Author: AtlanticIS

Corporates

Compania General de Combustibles’ Proposed Notes Assigned Preliminary ‘B’ Rating; ‘B-‘ Issuer Rating On Watch Positive

AtlanticIS
  • Argentina-based oil and gas exploration and production (E&P) company Campania General de Combustibles S.A. (CGC) recently announced a debt refinancing that will extend its debt maturity profile and materially reduce refinancing risk.
  • BUENOS AIRES (S&P Global Ratings) July 26, 2019–S&P Global Ratings assigned its preliminary ‘B’ rating to CGC’s proposed bond issuance. At the same time, we affirmed our ‘B-‘ issuer credit rating (ICR) on CGC and placed it on CreditWatch with positive implications.
  • The CreditWatch positive reflects that there’s a high chance that the company will be able to issue the bond in the next few days, which will prompt us to upgrade CGC to ‘B’ with a stable outlook.

The preliminary rating on the proposed senior unsecured notes reflects that the issuance would materially reduce CGC’s refinancing risk. It also incorporates the imminent upgrade of the ICR once the transaction becomes effective. In the meantime, we’re placing the ICR on CreditWatch positive.

The rating on the notes is preliminary pending their successful issuance, and assuming that the notes’ final terms and conditions do not differ materially from the draft documents presented to us.

Corporates

Empresas Copec S.A. And Copec’s Outlooks Revised To Negative On Higher Leverage; ‘BBB’ Ratings Affirmed

AtlanticIS
  • Empresas Copec (E-Copec) has an ambitious investment plan for about $2.7 billion this year and $2.1 billion in 2020.
  • Since May 2019, pulp prices have sharply fallen and we only expect modest recovery starting in the fourth quarter of the year. This will take a toll on the group’s EBITDA generation.
  • We now expect the company to post adjusted debt-to-EBITDA above 3.0x in 2019 and 2020.
  • SAO PAULO (S&P Global Ratings) July 29, 2019–S&P Global Ratings revised its outlook on E-Copec and subsidiary Compañía de Petróleos de Chile Copec S. A. (Copec) to negative from stable and affirmed the ‘BBB’ long-term issuer credit ratings on both companies.
  • The negative outlook reflects the one-in-three likelihood of a one-notch downgrade over the next 24 months if E-Copec cannot rapidly reduce leverage once the high investment cycle comes to an end.

The outlook revision reflects higher leverage expectations for the next two years following a more aggressive investment strategy in recent years.

E-Copec (the group) has ambitious investment plans for the next couple of years, especially at its forest products subsidiary, Celulosa Arauco y Constitución (Arauco; BBB-/Stable/–). Arauco is investing in a new pulp mill (Project MAPA) with 1.56 million tons of bleached hardwood pulp capacity for $2.35 billion, to be mostly disbursed during this year and the next. Additionally, through Alxar S.A. (not rated), the group owns 40% of the Mina Justa copper project in Peru. This project will demand about $260 million of direct investment between 2019 and 2020 from E-Copec, while it will raise project finance debt, adding $360 million to the group’s debt. These two large projects add to the already considerable capital expenditures (capex) that the group needs to maintain operations, for some smaller projects, and to pay $160 million for the panel business that Arauco acquired in Mexico.

Furthermore, the fuel and lubricant distribution subsidiary, Copec, which historically has had low leverage and provided some cushion against a more aggressive leverage profile at Arauco, is emerging from a period of acquisitions. Between 2016 and 2018, Copec acquired ExxonMobil Andean Holding LLC (EMal) and Mapco, resulting in a considerable increase in leverage that made its debt-to-EBITDA ratio peak at 3.0x as of March 31, 2019, compared to 1.8x in 2015. We expect Copec’s debt to EBITDA to remain close to 2.8x in 2019 and then near 2.5x in 2020.

We believe the higher capex, depressed operating cash flow generation amid lower pulp prices, and higher leverage at Copec will combine to push E-Copec’s debt to EBITDA to 3.2x-3.4x in 2019 and 2020.

Banking

Banco de Chile’s Proposed HKD 372 Million Senior Unsecured Notes Rated ‘A’

AtlanticIS

SAO PAULO (S&P Global Ratings) July 29, 2019–S&P Global Ratings assigned its ‘A’ issue-level rating on Banco de Chile’s (A/Stable/A-1) proposed HKD372 million senior unsecured notes due July 29, 2031. The issuance is part of the bank’s $3 billion medium-term notes program. The bank will use the proceeds primarily for general corporate purposes.

Our rating on the notes reflects their pari passu ranking with the bank’s other senior unsecured debt obligations. As a result, the rating is the same as the long-term issuer credit rating on the bank. The notes constitute only about 0.1% of Banco de Chile’s total funding base. Therefore, this issuance doesn’t change our view of the bank’s funding profile and does not increment refinancing risk.

Banco de Chile has a well-established brand and diversified market access in the highly competitive Chilean banking system, factors that confer steady revenue flow. Moreover, the bank’s sound asset quality metrics and conservative underwriting standards continue to drive sound financial results, although pressured by lower inflation prospects in the country. Capital flexibility should improve after the bank repays the long-term subordinated obligations due to the central bank as part of the bailout following the economic and banking industry turmoil in 1982-1983. From now on, the bank would be better positioned to adopt new capital requirements that will come into force in the next few years. The ratings also reflect our view of a funding structure highly diversified across sources and counterparties and a high deposit base with a stable amount of retail deposits. Its liquidity position provides adequate cushion to cope with unexpected cash outflows over the next 12 months.

