/raid1/www/Hosts/bankrupt/TCRLA_Public/190605.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
L A T I N A M E R I C A
Wednesday, June 5, 2019, Vol. 20, No. 112
Headlines
A R G E N T I N A
ARGENTINA: Tries to Narrow Down Trade Gap With China
ARGENTINA: Turns to Int'l. Telecommuting Amid Economic Crisis
B R A Z I L
NATURA COSMETICOS: Fitch Puts BB Rating on Watch Neg Amid Avon Deal
PETROLEO BRASILEIRO: Plans to Sell 2 Onshore Oil Areas in Brazil
TUPY SA: Fitch Affirms 'BB' LongTerm IDRs, Outlook Stable
D O M I N I C A N R E P U B L I C
DOMINICAN REPUBLIC: $584MM Reserves Tagged for Loans to Companies
DOMINICAN REPUBLIC: 1st Quarter Growth Plummets to 2.6%
M E X I C O
CTI INDUSTRIES: Credit Facility Breaches Cast Going Concern Doubt
MEXICO: 20K Hirings Expected for Oil Refinery Project
P U E R T O R I C O
SEARS HOLDINGS: Unsecured Creditors to Get 2.5% Under Amended Plan
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A R G E N T I N A
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ARGENTINA: Tries to Narrow Down Trade Gap With China
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EFE News reports that Argentine exports to China have increased in
the past few years, thanks to half a dozen distribution centers it
has opened in the world's second largest economy, the South
American country's ambassador in Beijing said.
Diego Guelar in an interview with EFE insisted that the rapid
growth in exports to China has shifted the paradigm towards value
addition of products with main focus on direct sales from these
business centers operated by the Chinese in the Chinese territory.
The latest of such centers was inaugurated in Shanghai, according
to EFE News.
"Argentina was characterized as a country which did not sell
anything, but rather people came from outside to buy, including
Chinese buyers. There was no export policy. But now, for the
first time, it is the Argentine exporters who send their products
to China for local distributors to sell," the report quoted Mr.
Guelar as saying.
The center that was inaugurated belongs to the Chinese company
Jerui, which has marketed Argentinean products like other similar
firms operating the five existing centers in the country. The
centers are not directly linked to the Argentinean authorities but
receive their support, EFE News notes.
"We are offering an option in which the exporters send goods to
companies which have the capacity to refrigerate, store and sell
inside the free trade zones in the big cities, consign the goods to
them, and they sell it for the exporters," the ambassador
explained, the report relays.
He said that such an option was a cultural shift in the way of
approaching export, the report says.
"Argentineans are learning that they have to place the product in
the Chinese port to sell it, because here the market is so hungry
that if a product is consumed, it has to be delivered immediately,"
the report quoted Mr. Guelar as saying.
He said the plans were already working, as according to official
data, Argentina's exports to China in April were 28 percent higher
year-on-year, the report relays.
However, trade balance between the two countries remains heavily
tilted towards China, the report notes.
Argentine exports to China stand at just $4.2 billion compared to
Chinese imports worth $12 billion -- a situation which arises "not
because how much we buy from China, but how little Argentina
sells," Guelar insisted, the report notes.
The data becomes even more noteworthy if compared with figures from
neighboring countries such as Brazil, Chile and Peru, which are
large exporters to China, the report says.
"We started at a very low base and we still have a long way to go,"
said Mr. Guelar, attributing the situation to the political and
economic situation in his country during the last few decades, the
report relays.
"The production in Argentina has continued to decline because it
has been bad times for us as a country and we did not understand
that the main market of any country today is not its internal
market. One has to have an export policy which understands that the
market is global and China is our most important market," the
ambassador said, the report notes.
According to Guelar, another big challenge for the future of this
kind of business centers is changing the type of products being
exported, making them value-added, as currently the biggest part of
exports arriving in China is made up of almost unprocessed soy and
meat, raw wool and crude petroleum, the report discloses.
The ambassador said the big business opportunities were there to
grab if Argentine companies understood that the market demanded
quality, the report says.
Market analysis, he said, was needed in order to produce for China
instead of just sending what was left as surplus, the report adds.
About Argentina
As reported in the Troubled Company Reporter-Latin America, S&P
Global Ratings in June 2018 affirmed its 'B+' long-term sovereign
credit ratings on the Republic of Argentina. S&P's long-term
sovereign credit ratings on Argentina was raise to 'B+' from 'B' in
October 2017. The outlook on the long-term ratings remains stable.
In May 2018, Fitch Ratings affirmed Argentina's Long-Term
Foreign-Currency Issuer Default Rating (IDR) at 'B' and revised the
Outlook to Stable from Positive.
In December 2017, Moody's Investors Service upgraded the Government
of Argentina's local and foreign currency issuer and senior
unsecured ratings to B2 from B3. The senior unsecured shelves were
upgraded to (P)B2 from (P)B3. The outlook on the ratings is
stable.
