Author: AtlanticIS

Infrastructure

Repsol’s new oil and gas price scenario leads to €4.8 billion post-tax impairment in 2019

AtlanticIS

Spain, December 2, 2019 – Repsol S.A. (Baa1 stable) announced that it aims to achieve net zero emissions by 2050. It also said that in this context it assumes a new oil and gas price scenario consistent with the Paris Agreement’s climate goals, which is lower than the company’s previous scenario, in particular for the gas prices that are currently under pressure. The updated price scenario implies a lower value of some assets, leading to a post-tax impairment charge of €4.8 billion, which will be reflected in 2019 results. The impairment is credit negative.

The value of the impairment equals roughly 8% of Repsol’s total assets and around 15% of its total equity as of the end of September 2019. Pro forma for the impairment, Repsol’s total debt/capital ratio (as adjusted by Moody’s), which is one of the main ratios of our global integrated oil and gas rating methodology, deteriorates by around 4% from roughly 35% as of the end of September 2019. The ratio remains broadly in line with the current rating.

However, the impairment comes at a time when Repsol’s key credit metrics have deteriorated from fairly healthy levels in 2018 in a comparatively weaker pricing environment in 2019. For instance, the company’s Moody’s-adjusted retained cash flow (RCF)/net debt ratio has declined to low 20s in percentage terms for the 12 months to September 2019 from around 30% in 2018. We expect an improvement of the ratio back toward 30% in the next 12-18 months, supported by growth in earnings in the upstream business, but also owing to potential benefits in the downstream business coming from the IMO 2020 regulation, for which the company is well positioned. We forecast the improvement despite the roughly €1 billion extraordinary share buyback for 2020 announced in July this year, which Repsol justified by its expectation of better cash flow generation compared to its original business plan for 2018-2020.

Notwithstanding the impairment we note positively the company’s strengthened commitment towards reducing its carbon footprint, which is becoming an increasingly important credit consideration. With its new 2050 carbon neutrality objective, Repsol also sets new goals for the reduction of its carbon intensity indicator from a 2016 baseline: 10% by 2025, 20% by 2030 and 40% by 2040. Additionally, it defines concrete steps for all of its businesses to achieve those goals, which, among others, include biofuels, recycling, natural carbon sinks and low-carbon energy.

Specifically, low-carbon energy is playing an increasingly important role for Repsol. Within its current business plan for 2018-2020 Repsol plans to invest €11 billion as a core portfolio capital spending during those three years. On top of that, the company budgets €4 billion during the same period to expand its downstream operations (roughly €1.5 billion) and develop its low-carbon energy business (roughly €2.5 billion). With the new 2050 carbon neutrality objective, Repsol also increases its target for low-carbon electricity generation capacity by 3 GW to 7.5 GW by 2025, and will begin to expand into new markets to become a leading international player in renewable energies. Repsol currently has almost 3 GW in operation and around 1.1 GW under development.

Credit Outlook: 9 December 2019. Pg. 4
Moodys

Corporates

LATAM’s partnership with Delta Air Lines is credit positive

AtlanticIS

Chile, September 27, 2019 – Delta Air Lines, Inc. (Baa3 stable) and LATAM Airlines Group S.A. (LATAM, Ba3 stable) announced that they had entered a strategic partnership in which Delta will acquire 20% of LATAM’s shares for $1.9 billion through a secondary public tender offer for $16 per share. The partnership also includes Delta investing $350 million in LATAM to support the creation of the partnership. Additionally, Delta will purchase four Airbus A350-900 aircraft that LATAM operates and assume LATAM’s purchase commitments for 10 A350s scheduled for delivery between 2020 and 2025. Delta will be represented on LATAM’s board of directors as one of the company’s largest shareholders.
We view the announced partnership as credit positive for LATAM because it will create a complementary route connecting the Americas that, according to the airlines, will be the strongest airline route network between North and South America. The partnership will also provide strategic, operational and financial benefits for LATAM.
The $350 million investment will not increase LATAM’s liquidity because it will largely be used to create the partnership. But the acquisition of the four A350-900 aircraft and the assumption of the commitments for the 10 A350s scheduled for delivery will improve LATAM’s free cash flow generation and reduce its forecasted debt by over $2 billion by 2025, which is around 20% of the company’s gross indebtedness that totaled $10.6 billion at the end of June 2019. There will be no immediate effect on the company’s credit metrics because the commitments are scheduled to be delivered between 2020 and 2025.
LATAM will withdraw from the oneworld global airline alliance. Presumably, a large portion of the $350 million investment in the partnership will fund LATAM’s oneworld exit. American Airlines, Inc. (Ba3 stable), a oneworld member, in a 26 September press release, noted that the Chilean Supreme Court had ruled against an application for American and LATAM’s to form a joint business arrangement, which influenced the decision for American and LATAM to part ways.
Delta’s $1.9 billion purchase price for the equity stake values LATAM’s equity at $9.5 billion, which compares with a pre-announcement market cap of about $5.5 billion, or a per share price of about $9.00. The tender offer will be at $16.00 per share, an almost 80% premium to LATAM’s average share price over the past 30 days.
Delta and LATAM’s transactions are subject to regulatory approvals, and regulatory risk remains given the Chilean Supreme Court’s ruling against the proposed joint business arrangement between American and LATAM. However, in the case of Delta and LATAM, there is minimal overlap today between the airlines’ capacity, which was not the case with LATAM and American.
LATAM is a Chile-based airline holding company formed by the business combination of LAN Airlines S.A. of Chile and TAM S.A. of Brazil in June 2012. LATAM is the largest airline group in South America, with a local presence for domestic passenger services in Brazil, Chile, Peru, Ecuador, Argentina and Colombia. The company also provides intra-regional and international passenger services, and has a cargo operation using the belly space on passenger flights and dedicated freighter service. For the 12 months that ended June 2019, LATAM generated $9.75 billion in net revenue and carried 71.1 million passengers and 900,000 tons of cargo.
With an industry-leading global network, Delta and the Delta Connection carriers offer service to more than 300 destinations in more than 50 countries on six continents. Headquartered in Atlanta, Delta had over 88,000 full-time equivalent employees and operated a fleet of more than 1,200 aircraft in 2018. The company reported $44.4 billion of revenue in 2018.

