Elevated defaults point to rising tide in early 2024 before easing by year-end. Nonfinancial corporate family defaults nearly tripled to 92 in 2023 from 31 in 2022, the highest annual default tally since 2020. Our 12-month trailing issuer-weighted default rate wrapped the year at 5.6%, and is set to peak at 5.8% in early 2024, before slowly reverting to its historic average by June 2024 and then moderating further to around 4% by year-end. Although Q.o.Q. defaults were unchanged at 20 in Q4, levels remain elevated.
Private equity (PE) backed companies lead Q4 defaults. In contrast to public counterparts, defaulted PE-owned companies affected more loans than bonds, with about $7.8 billion versus $5.0 billion, respectively. Given the high incidence of senior secured loan-only LBOs among distressed issuers, leveraged loans will continue to experience higher defaults than high yield bonds. Majority of Q4 DEs involved amend-and-extend transactions, including loan maturity extensions, interest rate conversions to PIK.
Half of Q4 defaults were repeat defaulters, with 70% of these having a PE backer. Most re-defaulters were companies which completed at least one round of DEs in the past, followed by another out-of-court restructuring during the last three months of the year. Many were companies which had undergone one or two rounds of DEs previously and ultimately sought Chapter 11 protection or missed debt payments. We expect this trend to persist through most of next year, as the default rate is set to remain above average through the first half of the year.
Media sector stood out in Q4 with three defaults, completed as distressed exchanges (DEs) . However, the total defaulted debt for this group was small relative to the largest defaults in the telecommunications, retail, services, healthcare and packaging sectors. Looking ahead, the telecommunications and durable consumer goods sectors will face the highest default rates projected for 2024.
Credit risks remain high for lower-rated segment of spec-grade universe. The distressed subset of the B3N List, Caa2-PD and lower rated companies rose to 97, up from 87 in the previous quarter and 82 a year earlier. Many of these weaker private companies will succumb to default as liquidity conditions for those in the leveraged loan market deteriorates in the months ahead.
Credit Outlook: 1 February 2024. Pg. 35 Moody’s Investors Service
Brazil, January 25, 2024 – Gol Linhas Aereas Inteligentes S.A. (Ca negative) filed for voluntary protection under the US Chapter 11 financial reorganization process. Gol’s reorganization process increases liquidity risks for its parent company, Abra Group Limited (Caa3 negative), and the possibility of rental cash flow disruption for certain asset-backed securities (ABS) deals with significant exposure to aircraft leased to Gol.
As part of the filing for Chapter 11, Gol was granted an automatic stay for all debt obligations, including the secured notes due 2028, which are the main source of cash to Abra to cover its own interest payments. The uncertainties regarding the continuity of interest payments and management fees from Gol to Abra increase Abra’s credit risk and could lead to liquidity squeezes, which led us to downgrade Abra’s ratings to Caa3 from Caa1.
At the end of January 2024, Abra had $86 million in cash. Abra’s main source of cash relates to the cash payments from Gol’s secured notes due 2028, and management fees from Gol and Avianca Group International Limited (B2 stable), which provides coverage for the cash interest payment at Abra. We estimate that Abra’s sources of cash excluding the payments from Gol cover its cash interest expense by only 0.4x-0.5x, compared with 1.5x-2x with Gol’s interest payments and management fees. Abra’s main cash outflows relate to its notes interest payments ($60 million-$70 million per year) and annual expenses at the holding level of approximately $20 million per year. With this liquidity profile, Abra could absorb up to two years with no cash inflow from Gol before consuming all of its cash position and potentially entering into a debt restructure with its own creditors.
Gol secured $950 million in a debtor-in-possession (DIP) financing to continue operating during the reorganization process, granted by creditors of Abra. The DIP could lead to continued interest payments for Abra, however the final decision is subject to court hearings as part of Gol’s reorganization process. Before Gol filed for Chapter 11, Abra signed a forbearance agreement with its creditors to avoid the exercise of the rights and remedies with respect to specified defaults as a result of Gol’s filing.
Under Chapter 11, Gol will continue renewing its fleet, returning older aircraft that are grounded and receiving new-generation aircraft. The airline will maintain the timetable to receive new aircraft that were delayed in 2023 and ones that are scheduled for delivery in 2024.
