Weak economic conditions are expected to spur more downgrades than upgrades for Brazilian corporates through the first six months of 2014, according to a new Fitch Ratings report.
Since the beginning of 2013, downgrades have outpaced upgrades by a ratio of 1.2x. Sixteen percent of the 108 Brazilian corporates rated by Fitch have a Rating Outlook of Negative, as opposed to six percent with a Rating Outlook of Positive.
“With Brazilian GDP at 1.5 percent during the second quarter, uncertainties abound about the ability of the Brazilian economy to grow faster after the Central Bank of Brazil’s four rates hikes,” said Debora Jalles, Director in Fitch’s Latin America Group. “While these measures may tame high inflation and bolster the battered Brazilian real, they are likely to further erode consumer demand and put additional pressure on operating margins and profitability.”
Leverage has risen since the start of the global economic crisis. As of Dec. 31, 2012, the median total adjusted leverage ratio for Brazilian corporates was 4.2x, while the median net leverage ratio was 2.9x. These measures compare unfavorably with 2008 when they were 2.9x and 2.2x, respectively.
Negative free cash flow has grown significantly in the last two years due to high capex levels, which are not expected to decline in the future. With dividend payouts minimal for most, only a few corporates can boost liquidity by lowering dividend outflows.
Robust liquidity is a bright spot with the median cash/short-term debt ratio 1.4x as of Dec. 31, 2012.
Default risk is low despite weak capital markets. Fitch does not foresee defaults approaching 2008 levels in the next 12 months due to low exposure to toxic derivative instruments, and relatively high cash balances in the riskiest sectors. The airlines, sugar and ethanol, and protein industries are among the riskiest.