Latin Defaults’ Repeated Loops
As Latin America continues to garner notice for remaining outside the global economic fear epicenter, S&P issued a report showing it accounted for half the 15 emerging market defaults this year, with Brazilian bank and Belize sovereign fights now souring investor attitudes. The speculative-grade non-payment rate was 2 percent for the universe in July, and the region has a dozen ‘weakest links” with B- or lower ratings and negative outlooks with less than 40 percent of followed companies high-grade. The negative bias rose but was skewed by policy risk reflected in Argentina’s expropriation of energy company YPF. LAC has been responsible for over one-fifth of the near $350 billion in global placement through the first seven months this year, and outside Mexico the main export partners are in the Eurozone or other developing economies. According to the Institute for International Finance’s lending surveys conditions remain positive and are aided by domestic consumer demand as an available backstop which can be bolstered by government fiscal and monetary responses. Brazilian utilities have led the recent default wave, and Cemex remains a “weak link” even as creditors agreed to another refinancing after the 2009 crisis deal. Other names in that category include Jamaica’s National Commercial Bank and metal producers in Argentina and Venezuela. Latin American GDP growth will be 3.6 percent this year, twice the Caribbean’s pace. Exports often represent one-quarter of output and crude petroleum is one-tenth of sales abroad. The Eurozone was the source of 40 percent of FDI, one-third from Spain, and China has jumped to the top ranks as a commodity buyer and project sponsor. The study cites a trend toward resource nationalization in the Andean zone and elsewhere that could reduce inflows at a time when countries must again marshal “countercyclical” tools against slipping industrial indicators worldwide.
Belize’s 2029 “Superbond” went into initial default against this background as officials claimed they “could not afford” a $3 million August payment as the coupon increased from 6 percent to 8.5 percent under the 5-year old previous restructuring. The Creditor Committee, headed by Greylock Capital, expressed outrage at the par and discount exchange options offered amounting to 45 percent principal reductions for the latter after receiving assurance from the Barrow administration of its “consensual” intent. A sticking point in the negotiations is resolution of the liabilities of utilities nationalized since the original accord which are a major burden at 20 percent of GDP which may affect capacity to pay. Secondary prices dropped to the 30 cents level on the sudden hard line stance, which has also upset bondholders in the Banco Cruzeiro workout overseen by Brazil’s central bank after its June seizure. 90 percent acceptance is needed for a deposit protection fund buyback offer valued in the 45 cent range versus the 60 hedge funds envision in a court cross-claim.