Credit Outlook: 30 September. Pg. 4
Moodys

Banking

Banco de Crédito e Inversiones’ continued appetite for real estate exposure is credit negative

AtlanticIS

Chile, September 27, 2019 – Chile-based Banco de Crédito e Inversiones (Bci, A2/A2 stable, baa11) announced that its South Florida-based subsidiary, City National Bank of Florida (CNB), plans to acquire Executive National Bank, a small Miami bank focused on real estate financing. The planned acquisition is credit negative for Bci because it reflects the bank’s willingness to further increase its exposure to the real estate market in Florida while maintaining a moderate ratio of tangible common equity (TCE) to risk weighted assets (RWA).
This acquisition follows the bank’s 2018 acquisitions of another Miami-based bank, TotalBank, and five of Walmart’s Chilean financial services subsidiaries. It also comes amid Bci’s ongoing effort to place itself in the forefront of Chile’s shifting credit card acquiring business, initiatives, which combined, risk straining the bank’s management.
Although Executive National Bank’s $455 million assets equal about 3% of CNB’s $15.1 billion of assets, it is CNB’s second acquisition in Miami in as many years and follows an aggressive organic expansion of that franchise. Bci’s 2015 acquisition of CNB increased Bci’s exposure to South Florida real estate to 120% of its TCE (see Exhibit 1). Bci’s South Florida real estate exposure has continued to increase since then as a result of organic growth of around 20% between 2015 and 2018, and Bci’s acquisition of TotalBank (about $3 billion in assets), which is also focused on real estate financing in the region.

Slower loan growth to more sustainable levels, would alleviate pressure building in Bci’s capitalization stemming from continued aggressive expansion in Florida real estate, a market that has historically proven to be unstable. We estimate that Bci’s South Florida real estate exposure will now equal approximately 170% of TCE, up from 116% in 2017.
Following its various acquisitions, Bci has committed to maintaining a stable Tier 1 ratio of at least 10%. However, our estimated ratio of Bci’s TCE to adjusted RWA of 9.5% as of June 2019 is moderate compared with the 15.1% median for global banks with similar credit risk. It is also below the 10.3% average for Banco Santander-Chile (A1/A1 stable, a3) and Banco de Chile (A1/A1 stable, a3), Bci’s main competitors in Chile.
Although CNB will acquire Executive National Bank for $75 million in a cash transaction, the acquisition will reduce Bci’s own TCE-to- RWA ratio by 10-12 basis points, which will further distance the bank’s capitalization from our expectation of a 10% capital ratio as a result of earnings retention and growth. Nevertheless, we do not expect a major deterioration of Bci’s other consolidated key metrics, given Executive National Bank’s adequate fundamentals (see Exhibit 2). Moreover, CNB has exhibited conservative underwriting standards despite its high growth. CNB’s loan-to-value ratio as of June averaged a low 52%. Over the next year, CNB also plans to moderate its loan growth to about 10%, which will partly mitigate asset risks associated with its higher exposure to real estate sector.

Bci’s management is also busy on other fronts. The bank is undergoing a major venture to establish itself at the forefront of the shifting payments business in Chile. In May, Bci established a 10-year joint venture with EVO Payments International, LLC (B2 negative), a payment technology and services provider, to complement the bank’s mobile payment solution MACH, which started in 2017 and provides peer-to-peer payments for over one million subscribers. Following a September 2018 ruling by the Tribunal for the Defense of Free Competition, the Chilean market is shifting from a business controlled by Transbank S.A. to one with multiple participants with increased product offerings for businesses and individuals, and more competition.
Bci also plans to jump start a new Peruvian bank, to be named Banco Bci Perú, which will begin operations following regulatory approvals in 2021 with a $60 million capital investment. In its announcement, Bci said its application for a branch license in Peru focused on commercial lending. Banco Bci Perú will cater to large Peruvian corporates and the substantial number of Chilean companies with operations in Peru. Nevertheless, Banco Bci Perú will remain small. Over the next 10 years, Banco Bci Perú will not exceed 5% of Bci’s $45.7 billion gross loans as of June 2019.

Credit Outlook: 30 September 2019. Pg. 10
Moodys

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