stable outlook for Colombia in May, has had its eyes on the upcoming budget decision even since before the election.

After inauguration, wrote the agency earlier this year, the administration’s “first major challenge will be to present the 2019 budget, testing its commitment to meet the current fiscal rule’s targets.”

Included among those that the big three rating agency has put on a negative outlook are Bancolombia, Banco de Bogotá, Seguros Generales Suramericana (SGS), Seguros de Vida Suramericana S.A. (SVS), and Compañía Aseguradora de Fianzas S.A. Confianza (Confianza).

While the Colombian government maintains a willingness to support Bancolombia and Banco de Bogotá, “its capacity to provide support is reflected by its rating,” stated Moody’s.

While the New York-based agency noted that the Colombian government maintains a willingness to support Bancolombia and Banco de Bogotá, “its capacity to provide support is reflected by its rating,” stated Moody’s.

“The affected banks’ long-term deposit and senior unsecured debt ratings of Baa2 are positioned at the same level of sovereign bond rating as Moody’s assesses a very high probability that the government will support them if needed,” added the agency. “This assessment considers the very large deposit franchises of the affected banks, which are the two largest in Colombia, with deposit market shares ranging of 12.9% (Banco de Bogota) and 23.2% (Bancolombia) as of September 2017.”

The outlooks for Grupo Aval Acciones y Valores S.A. and Grupo Aval Limited (the controlling companies tied to Banco de Bogotá) have been unaffected.

Regarding the insurers, Moody’s said in a statement that “the change to a negative outlook on SGS’ and SVS’ ratings addresses the likelihood that — were it to ultimately occur — a downgrade of Colombia’s sovereign bond rating could lead to a rating downgrade for SGS and SVS, primarily taking into account the correlation between the companies’ credit profiles and that of the Colombian sovereign, given their direct and indirect exposures to sovereign assets, and the fact that the insurers’ ratings are currently positioned at the sovereign rating level.”

Three infrastructure issuers also suffered the same outlook change to negative: Interconexion Electrica S.A. E.S.P. (which has a Baa2 rating, now with a negative outlook), Empresas Publicas de Medellín S.A. E.S.P. (Baa2, negative), and Enel Americas S.A. (Baa3, negative).

READ MORE: Moody’s Drops Credit Rating for Colombia to Negative from Stable

The fallout has not affected Ecopetrol S.A., however. Moody’s has maintained its Baa3 rating and stable outlook for state-controlled oil company

The Bogotá-based hydrocarbon giant highlighted the news, saying in a statement that the change for the nation’s outlook “had no effect on the company’s credit rating, as it anticipates continuously improving fundamental performance.”

Ecopetrol announced this week that it made a net profit of 6.6 trillion pesos in 2017, its best results since 2013 and more than four times its reported profit in 2016. In 2017, it also extended its reserve life to 7.1 years and hit output goals of 715,000 barrels of oil equivalent per day, a level it expects to at least match this year amid up to $4 billion USD in investment in exploration and production.

The key reasons listed for the negative outlook are uncertainty surrounding the country’s upcoming elections, challenges adhering to the so-called fiscal rule, and the risk of economic growth remaining below potential.

Moody’s cited the risk that the next government has a “weak mandate” that prevents it from adopting additional fiscal measures to preserve Colombia’s fiscal strength.

It added that, while the agency does expect Colombia to hit its fiscal deficit target of 3.3% of GDP this year, low growth and still-lagging tax revenue, despite the reform passed in last 2016, are likely to result in a “lower rate of fiscal consolidation.”

Still, despite the concerns, the New York-based agency acknowledges that Colombia shares some key rating factors — including institutional stability, economic size, and growth — with other Baa2-rated nations.

Thus, if the new incoming government, which will take over in August after President Juan Manual Santos concludes his second term, can continue to reduce the nation’s fiscal deficit and formalize other measures, then Moody’s could revise Colombia’s outlook back to stable.

READ MORE: Petro, Fajardo Emerge as Favorites in Colombian Presidential Election Poll

The move follows a ratings downgrade for the country last December by Standard & Poor’s, which cut Colombia’s long-term foreign currency sovereign credit rating from BBB to BBB-. The agency highlighted the country’s “diminished policy flexibility” due to “weakened fiscal and external profiles” and external debt in its analysis following the move.