Out of the eight aircraft lease ABS that we have rated since 2021, five have exposure to aircraft1 leased to Gol. These transactions benefit from lessee diversity, with exposure to Gol in these transactions ranging from approximately 2% to 22% of the most recently reported adjusted base value. Certain ABS deals may experience some fluctuations in rent cash flow collections in the coming months as Gol undergoes reorganization. However, liquidity facilities, performance triggers, and deleveraging among other structural features, will help shield senior bondholders from risk. In the event that lease negotiations fail2, deals will likely lose rent cash flow related to the Gol lease until lessors can repossess and re-lease or sell these aircraft. Given the current aircraft shortage in the market, lessors could potentially release these aircraft at favorable lease rates or sell for a premium with shorter downtime.
For Avianca, the potential contagion channels of Gol’s filing for Chapter 11 are contained. Avianca’s post-bankruptcy exit financing contains restrictive covenants, including, among others, debt incurrence limitations, limitations on restricted payments and investments and limitations on related party transactions. Pursuant to the covenants, Avianca’s ability to distribute cash or lend funds to Abra would be very limited. These restrictions serve to insulate Avianca from the financial distress of Gol or any contagion effect on Abra.
The Chapter 11 filing is a result of an accumulated cash burn and high financial leverage for Gol derived from high interest rates, the grounding of the Boeing MAX aircraft in 2019 and the pandemic, which led to weakening liquidity. We downgraded Gol’s ratings to Ca to reflect our view of some prospect for recovery for existing secured and unsecured creditors and will subsequently withdraw the rating. With the Chapter 11, Gol expects to strengthen its financial position, while maintaining the current size of its operations.
Credit Outlook: 1 February 2024. Pg. 6 Moody’s Investors Service
Peru, February 8, 2022 – Compania de Minas Buenaventura S.A.A. (Buenaventura, B1 stable) announced that it reached an agreement to sell its 43.65% stake in Minera Yanacocha S.R.L (Yanacocha) to Newmont Corporation (Baa1 stable) for $300 million net of payments and additional $100 million contingent to increases in gold and copper prices. Additionally, Newmont will transfer its ownership interest in La Zanja and contribute $45 million related to closure costs.
The transaction is credit positive because the company will use net proceeds, together with $100 million in dividends received from its 19.58% stake in Sociedad Minera Cerro Verde S.A.A. (Cerro Verde), to prepay its $275 million syndicated facility and fund growth capex.
In July 2021, Buenaventura issued $550 million in senior unsecured notes that were used to pay in full the Peruvian Tax Authority (SUNAT’s) tax claim. The additional debt combined with operational disruptions pushed Moody’s adjusted leverage to a 8.9 times peak in December 2020. Upon the announced debt repayment, we expect leverage to be around 4.7 times by 2022, which is still high for the ratings category. The company has publicly committed to reduce leverage and the B1 rating incorporates our expectation that Buenaventura will continue its deleveraging trend through a combination of operational improvements during 2022 and debt reduction.
The growth capex, estimated between $80 million and $120 million in 2022, will be used to fund San Gabriel project, although it would start contributing significant EBITDA from only 2023-24 onward. San Gabriel has an estimated annual production capacity of 120,000-150,000 ounces of gold. Buenaventura has faced a number of operational challenges and disruptions including lower ore grades, lower recoveries, limited availability of transportation vehicles and reduced workforce because of the pandemic. Additionally, in September 2021, Buenaventura announced that the local community surrounding the Uchucchacua mine started a strike. Uchucchacua generates negative EBITDA and free cash flow and we expect this to be the case through 2023.
Upon debt repayment the company’s capital structure will comprise the $550 million senior unsecured bond due in 2026 and other bank facilities totaling $813 million, from $1,109 million at year-end 2021. Buenaventura’s liquidity will be adequate, supported by the company’s around $288 million in cash as of September 2021, net proceeds from the proposed transaction and dividends from its affiliate, Cerro Verde. These funds positively compare with the company’s expected negative free cash flow at around $30 million which includes $250 million of total capex, no dividends and no material debt amortization.
