Author: AtlanticIS

Countries

Argentina Local Currency Ratings Lowered To ‘SD’ On Distressed Debt Exchange; ‘CCC-/C’ Foreign Currency Ratings Affirmed

AtlanticIS

Argentina, January 20, 2020 – The administration of President Alberto Fernandez launched and concluded an exchange on its peso-denominated short-term debt on Jan. 20, 2020. This followed the Dec. 19, 2019, unilateral extension (until August 2020) of U.S. dollar-denominated short-term paper held by private-sector market participants. We classify this peso-debt exchange as a distressed exchange, which constitutes a default under our criteria, and we are lowering our local currency sovereign credit ratings on Argentina to ‘SD/SD’ from ‘CCC-/C’. We are also affirming our long-term foreign currency sovereign credit rating at ‘CCC-‘, and the outlook remains negative. The negative outlook reflects prospects for a further restructuring of sovereign debt as the administration holds dialogues with bondholders, financial intermediaries, and official creditors on its policy priorities, economic strategy, and re-profiling plans.

Rating Action: On Jan. 21, 2020, S&P Global Ratings lowered its local currency sovereign credit ratings on Argentina to ‘SD/SD’ from ‘CCC-/C’ (our criteria do not distinguish between short term and long term when there is a default). We affirmed the foreign currency sovereign credit ratings at ‘CCC-/C’. The outlook on the long-term foreign currency sovereign credit rating remains negative. We also took the following rating actions:

  • We lowered the long-term local currency-denominated issue ratings to ‘CC’ from ‘CCC-‘;
  • We affirmed the long-term foreign currency issue ratings at ‘CCC-‘;
  • We affirmed our ‘B-‘ transfer and convertibility assessment on Argentina; and
  • We lowered our national scale rating on Argentina to ‘SD’ from ‘raCCC-‘.

Outlook: The negative outlook on the long-term foreign currency rating reflects the downside risks to timely and full payment of debt over the short term amid stressed economic and financial market dynamics. The sovereign’s access to liquidity is likely to remain constrained as the Fernandez Administration outlines its economic policies while engaging in dialogue with bondholders, bankers, and the International Monetary Fund. We could lower the foreign currency ratings if the government finalizes terms with bondholders for a potential debt restructuring that is characterized as a distressed debt exchange based on our methodology. Such a restructuring could entail an extension of maturities, which will not be compensated by the issuer, or a reduction in the face value of debt. Additionally, we could lower the ratings if economic and financial stresses further threaten timely debt service or the sovereign misses a debt payment. We could raise the ratings following implementation of a debt restructuring if policy signals and execution start to successfully turn around or stabilize private-sector confidence, market turbulence subsides, and the government regains access to market financing.

S&P Global Ratings, January 21, 2020

Countries

Falling consumer confidence is credit negative for Spanish ABS

AtlanticIS

Spain, January 7, 2020 – Centro de Investigaciones Sociológicas (Center for Sociological Research, or CIS) reported that Spain’s consumer confidence index had plunged to 77.7 in December 2019, 13 points below the levels in December 2018 and the lowest level since 2013. The significant decline in consumer confidence, consistent with other negative data reported in recent days, is credit negative for asset-backed securitisations (ABS) collateralised by Spanish consumer loans. Consumer confidence data provide a forward indicator that asset risks will increase and consequently weaken the performance of securitised loans. Falling consumer confidence somewhat correlates to weaker future performance in consumer credit, as the exhibit shows. Indeed, consumer confidence plunged in mid-2007 before Spanish consumer nonperforming loan (NPL) ratios surged.

The sharp decrease in consumer confidence during the second half of 2019 reflects an increasing concern among Spanish consumers about the national economy and employment. We expect that borrowers will face more challenges repaying their consumer loans because of a gradual moderation in the growth performance of the Spanish economy: we expect GDP growth of 1.8% for 2020 compared to 3% growth in 2016-17. The decline in consumer confidence is consistent with other negative data reported in recent days, including a 4.8% drop in 2019 car registrations, according to data from Spain’s associations of auto manufactures (Anfac), dealers (Faconauto) and vendors (Ganvam). The drop is the first in Spain since 2012.
Adding to these challenges is that consumer lending continues rising despite indications of economic deceleration. The overall stock of household debt in 2019 was relatively flat compared with 2018, but there were different trends when comparing secured lending and unsecured lending. According to the Bank of Spain, the stock of consumer loans in 2019 increased 4% from a year earlier (November 2019 data), doubling GDP growth, while the stock of mortgage debt fell 1% over the same period, suggesting the mortgage market is adapting to a decelerating economy.
The combination of the decline in consumer confidence and an increase in unsecured debt will continue to put pressure on Spanish ABS. However, the effect will not be the same for all types of consumer loans. We expect that auto-loan ABS will perform better owing to these borrowers’ higher quality. But consumer loans with no specific purpose are often used by borrowers facing financial troubles in household economies, and they will likely be most negatively affected. Still, the performance of Spanish consumer-loan ABS is better than the national average of consumer NPL given the stronger eligibility criteria applied to Spanish securitisations.

