Number of downgrades or negative moves in ratings is quite small, survey by Fitch and Moody’s shows
Aeris’s plant in Pecém, Ceará: manufacturer of equipment for power generation is among companies downgraded recently — Foto: Divulgação
The interest rate hikes aimed at curbing inflation have punished consumers and companies in recent months, increasing default rates and causing lenders to impose stricter conditions to extend credit. This more negative scenario, however, has had little impact on the credit ratings of most companies.
The number of downgrades or negative moves in companies’ ratings has been quite small, a survey by credit rating agencies Fitch and Moody’s shows. Fitch downgraded five companies in the last two years – the period when the Brazilian Central Bank conducted the monetary tightening cycle – including four in 2021 (Eldorado, Andrade Gutierrez Engenharia, General Shopping and USJ) and only one this year (Hidrovias do Brasil), considering the global scale assessment of the debt issued by non-financial companies in the Brazilian market.
In addition, nine companies were downgraded according to the local scale, including five in 2021 (Restoque, Smartfit, Anima, AES Tietê and Inbrands) and four this year (Aeris, Le Buscuit, Restoque and Espaçolaser).
For comparison purposes, between 2015 and 2016, the period in which Brazil’s key interest rate Selic was raised to 14% per year, the number of downgrades totaled 49 under the global scale credit rating, and 94 by the local scale rating. In all cases, Fitch excludes rating actions that followed variations in sovereign credit ratings, like actions driven by the change in Brazil’s risk rating.
Moody’s, on the other hand, analyzed the rating actions related to the debt of Brazilian non-financial companies issued abroad. And found that, between 2021 and 2022, there were 5 downgrades or outlook changes to negative, compared with 154 between 2015 and 2016. In this case, the agency also accounts for changes caused by sovereign rating downgrades.
Ricardo Carvalho, the managing director of Fitch Ratings, sees a historical correlation between interest rates and companies’ risk ratings. But in this cycle, although the Selic has returned to levels close to those seen between 2015 and 2016, a record period in terms of downgrades, the impact is very low. This can be explained mainly by the difference in the prospective scenarios that companies work with today and those envisioned seven years ago. “The business environment in 2015 and 2016 was very hostile, similar to what companies experienced in 2020, when the pandemic hit,” he said. “The difference is that, at that time, companies incorporated a scenario of a continuous cash generation cycle, which was dashed, and had to deal with an intense decline in activity indicators and rising interest rates.”
As a result, companies started 2015 more leveraged, with plans for a lot of capital expenditure based on a scenario of economic growth, Mr. Carvalho said. The country’s economic and political crisis – a backdrop that included the now questioned anti-corruption task force Car Wash, the country’s loss of investment grade, and the consequent impeachment of then-president Dilma Rousseff – dashed expectations and hurt companies in a more generalized way, the executive said. Rising interest rates, therefore, had a much more perverse effect on the health of companies.
Today, companies operate under a sluggish growth perspective, which translates into more modest investment plans and, consequently, lower leverage ratios. “Cash generation is expected to recover gradually. Nobody expects a fabulous recovery,” he said.
The companies’ leverage ratios, which went through a period of more intense adjustments during the pandemic, are also more conservative. Credit ratings already consider the current condition of these earnings reports, which reduces the need for rating changes.
But this does not mean that companies are doing great, Mr. Carvalho said. “We don’t have an investment cycle today, companies have idle capacity, and many have yet to recover the level of demand seen in 2019, especially those that depend on domestic demand,” he said. “We are far from a favorable environment in Brazil.”
Interest rates are not the main factor influencing the rating of companies, but it is still possible to see a direct correlation between the Selic and rating actions, said Marianna Waltz, managing director of Moody’s. After all, high interest rates and the prospect of sluggish GDP growth impact companies’ EBITDA and cash generation. “Most will generate less EBITDA this year,” she said. On the other hand, companies face the cycle of high interest rates with stronger results and better leverage ratios. This is because these companies made a strong adjustment during the pandemic, making them leaner and more liquid. “All the companies had to make very severe adjustments, restructured their balance sheets, debt, and headcount,” she said. “So we don’t expect negative changes in the ratings.”
The fact that Brazil has moved first to raise interest rates and that companies are well positioned greatly reduces the risk of default among companies, Ms. Waltz said. According to her, Moody’s expected default measure for Latin American companies, excluding Argentina, is currently at 1.2%, which suggests a risk of default within the group of companies covered by the agency. In March, the index was 2.2%. Given that Brazil hosts 100 of the 150 companies analyzed, it is possible to say that the situation of local companies has great weight in the indicator. The global index is much higher, of 3.7%.
Mr. Carvalho, with Fitch, recalled that the corporate debt market is much stronger and more active than seven years ago, which contributes to mitigating the impact of rising interest rates on companies’ risk. As a result, companies had access to liquidity and were able to extend the term of their debts, even in a contractionary interest rate scenario. “We thought that liquidity would shrink as of June, but this did not happen,” he said. As a result, the volume of debentures issued this year, up to July, already totals R$158 billion.
This large debt offer will mean, over time, higher leverage ratios, but this will still happen very gradually given the low investment scenario. According to the executive, the risk from now on is that interest rates remain high for a “longer than reasonable period.” “The big concern is the time frame of interest rates,” Mr. Carvalho said.
*By Lucinda Pinto — São Paulo
Source: Valor International