Headquartered in Lima, Peru, Buenaventura is a mining company engaged in the exploration, mining and processing of gold, silver, copper, zinc and lead in Peru. Following this transaction, Buenaventura has five wholly owned and two majority-owned mines, as well as a 19.58% stake in Cerro Verde, one of the world’s largest copper mines and a 40.1% stake in Coimolache, which owns the Tantahuatay gold mine that Buenaventura operates. Buenaventura is controlled by the Benavides family (27% of the voting stock), and is listed on the New York Stock Exchange and the Lima Stock Exchange. For the 12 months that ended September 2021, the company generated $883 million in revenue and Moody’s adjusted leverage was 5.4x.
Credit Outlook: 14 February 2022. Pg. 6 Moody’s Investors Service
Spain, September 15, 2021 – The Spanish government published Royal Decree Law 17/2021, implementing measures to limit the effect of rising wholesale gas prices on consumers’ electricity and gas tariffs. The law follows a government proposal, currently being debated in parliament, to claw back incremental profits that owners of Spanish nuclear, large hydro and large renewables plants would have gained from higher carbon prices under a no-subsidy regime commissioned before October 2003.1
The new law is credit negative for Spain’s unregulated electricity and gas utilities because it introduces a revenue deduction that will weaken utilities’ credit metrics, heightens political risk and diminishes the opportunities for arbitrage for hydropower generation.
Based on current spot gas prices, the new law will incrementally weaken the financial profiles of Enel SpA (Baa1 stable), Iberdrola SA (Baa1 stable), Naturgy Energy Group SA (Baa2 stable) and EDP – Energias de Portual SA (EDP, Baa3 positive). Their ratios of funds from operations (FFO) to net debt would fall by 20-130 basis points, all else equal, in 2021-22 (see exhibit). Endesa SA (Baa1 stable), whose credit quality benefits from being 70%-owned by Enel, would record a 550-600 basis point decline in its FFO/net debt ratio, given Endesa’s larger proportion of earnings coming from Spanish nuclear and hydro generation.
Sources: Moody’s Financial Metrics and Moody’s Investors Service
The new tax does not take into account the level of hedging already implemented by Spanish utilities for their 2021-22 output at power price levels reflecting gas prices below current levels. Assuming the Spanish government does not extend the tax beyond March 2022, the effect of the clawback on FFO/net debt ratios would be more muted in 2023 at 10-40 basis points (excluding Endesa, for which the effect would be closer to 300-350 basis points). In addition, the negative effect of the tax could be more than offset by higher realized power prices in the generation business.
The law is also credit negative for owners of Spanish nuclear, hydro and large merchant renewables plants because there is a risk that the government will extend the tax if gas prices do not come down materially by March 2022. Additionally, the limit on the increase in TUR will have a modestly negative effect on Naturgy’s debt position, and to a lesser extent Endesa’s, because of a resulting working capital deterioration. Sales and EBITDA should continue to reflect a full cost pass-through, however.
Spain’s new measures include a revenue deduction on nuclear, large hydro and renewables plants not benefiting from a specific remuneration scheme. Indexed on Iberian spot gas prices from 16 September 2021 until 31 March 2022, affected power plants will be taxed under a formula reflecting Iberian spot gas prices as long as spot gas prices exceed €20 per megawatt-hour (MWh). Under that formula, 90% of the estimated upside in wholesale power prices attributed to the wholesale gas price increase will be taxed. The government estimates that the total tax collection, which will be used to reduce consumers’ electricity bills, will equal €2.6 billion.
The measure includes a cap on the increase in the protected gas tariff (TUR), limiting the fourth-quarter 2021 TUR to 4.4% instead of 28% if the TUR were to reflect current wholesale gas prices. The law also limits to 15% the next planned TUR tariff revision for the first quarter of 2022. The Spanish government also plans to implement forced auctions, whereby major power generators must auction some baseload power generation in the forward markets to improve liquidity and open the market to new suppliers. However, it is unclear how utilities that have sold in advance their power plants’ output can offer capacity in an auction without breaking existing contracts.