Credit Outlook: 13 January 2020. Pg. 19
Moodys

Banking

Banco Sabadell sells its asset management unit, a credit positive

AtlanticIS

Spain, January 21, 2020 – Banco Sabadell, S.A. (Baa2/Baa3 stable, ba2) announced that it had reached an agreement to sell its 100% interest in asset management unit Sabadell Asset Management, S.A. S.G.I.I.C., Sociedad Unipersonal (SabAM), to Amundi Asset Management for €430 million. As part of the agreement, Banco Sabadell and Amundi entered a 10-year partnership. The transaction is credit positive for Banco Sabadell because it will generate a capital gain of €351 million and will improve the bank’s regulatory capital metrics.
Upon the closing of the transaction, which the parties expect will occur in third-quarter 2020, Banco Sabadell estimates that its fully loaded Common Equity Tier 1 (CET1) ratio will increase 36 basis points (bps) from the pro forma fully loaded CET 1 ratio of 11.8% reported at the end of September 2019. Banco Sabadell expects an additional seven-basis-point increase related to specific guarantees in effect over the length of the distribution agreement that will be accrued proportionally over the next 10 years. This disposal is concurrent with Banco Sabadell’s strategy of divesting noncore assets and raising its fully loaded CET1 ratio to around 12%. (see exhibit)

The sale of this unit will have a relatively modest effect on the group’s profitability. Banco Sabadell disclosed that SabAM had an estimated net profit of €34 million as of year-end 2019, including, among other things, €65 million of net fee and commission income and €17 million of operating expenses. SabAM’s net profit constitutes around 4% of the bank’s annualized net income as of the end of September 2019 (net of the €135 million extraordinary gains from the Solvia disposal).

In the current environment of low interest rates and decelerating economic growth in Spain, the loss of this revenue source risks putting an additional strain on the bank’s earnings generation capacity. The sale of SabAM limits the potential growth of fee and commission income that could help ongoing challenges to Banco Sabadell’s net interest income. However, these downside risks should be broadly offset by cost savings derived from the de-risking of the bank’s balance sheet and the cost-efficiency plan, while the bank expects its subsidiary TSB Bank plc (Baa2 negative, baa2) to generate profit starting in 2020. Banco Sabadell also expects to benefit from increased distribution fees as a result of the partnership with Amundi.

Credit Outlook: 27 January 2020. Pg. 26
Moodys

Infrastructure

Deferral of Argentina’s gas tariff increase is credit negative for regulated gas utilities

AtlanticIS

Argentina, November 25, 2019 – Argentina’s Energy Secretariat announced an additional deferral on a tariff increase for gas distribution and transport margins that was to take effect in October 2019. The deferral is credit negative for regulated gas utilities because it will continue to erode their revenue amid rising costs related to Argentina’s very high inflation rates. Additionally, the deferral adds to the uncertainty about the future consistency of Argentina’s regulatory framework.

According to an integral tariff review (RTI), the adjustment, which was postponed until 1 February 2020, corresponds to the six-month period that ended August 2019 and should follow Argentina’s wholesale price index (IPIM) at almost 30% (see Exhibit 1).

The tariff increase corresponding to February/August 2018 follows the average between IPIM, construction cost index (ICC) and salary variation index (IVS), in order to include in the adjustment variations related to activity levels, salaries and retirement plans among others.
Sources: INDEC and Moody’s Investors Service

Argentina’s regulatory framework and the sufficiency of future regulated rates has become more uncertain in the context of the ongoing government transition and the arrival of a new administration with yet unclear policy orientation in the sector. While most companies have low leverage and other strong credit metrics, rising costs amid very high inflation rates, constrained market access and tight liquidity increases the risk that they will take measures such as delaying payments to suppliers to continue operations.

The regulatory environment for utilities in Argentina historically has been evolving.(1) During the 12 years under Argentina’s previous leadership, regulated tariffs remained almost frozen despite high inflation and utilities’ increased costs. As a result, utilities did not have enough cash to spend on capital investments and the quality of service deteriorated significantly. By passing the RTI the current administration ended with the 12 year tariff freeze, a credit positive; however, the government postponed the second-half 2019 tariff adjustment because of increased consumer criticism and political opposition.

If there were to be no adjustment to utilities’ tariffs, the improvements since RTI’s implementation would reverse and negatively affect their revenue. Moreover, under the RTI, companies committed to a five-year mandatory investment plan to expand coverage and improve their service quality and standards. Without the additional funds derived from the now-deferred tariff, utilities would find it difficult to fulfill these commitments.(2) Exhibit 2 shows the level of investments in years one and two of the five-year plan that companies were able to achieve because of the RTI plan that began in 2017.

Endnotes
1. See Argentine legislation to revoke tariff increase is credit negative for regulated utilities, 4 June 2018.
2. Along with the tariff increase deferral, the ministry enables gas utilities to ask for a reduction of their investment requirements by an amount equal to the effect of the tariff adjustment deferral

Credit Outlook: 2 December 2019. Pg. 14
Moodys

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