At the same time, Argentina's short-term rating was affirmed at Not
Prime (NP). The senior unsecured ratings for unrestructured debt
were affirmed at Ca and the unrestructured senior unsecured shelf
affirmed at (P)Ca. Moody's said the key drivers of the upgrade of
the rating to B2 are: (1) a record of macro-economic reforms that
are beginning to address long existing distortions in Argentina's
economy; and (2) the likelihood that reforms will continue and in
turn sustain the recent return to positive economic growth.
The stable outlook on Argentina's B2 ratings balances Argentina's
credit strengths of its large, diverse economy and moderate income
levels against the credit challenges posed by still high fiscal
deficits and a reliance on external financing, which increases its
vulnerability to external event risk, said Moody's.
Back in July 2014, Argentina defaulted on some of its debt, after
expiration of a 30-day grace period on a US$539 million interest
payment. Earlier that day, talks with a court-appointed mediator
ended without resolving a standoff between the country and a group
of hedge funds seeking full payment on bonds that the country had
defaulted on in 2001. A U.S. judge had ruled that the interest
payment couldn't be made unless the hedge funds led by Elliott
Management Corp., got the US$1.5 billion they claimed. The country
hasn't been able to access international credit markets since its
US$95 billion default 13 years ago. On March 30, 2016, Argentina's
Congress passed a bill that will allow the government to repay
holders of debt that the South American country defaulted on in
2001, including a group of litigating hedge funds that won
judgments in a New York court. The bill passed by a vote of 54-16.
ARGENTINA: Turns to Int'l. Telecommuting Amid Economic Crisis
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EFE News reports that since Argentina's latest economic crisis
erupted last year, with the peso depreciating sharply and inflation
soaring, people have turned to international telecommuting as a
means of earning income in stable currencies without emigrating
abroad.
While the peso was trading at roughly 20 per United States dollar
12 months ago, it has since depreciated to a record low of 46 per
greenback in recent weeks, generating a climate of instability in
Argentina, according to EFE News.
Additionally, uncertainty surrounding October's presidential
elections -- and the prospect that incumbent, market-friendly
President Mauricio Macri will lose his bid for re-election -- have
rattled global financial markets, the report relays.
The report notes that while Argentines have long saved money in
dollars as a hedge against high inflation (which currently is
running at 54 percent annually), they now are looking to
international telecommuting as a way to earn income in greenbacks.
That has led to growth in platforms such as Freelancer, which,
according to its vice president for Latin America, Sebastian
Sieles, offers workers the possibility of connecting with companies
anywhere in the world, the report says.
Communication technology has broken down borders and allowed
companies in the world's biggest markets to seek talented workers
elsewhere, the report notes.
"The markets showing the greatest demand for talent are the United
States, the United Kingdom, Canada and Australia. Knowing English
is always a plus," said the VP of Freelancer, a platform on which
more than 10,000 job opportunities are generated every day, most of
them linked to the creative economy and the digital economy, the
report says.
Argentines, meanwhile, also are looking to the US, UK and Europe
for employment opportunities, especially considering that the more
the peso depreciates the greater the purchasing power of those
earning income in dollars, euros or pounds, the report discloses.
One such case is that of Giannina Gastaldo, an architect from the
central province of Cordoba who started working with foreign
companies sporadically three years ago but has begun doing so on an
exclusive basis over the past six months, the report notes.
She says international telecommuting also entails other benefits.
But even though the weak peso benefits Gastaldo in the short term,
she said she hopes the currency strengthens in the future for the
good of the country and to reduce inflation, the report discloses.
About Argentina
As reported in the Troubled Company Reporter-Latin America, S&P
Global Ratings in June 2018 affirmed its 'B+' long-term sovereign
credit ratings on the Republic of Argentina. S&P's long-term
sovereign credit ratings on Argentina was raise to 'B+' from 'B' in
October 2017. The outlook on the long-term ratings remains stable.
In May 2018, Fitch Ratings affirmed Argentina's Long-Term
Foreign-Currency Issuer Default Rating (IDR) at 'B' and revised the
Outlook to Stable from Positive.
In December 2017, Moody's Investors Service upgraded the Government
of Argentina's local and foreign currency issuer and senior
unsecured ratings to B2 from B3. The senior unsecured shelves were
upgraded to (P)B2 from (P)B3. The outlook on the ratings is
stable.
At the same time, Argentina's short-term rating was affirmed at Not
Prime (NP). The senior unsecured ratings for unrestructured debt
were affirmed at Ca and the unrestructured senior unsecured shelf
affirmed at (P)Ca. Moody's said the key drivers of the upgrade of
the rating to B2 are: (1) a record of macro-economic reforms that
are beginning to address long existing distortions in Argentina's
economy; and (2) the likelihood that reforms will continue and in
turn sustain the recent return to positive economic growth.