The law also imposes changes to Spain’s water law, implementing monthly discharges for hydropower plants and minimum volumes of water stored in reservoirs each month. This is to avoid unwanted environmental effects on reservoirs’ plant and wildlife. These changes will reduce arbitrage opportunities for hydropower plant operators and likely trim their profitability.
The Spanish government’s new law illustrates the increasing risks of political intervention related to affordability faced by unregulated utilities, and comes at a time when wholesale power and gas prices are rising significantly. Other EU countries are likely watching the Spanish example closely and may consider similar measures given the electricity sector was prone to political intervention 10-15 years ago, when power prices last spiked. Other countries’ inclination to follow Spain’s example will also reflect each government’s desire to signal energy policy stability and predictability in the context of material investments required to decarbonize Europe’s electricity systems.
Endnotes:
1See Proposed profit clawback on nuclear and hydro is credit negative, impact modest, 4 June 2021.
Credit Outlook: 20 September 2021. Pg. 8 Moody’s Investors Service
Panama, September 15, 2021 – Cable & Wireless Communications Limited (C&W, Ba3 negative) and America Movil, S.A.B. de C.V. (AMX, A3 negative) announced plans for AMX to sell its Claro Panama S.A. unit to C&W for $200 million. This transaction is positive for all participants, including the three remaining telecom competitors in Panama – C&W, Cable Onda, S.A. (Ba2 stable) and Digicel Group Holdings Limited (Caa2 stable) – because the deal would take AMX out of the Panama market, and allow a more rational competition.
The sale would also allow each competitor to hold more 5G cellular capacity, although a 5G auction date has yet to be set. AMX’s sale of Claro Panama would consolidate C&W as one of the largest operators in Panama.
The transaction has no material effect on the operators’ credit metrics, but it is credit positive for C&W, helping the company to consolidate its competitive position in Panama, C&W’s main market. C&W will generate 27% of its revenue in Panama, up from 22% today, and the new assets will represent around 6% of C&W’s consolidated revenue and around 4.4% of its EBITDA, as per our own estimates.
C&W plans to finance the acquisition using incremental borrowings and C&W own cash, which totaled $534 million as of June 2021. While the additional debt won’t be material, C&W’s debt/EBITDA ratio of 5.3x as of June 2021, including our standard adjustments, is high for the Ba3 rating category. We expect the company it to gradually return to pre-pandemic levels in 2022-23, although risks remain high.
The transaction will give C&W an improved market position in Panama with roughly half of the market share. We expect that the consolidated company will generate an EBITDA margin in the high-30 percent range, improving as it extracts synergies and improves its leverage.
Buying Claro Panama effectively gives C&W 760,000 more subscribers in Panama, on top of its roughly 1.6 million only in Panama, and 3.3 million subscribers, on a consolidated basis, as of June 2021.
Increasing competition since 2018 and later the coronavirus pandemic, have hampered C&W’s performance in recent years, costing the company some of its prepaid subscribers and reducing its average monthly revenue from subscriptions. A new marketing campaign in 2019 and continued upgrades to its network helped C&W’s curb its subscriber losses. But Panama’s restrictions on movement in 2020 because of the pandemic, which the government relaxed throughout the year but then reinstated in the first quarter of 2021, hurt C&W’s average revenue per user and its EBITDA. Those results came despite the company’s efforts to contain expenses and its addition of 61,100 mobile subscribers in the first quarters of 2021.
The transaction also benefits AMX, giving the Mexican telecom conglomerate $200 million that it plans to use to repay debt and further advance toward its net leverage ratio target of 1.50x from 1.64x as of June 2021. Claro Panama currently represents less than 1% of AMX’s consolidated revenue. AMX will retain the Claro Panama towers but plans to spin them off, along with most of its roughly 35,000 towers in Latin America, probably by early 2022.
C&W’s purchase of Claro Panama follows a pattern of telecom consolidation in Panama. In 2019 Cable Onda acquired Telefonica Moviles Panama, then the country’s mobile market leader. Panama fast-growing economy, with one of the largest growth rates per capita in the region, offers telecom operators there good opportunities for growth in a very competitive market.
Credit Outlook: 20 September 2021. Pg. 6 Moody’s Investors Service
Atlantic Investors Service 
You must be logged in to post a comment.