Author: AtlanticIS

Corporates

Clear Channel’s equity offering will reduce debt, but leverage will remain high

AtlanticIS

United States, July 26, 2019 – Clear Channel Outdoor Holdings, Inc.’s (CCO) $350 million equity offering on 25 July is credit positive because we expect that the company will use the net proceeds to repay $333.5 million of subsidiary Clear Channel Worldwide Holdings, Inc.’s (CCW, B3 stable) 9.25% senior subordinated notes due in 2024 or $383.7 million if the underwriters exercise their option to purchase additional shares. However, we expect that pro forma leverage levels will remain high at 8.5x, although down from 9.1x as of first-quarter 2019 (excluding our lease adjustments). Interest expense is projected to decrease by approximately $31 million and result in a slight improvement in interest coverage to 1.6x from 1.5x as of first-quarter 2019.

CCW’s pro forma EBITDA minus capex to interest coverage ratio will remain weak at 1x and up slightly from 0.9x as of first-quarter 2019. Free cash flow has been negative over the past several years including $80 million of negative free cash flow as of the last 12 months to first-quarter 2019 and will still be negative pro forma for the transaction at negative $50 million following the $31 million in interest expense savings.
CCW is expected to benefit from the elimination of the trademark license expense ($38.7 million in 2018) and the positive trends for the outdoor industry in North America, Latin America, and Europe, but faces more challenging trends with its joint venture in China. We also note that although CCW’s debt is denominated in US dollars, a substantial part of its business is in international currencies that can negatively affect results if the currencies that it does business in decline relative to the dollar. While leverage is modestly improved from the transaction, it still remains very high and leaves the company vulnerable to economic declines in the global economy.
The equity offering also provides clarity on the strategy for CCO following the separation from iHeartCommunications, Inc. (B2 stable). The new owners of the company are expected to try to grow the business instead of selling off all or parts of the business in the near term, as can be the case when former debtholders become equity holders. While CCO may consider attractive offers for select assets, we do not expect large-scale transactions that would lead to a substantial change in the portfolio of assets. Over the longer term, the strategy has the potential to change because many of the former debtholders are not naturally long-term strategic equity investors and may seek to exit their equity position in time.
CCW is an intermediate holding company that houses the assets of the international outdoor advertising operating segment of CCO. Headquartered in San Antonio, CCO is a leading global outdoor advertising company that generated last-12-month revenue of approximately $2.7 billion as of first-quarter 2019. Following the exit of former parent iHeartCommunications’ bankruptcy process, former iHeart debtholders owned 89% of CCO’s equity.

Credit Outlook: 29 July 2019. Pg. 6
Moodys

Banking

Facebook’s Libra puts big tech in fintech

AtlanticIS

United States, June 18, 2019 – Facebook and 27 other partner companies formally announced Libra, a form of digital currency powered by blockchain technology. Facebook will launch a new subsidiary, Calibra, in 2020 that will offer a digital wallet for Libra and be available in Facebook Messenger and WhatsApp, as well as through a standalone app. At launch, Calibra will focus on peer-to-peer (P2P) transfers of Libra, but could later introduce the digital currency as an alternative for consumer-to-business (C2B) payments.
We see the launch as supporting Facebook’s efforts to integrate more deeply with its 2.4 billion users beyond social media platforms and to potentially attract new users. The launch could also help the company tap new data sources, making its advertising more efficient and boosting overall advertising revenue.

From the payment processing industry’s perspective, the launch of an alternative payments platform by a technology leader as ubiquitous as Facebook is likely to accelerate electronic payments’ share gains from cash and checks. The key issue that remains unclear at this time is how Libra will tie into the rest of the world’s financial ecosystem. Visa and Mastercard appear to be more natural partners for Libra than national automated clearing house systems in light of the global nature of Facebook’s effort.

Still, Libra faces a range of regulatory hurdles. The announcement has already attracted the attention of financial regulators globally. Some US lawmakers have been quick to raise privacy concerns, while national authorities in Europe and Asia have raised concerns regarding the stability of digital currencies. The adoption of new forms of currency that fall outside of a country’s control raise a variety of issues for sovereign issuers, in that digital currencies can adversely affect national and regional central banks’ ability to implement monetary policy. Governor of the Bank of England (BoE) Mark Carney signaled the BoE’s intent to engage with tech companies to ensure consistent regulatory treatment and ultimately allow payment providers access to central bank overnight accounts – similar to
commercial banks.

For potential efficiencies to be realized, Facebook and its partners will need to overcome a number of hurdles, in particular, regulatory acceptance, which will be a key determinant of Libra’s path. In addition, for Libra to develop economic characteristics associated with currencies, a critical mass of users will need to trust it, its price and liquidity will have to be relatively stable and there will need to be a means to control supply. It is unclear what other ‘money-like’ applications Libra will ultimately be used for beyond the ability to make P2P transfers within a relatively contained context.
According to the Libra white paper, the currency will be backed by reserve assets consisting of bank deposits and short-term government securities (in a basket of so-called stable currencies) to minimize price volatility. The reserve feature of Libra makes it distinct from Bitcoin and most other cryptocurrencies. A wide range of firms, including online payment processors, telecom companies and major merchants, will govern the new currency through a new group known as the Libra Association, as shown in the exhibit.

Libra is positioned as a stable, real asset-backed currency built on a secure and stable open-source blockchain. One of its primary goals is to improve access to financial services for the global underbanked population, which is estimated at 1.7 billion people.

The significant issue that remains unclear at this time is which processing infrastructure the new digital currency will use. On the network side, Visa Inc. (Aa3 stable) and MasterCard Incorporated (A1 stable) appear to be more natural partners for Libra than national automated clearing house (ACH) systems in light of the global nature of Facebook’s effort. If Facebook were to launch a separate payment processing network, it would be credit negative for the card networks. On the merchant processing side, there will be a role for processors to handle transactions settled with Libra, as they handle transactions in national currencies today. With operational details not yet available and the launch for C2B payment applications some time away, we believe that the impact to the industry will be broadly positive, but it is too early to judge the magnitude and timing.
The widening application of digital distribution and product development in financial services is materially changing the basic terms of competition across banking business segments, including payments, lending, capital markets, and wealth management. In the fast-evolving digital ecosystem, the largest technology firms are poised to become formidable competitors in retail financial services, undercutting banks’ transaction fees. Facebook is certainly not the first company to launch a crypto payment solution; however, with its immense user base it would pose a threat to the banking industry should the initiative gain traction with consumers and businesses.
In particular, this new platform could effectively provide an alternative ecosystem for payments, bypassing existing players and obviating some of the roles banks traditionally play. Another key factor to watch as the product evolves is whether Calibra and other Libra wallets ultimately offer deposit-like products and other financial services and, if so, to what extent clients, including consumers and businesses, use them.
As big tech companies like Facebook position themselves as financial service providers, their success could allow them to control not only a significant portion of distribution and customer mindshare, but also to compete more directly with incumbents by manufacturing financial products, controlling the user experience and, ultimately, capturing a greater share of associated profit.

Credit Outlook: 24 June 2019. Pg. 11
Moodys

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.