NEW YORK, Oct 9 (IFR) - Downgrades in the Brazilian corporate space will outpace upgrades in the second half of 2013 and into 2014 due to weak economic conditions, Fitch said on Wednesday.
Of the 108 Brazilian companies rated by Fitch, 16% already have a negative outlook, with rising leverage and the growth in negative free cash flow weighing particularly hard.
Just 6% of the companies have been assigned positive outlooks.
Among 20 companies with weak liquidity coverage, Fitch pointed to some vulnerable to refinancing risks.
These include utility holding Abengoa Concessoes, toll road concessionaire CRT, infrastructure names Mendes Junior and OAS, and homebuilder Trisul.
“The primary cause of this weakening is capex investments that have resulted in negative free cash flow, particularly for the construction companies,” the rating agency said.
Some 46 credits face leverage pressure due to the weakening Brazilian real, which has hurt dollar debt costs. The median total adjusted leverage ratio for Brazilian corporates hit 4.2x as of the end of 2012, up from 2.9x in 2008.
Even so, Fitch does not see leverage rising much further in a country where many corporates are controlled by conservative families or small shareholder groups focused on long-term growth.
In this space, cash flow from operations has fallen to BRL179.9bn from BRL184.3bn between 2011 and 2012.
Softer local demand, due to consumers’ limited borrowing capacity and pricing pressures for exporters suffering from weaker commodity markets, has also taken its toll.
Fitch does not foresee cash flow ratios improving in the short term as most Brazilian corporates have high capex levels as they look to remain competitive in the global marketplace.
A cut in dividend payments is also limited by local laws that require minimum dividend payments.
That said, corporate Brazil still enjoys favorable liquidity positions, with median cash/short-term debt ratios at 1.4x as of December 31 2012, according to Fitch.
Sixty percent of the companies rated by Fitch had “very strong to satisfactory liquidity” profiles at the end of last year.
While several names suffer from weak liquidity, many have sufficiently predictable cashflows to compensate for this. These include utilities CEMIG and Light, drugstore chain Pague Menos, and car rental and logistics provider Ouro Verde.