The corporate default rate has risen in Latin America, as economic growth slows down rapidly in most of the countries across the region. According to US ratings agency Moody’s, the ‘speculative-grade issuer-weighted’ default rate for Latin American corporates increased to 4.2% for the 12 months ended in June 2015, up from 3.1% in the year-ago period.
The 4.2% rate is based on ten defaults by Moody’s-rated corporate issuers, eight of which were from Brazil, which is suffering from a recession.
China’s gradual slowdown and US monetary policy tightening are likely to keep Latin American credit conditions under pressure through 2016, says the ratings agency, adding that credit conditions across the region are likely to get “a bit worse before they get better.”
“Across sectors, four defaults originated in the Capital Industry sector including construction and engineering companies OAS SA and Sare Holding, S.A.B. de C.V., with OAS SA the largest company to default to date this year,” said John Kennedy, a Moody’s Associate Analyst.
The technology sector accounted for three defaults, all from one corporate family – NII Holdings Inc. The group, which owns Nextel-branded wireless units in Latin America, filed for Chapter 11 bankruptcy protection in New York last year after deteriorating performance caused it to miss a series of interest payments.
Moody’s expects the default rate to range from 1.9% to 4.2% by the end of the first half of 2016 in the region. In comparison, Moody’s expects the global rate to rise from 2.3% to 2.8% over the same timeframe.
While Brazil has already slipped into recession, economic growth has slowed down significantly in many other nations across the region. Over the past year, rating downgrades outpaced upgrades in Latin America. On average, Moody’s has lowered senior unsecured equivalent ratings by one-fifth of a notch in the region, compared with one-twenty-fifth of a notch globally.
Most of the companies that Moody’s downgraded are in Brazil. Waning Chinese demand for key commodities appears to be the key culprit. As the export stopped, major currencies in the region declined in value.
Now, with the US Federal Reserve moving closer to hike interest rates, investors will likely pull capital back to the US, reversing the conditions that drove investment into Latin America.
“In general, Mexico, Chile and Peru are better positioned to face the global headwinds, given their modestly improving economies. But in Brazil we foresee weak credit conditions for issuers across the board, as the country navigates through poor economic performance and political challenges. And in Argentina, the credit environment remains negative,” said the agency.