Making the grade

Corporate credit in Latin American faces downgrade but how real is the default risk?

There is cautious optimism amongst our sources in debt markets in Latin America that the region may be able to avert a full-blown debt crisis.

Revenue and cashflow growth have been falling in companies across many sectors due to pandemic-related effects and this is putting pressure on leverage ratios and in turn debt ratings. Fitch Ratings publicly stated that it is expecting the number of downgrades to sub-investment grades in Latin America this year to be multiples of 2019.

Despite this, according to our sources, most governments and companies have the reserves necessary to maintain debt repayments.

“There is no oasis right now!”

Head of Private Credit Strategies – Andean Asset Management (Peru Based).

A Peru-based Director in Debt Capital Markets for a global bank told us, “I do not believe that there is panic at the sovereign level, which is very supportive of corporate bonds. However, each industry and each company have its own sensitivity.”

The Chief Investment Officer for an Andean asset manager advises research and caution, “Investing in LatAm Corporate bonds requires active management, it would be dangerous to buy the whole asset class, because there are going to be defaults.”

The team over at UBS Wealth Management appear much more optimistic and have publicly described Latin American corporate bonds as an ‘oasis’ due to their outstanding returns even in the face of the pandemic. When we put this to local asset managers, they were dismissive, “there is no oasis at the moment,” said the Head of Private Credit strategies at a bank in Peru.

“Many investors are looking forward to 2022 as the year of recovery!”

Director, Debt Capital Markets – Global Bank (Peru Based).

Looking further out there seems to be some form of consensus of hope building that economic activity in most countries in the region should return to pre-pandemic levels in 2022. The recovery will not be even though, Brazil and Chile are already showing a faster recovery than Mexico which offered no support to the private sector. Our source in Debt Capital Markets at a global bank agreed, “Some instruments now have very attractive prices e.g. Hotels, Shopping centres but many investors are looking at 2022 as the year of recovery.”

COVID-19 hit Latin America later than in other regions and is still managing the pandemic’s impact but could attractive pricing and terms, coupled with investor appetite for yield in a low interest rate environment keep high yield bond markets moving forward in H2 2020?

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