D&P downgrades several Brazilian credit ratings
Reuters, Thursday, January 21, 1999 at 13:22
(Press release provided by Duff & Phelps Credit Rating Co.)
Chicago (January 21, 1999) -- Duff & Phelps Credit Rating
Co. (DCR) has downgraded a dozen corporate and structured
credit ratings in Brazil, in response to the country's ongoing
currency crisis.
At the same time, the global rating agency has placed
another six credit ratings on Rating Watch with downward
implications. However, DCR has also reaffirmed current ratings
on another 14 credits.
Factors supporting these rating actions include:
* Anticipation of a sharp contraction in domestic demand
for various products and services due to the devaluation of the
real;
* Continued weakness in worldwide commodity prices,
negatively impacting the ability of companies to derive
significant profits by redirecting their domestic sales into
international markets;
* The increased debt servicing burden of corporate
entities that have significant imbalances between U.S.
dollar-denominated debt and real-denominated revenues, due to
the magnitude of the devaluation and the speed with which it
occurred; and
* Rising refinancing risk, primarily reflected in
decreasing access to short-term trade finance for certain
borrowers, but also reflected in overall uncertainty regarding
long-term refinancing options.
When taking action on selected corporate and structured
ratings within Brazil on October 9, 1998, DCR alerted investors
to these risks, as well as to its concern about the heightened
counterparty credit risk faced by companies whose cash and
marketable securities were directly or indirectly tied to
government securities. In addition, DCR highlighted its
concern about the quality of accounts receivable balances held
by certain companies. These two factors drove most of the
rating actions in October and continue to be a source of
concern for DCR.
Structured and local currency rating reaffirmations
primarily reflect the position of companies that export almost
100 percent of their product, have a cost structure that is
almost exclusively denominated in reais, and are sufficiently
liquid. Foreign currency rating reaffirmations reflect ratings
which are constrained by the foreign currency rating of the
Federative Republic of Brazil.
Ratings Downgraded and/or Placed on Rating Watch--Down
Company Debt Rated/Security From: To:
Alcoa Aluminio S.A. Local Currency BBB BBB-
Export-Backed Notes BBB BBB-
(1996-1)
Companhia Siderurgica Export-Backed Notes BBB- BB+
Nacional S.A. (1996-A1&A2) (Rating Watch--Down)
Companhia Suzano de Export-Backed Notes BB+ BB-
Papel e Celulose (1996)
CRT Local Currency BBB- BBB-
(Rating Watch--Down)
Globo Cabo S.A. Local Currency BB+ BB
(Rating Watch--Down)
MRS Logistica S.A. Foreign Currency BB- B+
Local Currency BB- B+
Series A&B Notes BB- B+
due 2005
Net Sat Servicos Ltda.Local Currency BB- B+
(Rating Watch--Down)
Foreign Currency BB- B+
(Rating Watch--Down)
Petroleum Funding Export-Backed Notes BBB- BBB-
Corporation Ltd. (1996-1) (Rating Watch--Down)
Sadia S.A. Local Currency BBB- BB+
(Rating Watch--Down)
IFC Trust Certificates BBB- BB+
(1996) (Rating Watch--Down)
Ripasa S.A. Celulose Export-Backed Notes BB- BB-
e Papel (1997) (Rating Watch--Down)
Trikem S.A. Local Currency BB- BB-
(Rating Watch--Down)
Foreign Currency BB- BB-
(Rating Watch--Down)
Investor Certificates A A
(1997) (Rating Watch--Down)
Ratings Reaffirmed
Company Debt Rated/Security
Alcoa Aluminio S.A. Foreign Currency BB-
Aracruz Celulose S.A. Foreign Currency BB-
Local Currency BBB-
(Rating Watch--Down)
Export-Backed Notes BBB-
(1995-I & II) (Rating Watch--Down)
Cambuhy Citrus Guaranteed Export BBB-
Comercial e Backed Notes (Series 1996-1)
Exportadora Ltda.
Ceval Alimentos S.A. Export-Backed Notes BBB-
(1996-A) (Rating Watch--Down)
CRT Foreign Currency BB-
Companhia Siderurgica CSN Iron Guaranteed BB-
Nacional S.A. Notes
Companhia Siderurgica Export-Backed Notes BBB-
de Tubarao (1997-1&2) (Rating Watch--Down)
Globo Cabo S.A. Foreign Currency BB-
Sadia S.A. Foreign Currency BB-
Samarco Mineracao S.A. Foreign Currency BB-
Local Currency BB+
Export-Backed Notes BBB-
(1995)
Factors leading to each rating action are as follows:
Alcoa Aluminio - DCR believes that the companys cash flows
and credit protection measures could be substantially impacted
by a combination of a sharp contraction in Brazilian economic
activity and ongoing weakness in aluminum prices. Factors
supporting the ratings include the companys conservative
financial management, as reflected in full hedging of cash
positions, high liquidity and light debt amortization schedule;
and the technical and managerial support of Alcoa, the companys
U.S.-based parent.
Aracruz - DCR's reaffirmation of its ratings reflect the
companys continued ability to generate positive cash flows
during turbulent times within Brazil and at a time when prices
for bleached eucalyptus market pulp are depressed. This
ability is derived from the companys low-cost production
capabilities. With 94 percent of its sales derived from
exports and with a majority of its costs denominated in reais,
the devaluation could positively impact the companys cash flow.
The ratings remain on Rating Watch--Down as a result of the
companys significant NBC-E and NTN-D holdings.