Corporates

InterCement Brasil S.A. Downgraded To ‘B’ From ‘B+’ On Continuing Challenging Business Conditions And Higher Leverage

AtlanticIS
  • Despite InterCement’s recent asset sales and operations overhaul, performance and leverage should remain weak through 2019 and 2020.
  • Cement demand in Brazil, where the company has idled nearly 50% of its capacity would remain flat through 2019. In the meantime, the company’s Argentine operations are struggling with the economic downturn and political uncertainties.
  • On July 24, 2019, S&P Global Ratings downgraded the Brazil-based cement producer to ‘B’ from ‘B+’ on global scale and to ‘brA’ from ‘brAA’ on national scale. We also lowered our debt rating to ‘B’ from ‘B+’.
  • The stable outlook reflects that the company’s leverage metrics would probably remain close to 5.0x through 2019, improving to 3.5x-4.0x towards 2023. We factor in some level of financial assistance from its parent company, Mover, in case of need.

SAO PAULO (S&P Global Ratings) July 24, 2019–The downgrade reflects InterCement’s likely lower earnings and EBITDA for the next 12 months due to higher risks to the company’s competitive advantages. After the disposal of the Portuguese and Cape Verde operations last year, InterCement’s footprint has shrunk and remains concentrated in Brazil and Argentina, where operating conditions are subpar.

The cement market in Brazil is recovering at a sluggish pace in 2019. We expect InterCement to sell close to 8 million tons of cement in 2019, compared with 12.5 million in 2014 and 2015. Lack of market confidence and significant infrastructure projects are the main factors are behind the market slowdown. In 2020, conditions may slightly improve for long-term investment decisions depending on how the market perceives mid-term risks.

The Argentine subsidiary, Loma Negra, currently generates 55% of total cash flows. Despite volatile economic conditions, with currency swings and high inflation pressuring costs, Loma Negra’s solid market position and the government’s ambitious infrastructure plan allowed the subsidiary to maintain profitable operating margins. InterCement’s main project, L’Amali II, would increase operating efficiency at the Argentine division starting in 2020, but political risks may erode the subsidiary’s capacity to generate hard currency in the future, if economic problems exacerbate under the next administration.

After several changes at Mover subsidiaries’ portfolio, InterCement now accounts for 80%-90% of the group’s EBITDA. Apart from InterCement’s financial obligations, the group also guarantees Estaleiro Atlantico Sul’s (EAS) debt (about R$660 million) and is ultimately responsible for the fine stemming from the leniency agreement fine determined at the E&C subsidiary level (about R$800 million). After the sale of its share at CPFL Energia S.A., Mover repaid almost all of its corporate debt and has currently about R$1.8 billion in cash. Mover is also has a 15% minority interest in CCR S.A., with current market value of about R$4.5 billion.

In December 2018, Mover decided to inject about R$300 million into InterCement. The latter returned the proceeds to Mover after the sale of the Portuguese assets.

Banking

SCOR Brasil Upgraded To ‘AA-‘ On Revised Criteria; Outlook Stable

AtlanticIS
  • SCOR SE has a leading franchise in the U.S. life reinsurance, with robust capitalization according to our risk-based model (above the ‘AAA’ level) and on a regulatory basis.
  • We are affirming our ‘AA-‘ ratings on SCOR’s core operating subsidiaries, and raising our ratings on SCOR Brasil Resseguros SA to ‘AA-‘.
  • The outlook is stable because we anticipate that SCOR SE will maintain capital adequacy above the ‘AAA’ level under our risk-based model and generate earnings in line with global reinsurance peers’.

PARIS (S&P Global Ratings) July 25, 2019–S&P Global Ratings today affirmed its ‘AA-‘ long-term insurer financial strength and issuer credit ratings on the core subsidiaries of France-domiciled reinsurer SCOR SE (see the ratings list below for further details). The outlook is stable.

In addition, we raised to ‘AA-‘ our ratings on South Africa-based SCOR Africa Ltd. and Brazil-based SCOR Brasil Resseguros SA from ‘A-‘ and ‘BBB’ respectively under our revised group rating methodology.

We have also affirmed our ratings on SCOR’s outstanding hybrid and debt instruments.

The outlook is stable because we expect that SCOR will generate strong and sustainable earnings that enable it to maintain capital adequacy above the ‘AAA’ level under our risk-based model. We also anticipate the group will benefit from modest price increases in global non-life reinsurance business in 2019 and maintain its leading position, particularly in the life reinsurance market, further contributing to its competitiveness.

We could lower the ratings if the group’s capital adequacy deteriorated below the ‘AAA’ range for a prolonged period as a result of large unexpected losses or weaker-than-expected earnings, or if SCOR’s risk profile weakened, for example, through increased exposure to catastrophes.

We consider a positive rating action very unlikely over the next two years.

The group has a top-five position in the global reinsurance industry, with a very strong franchise and sound diversification by lines of business and regions. In our view, global non-life reinsurance is inherently more volatile than many other lines of insurance business. That said, the group has robust capital adequacy under our risk-based capital model and, according to the regulatory approach, even after severe natural catastrophe losses over the past two years.

We view positively SCOR’s risk management capabilities and we anticipate that they will enable the group to continue optimizing capital allocation and earnings and enhance its risk-return profile.

SCOR Africa and SCOR Brasil Resseguros are licensed to write reinsurance business and SCOR SE guarantees all of their obligations. In our view, this guarantee qualifies for full credit substitution with SCOR SE. We believe the group is willing and able to sufficiently support SCOR Africa and SCOR Brasil Resseguros during stress associated with a sovereign default. Therefore, we have equalized our ratings on SCOR Africa and SCOR Brasil Resseguros with that on SCOR SE under our revised group methodology.