Last October, Fitch Ratings affirmed its BBB rating for Colombia with a stable outlook. This month, however, the agency warned that the next government likely must cut spending to meet its 2019 fiscal rule target of getting the fiscal deficit down to 2.2% of GDP.

“The new administration takes office in August,” stated Fitch Ratings. “Its first major challenge will be to present the 2019 budget, testing its commitment to meet the current fiscal rule’s targets.”

Across the region, 19 of the 29 rated nations in the region rated by Moody’s, including Colombia, have a stable outlook, and two others have a positive outlook. On the downside, there are six countries — including Brazil, Mexico, and Chile — with negative outlooks, while two more are currently being reviewed for a downgrade by the big three rating agency.

Rising debt levels across Latin America and key elections, such as the May presidential election in Colombia that will determine the nation’s new head of state, further complicate a year that begins with encouraging economic growth momentum but will continue to face uncertainty.

“The increasing popularity of candidates promising steep changes in policy risks slowing, or even reversing, policy and reform implementation in some countries,” stated Moody’s in its report “Sovereigns — Latin America & Caribbean.”

Colombia is among those that the big three rating agency says will “see new administrations face greater social demands with fewer fiscal resources.”

Still, hopeful news abounds from outside Latin America, with Moody’s projecting “above-potential growth” in the United States alongside “stronger growth” in China. “The regional outlook incorporates Moody’s view that US-related policy risks have narrowed in the near term to NAFTA renegotiations,” stated the agency.

This along with ongoing domestic recovery in most large economies has led Moody’s to project regional GDP growth to finish at 2.7% in 2018, up significantly from the estimated 1.9% seen in 2017 and the 1.4% from 2016.

(Photo credit: Jared Wade)

Earlier this month, Moodys Investor Service, another one of the so-called “big three” ratings agencies, assigned a Baa3 rating to the notes, which will in part fund the construction of the a toll road project that was originally awarded to the company in 2015 within Colombia’s massive “4G” roadway infrastructure overhaul program.

“Final pricing for the rated notes was a coupon of 6.75%,” stated the New York-based agency in a statement. “Projected metrics and breakeven analysis are consistent with Fitch’s cases at the time the expected ratings were assigned. The rated notes coexist on a pari-passu basis with a UVR-denominated loan and two Colombian peso-denominated loans, for a total amount of up to 950,000 million Colombian pesos, and maturities between 2027 and 2038.”

Fitch added that the ratings are a reflection of the “acceptable mitigation of completion” and “ramp-up risks” of the project to the issuing company. The long-term view is also affected by an expected increase in traffic on the throughway over time and the fact that the company will be able to adjust the toll rates based upon inflation.

According to Fitch Ratings, “despite some back-loading” the debt structure of the project is “adequate.” This has led the agency to conclude that, although financial metrics are “initially weak for the rating category,” the full life of concession is supported by “growing flexibility, a high project life coverage ratio (PLCR). and a rapidly increasing loan life coverage ratio (LLCR), according to the applicable criteria.”

In its assessment, Moody’s stated that the proceeds of EPM’s issuance, which will be issued in Colombian pesos but are settled in U.S. dollars, will go toward refinancing some of all of the public utility’s $1.0 billion USD syndicated club deal loan due in 2020.

“Following the transaction, EPM’s total debt average life will extend to almost 6.5 years from the current 5.2 years,” stated Moody’s in its statement. “While settlement of the debt will be in U.S. dollars, the local currency denomination of the debt will reduce EPM’s exposure to dollar-denominated debt from the current level of 31% to 22%.”

Though it does not expect significant changes in the terms of the issuance, Moody’s did highlight that its rating assignment is based on preliminary documentation about EPM, which maintains 3,680 megawatts of net installed production capacity, the vast majority of which comes from hydropower.

“The transaction indenture does not encompass financial covenants, although the notes will include typical limitations on the occurrence of secured debt and/or sale-leaseback transactions,” stated Moody’s. “The issuer is, however, subject to meeting financial covenants established in other senior unsecured financing, including EBITDA/interest expense of 3.0x and debt/EBITDA of 3.5x.”

(Photo credit: Empresas Publicas Medellín, EPM)