Cambuhy - The rating was reaffirmed due to dual financial
guarantees provided by Votorantim, through an affiliate, and
Brasil Warrant. Votorantim also provides an operational
guarantee. The rating, to a lesser extent, also factors in the
favorable market prices for frozen concentrated orange juice
internationally.
Ceval - After restructuring its operations in 1998, Ceval
emerged as a processor of agricultural commodities products.
The company has become predominately an exporter with limited
domestic exposure.
Companhia Riograndense de Telecomunicaoes (CRT) - The
placement of this company's debt on Rating Watch--Down reflects
the refinancing risk faced by the company over the coming year.
The demand for telecommunications services is expected to
weaken due to the negative outlook for the economy during 1999.
Mitigating these factors is DCR's expectation that CRT will
maintain credit ratios which are more than adequate for its
current local currency rating, the fact that the demand for
telecom services is less cyclical than other sectors of the
economy, and CRTs flexibility to moderate its construction
program in a stressed environment.
Companhia Siderurgica Nacional (CSN) - The company has
significant exposure to the Brazilian domestic market. The
attractiveness of the export market as a viable alternative
destination for the companys products has been diminished by
sharp declines in world steel prices. However, the company
continues to benefit from a low cost structure and captive iron
ore mines, and enjoys strong local market positions in the
highest value added steel segments.
Companhia Siderurgica de Tubarao (CST) - The reaffirmation
of the rating associated with CST is based upon the company's
low cost structure, and sales which are almost solely derived
from exports. The recent devaluation could benefit CST, as the
companys revenues are dollar-based, while costs are primarily
real- denominated. The rating remains on Rating Watch--Down
primarily as a resultof the factors outlined in DCRs previous
press release dated October 9, 1998, such as risks associated
with its investment holdings in Brazil.
Companhia Suzano de Papel e Celulose - DCR downgraded the
ratings assigned to this companys export trust certificates on
July 30, 1998, due to weak international pulp and paper prices,
as well as decisions by the company earlier in that year to
utilize its cash for investments in Bahia Sul and Global
Telecom. DCR factored into that rating action an expectation
that the company would shore up its cash position in the near
term. To date, this has not occurred. The decision by DCR to
downgrade the certificates to BB- (Double-B-Minus) takes into
consideration concern about depressed prices for pulp and paper
during the first semester of 1999 within Brazil, as well as a
weaker cash position than originally anticipated due to the
absence of asset sales or an infusion of a significant amount
of equity by the companys owners.
Global Cabo and Net Sat - The lowering of the local
currency rating of Globo Cabo S.A. to BB (Double-B) from BB+
(Double-B-Plus) and the reduction of Net Sat Servios Ltda.s
local and foreign currency ratings to B+ (Single-B-Plus) from
BB- (Double-B-Minus Plus) are due to the difficulty both pay
television providers are expected to face as they attempt to
increase penetration in the face of weak consumer demand.
Additionally, the companies could be constrained in their
ability to pass on price increases to consumers in an attempt
to cover higher financial costs. Partly offsetting these
factors are the ownership positions in the companies held by
financially stronger Globo Comunicaoes e Participaoes
(Globopar). Globopar owns approximately two-thirds of Globo
Cabo and 54 percent of Net Sat. Although Globo Cabos debt and
Net Sats senior secured notes are not guaranteed by Globopar,
the credit position of the two companies are strengthened due
to its ownership. News Corp., with a 36 percent stake, also
owns a significant portion of Net Sat.
MRS Logistica - While the railroad run by MRS has increased
volumes and revenues since privatization, the companys cash
flows will be negatively impacted by current events. Its
revenues are primarily derived from iron ore and steel
shipments. Markets for the latter product, in particular, are
entering a particularly difficult period. CSN is one of the
companys largest shareholders and customers, and its credit
profile indirectly affects the credit profile of MRS.
Petroleum Fund Corporation Ltd. - The placement of the
export notes on Rating Watch--Down reflects the weakening
credit quality of the Brazilian government.
Ripasa - DCR downgraded this company's export receivable
securitization on August 14, 1998 due to concern over the
downturn in global paper markets and the austerity measures
undertaken by the Brazilian government. Unlike several rated
Brazilian entities, Ripasa does not have a significant currency
mismatch, with the bulk of its debt and revenues denominated in
reais. The Rating Watch- -Down designation primarily reflects
price and volume concern for the companys paper products during
the first semester of 1999 within Brazil.
Sadia - Despite having a strong 1998, its sales and margins
are likely to be adversely affected by lower domestic demand.
Partially mitigating the impact of the devaluation is the
companys potential to increase exports which currently
represent approximately 20% of total sales. However, the same
depends on Sadias ability to open new markets outside the
Middle East and Mercosur countries. Although the company
enjoys a high degree of liquidity, its counterparty credit risk
has increased due to its direct and indirect exposure to
government securities.
Samarco - The company's ratings have been reaffirmed. The
ratings are supported by sales which are overwhelmingly
export-driven, and the completion of an expansion program which
has resulted in a higher value- added product mix. The recent
devaluation could benefit the company, given its dollar-based
revenue stream and real-based cost structure.
Trikem S.A. - The company's significant exposure to the
Brazilian domestic market, coupled with weak polyvinyl chloride
(PVC) prices and high leverage, raise concerns about its
ability to maintain cash flow levels and credit protection
measures. The current ratings are supported by Trikems strong
market position in Latin Americas PVC market, partially
integrated operations, cost reduction initiatives and decreased
exposure to foreign-currency denominated debt.
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Copyright 1999, Reuters News Service
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