The stable outlook on Argentina's B2 ratings balances Argentina's
credit strengths of its large, diverse economy and moderate income
levels against the credit challenges posed by still high fiscal
deficits and a reliance on external financing, which increases its
vulnerability to external event risk, said Moody's.
Back in July 2014, Argentina defaulted on some of its debt, after
expiration of a 30-day grace period on a US$539 million interest
payment. Earlier that day, talks with a court-appointed mediator
ended without resolving a standoff between the country and a group
of hedge funds seeking full payment on bonds that the country had
defaulted on in 2001. A U.S. judge had ruled that the interest
payment couldn't be made unless the hedge funds led by Elliott
Management Corp., got the US$1.5 billion they claimed. The country
hasn't been able to access international credit markets since its
US$95 billion default 13 years ago. On March 30, 2016, Argentina's
Congress passed a bill that will allow the government to repay
holders of debt that the South American country defaulted on in
2001, including a group of litigating hedge funds that won
judgments in a New York court. The bill passed by a vote of 54-16.
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B R A Z I L
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NATURA COSMETICOS: Fitch Puts BB Rating on Watch Neg Amid Avon Deal
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Fitch Ratings has placed Natura Cosmeticos S.A.'s ratings on
Negative Watch following the company's announced plan to acquire
Avon Products, Inc. (Avon; Issuer Default Rating B+/Negative).
On May 22, 2019, Natura announced that it had reached an agreement
with Avon Products, Inc. to acquire Avon through in an all-share
merger. Natura Holding S.A. (Natura & Co) will become the new
holding company for the group and will wholly own Natura and Avon
shares. Once the transaction is complete, 76% of Natura & Co will
be held by Natura's existing shareholders and the remaining 24% by
Avon's shareholders.
The Negative Watch reflects the execution risks associated with the
integration of these businesses, challenges to improve
profitability against a dynamic and changing landscape, and higher
than anticipated medium-term refinancing risks. On a pro forma
basis, Fitch estimates Avon's EBITDA represents around 39% of the
combined entity. Natura is still working on the turnaround of The
Body Shop (TBS), a EUR1 billion debt-funded acquisition completed
in late 2017. Like TBS, Avon is a very large and complex global
company with declining reps/volumes; FX risk is high due to its
emerging market concentration. Avon and Natura have high exposure
to declining direct sales business, which is an additional negative
consideration, as they attempt to switch to an omni-channel
strategy.
The transaction is mostly equity financed and does not materially
impact Natura's consolidated leverage profile. On a pro forma
basis, Fitch expects Natura's debt adjusted debt/EBITDAR to reach
4.5x, excluding IFRS 16 impact. It represents an increase from the
4.0x ratio as of 2018 and threatens to inhibit the company's goal
of reaching 3.5x by 2020, which is a threshold for the company's
'BB' rating. Incorporating USD150 million of synergies, the pro
forma adjusted leverage would drop to 3.9x. Natura's access to
medium- to long-term funding will be another key to reducing
near-term ratings downgrade pressure.
This transaction significantly increases business scale (2018 pro
forma revenues USD9.1 billion), enhances the company's consultants
base, product portfolio and market presence in Latin America. In
addition, it should allow Natura to leverage its existing business
platform (manufacturing, distribution centers and logistics), which
could lead to operating and financial synergies. Natura expects
around USD150 million-250 million in synergies, but has mentioned
that it will need to reinvest part of these savings in digital and
social selling, R&D and brand initiatives, which are key drivers of
business and brand sustainability.
KEY RATING DRIVERS
High Execution Risks: Natura will face challenges as it attempts to
digest Avon's global operation outside of Latin America (47% of
revenues), which has been pressured by declining active reps and
sales volumes in complex markets such as Russia. The timing of this
transaction is not ideal, as the company continues to work on the
turnaround and integration of TBS and a digital transformation.
Both TBS and Avon have large businesses in regions/markets where
Natura does not operate, and TBS operates primarily through
traditional retail operations. Positively, Natura has been showing
some improvement in TBS margins during the last few quarters with
EBITDA margins expected in the 10%-11% range during 2019, an
increase from 8.4% in 2016.
Weak Results: Avon's business has been under intense pressure.
During the 2018, its EBITDA margin was 6.6%, a decline compared
with its average of 10% between 2014 and 2018. In comparison,
Natura had a 14% margin in 2018 and a 17% average EBITDA margin
between 2014 and 2018. The purchase of Avon will slightly improve
the company's geographic diversification. Brazil represents the
bulk of Natura's current operations and accounts for 45% of
revenues and 55% of EBITDA generation; this compares with 68% and
74%, respectively during 2016, before the acquisition of TBS.
Brazil and Argentina represent 45% of Avon's operating profit,
while Europe, the Middle East and Africa accounts for 39%, North
Latin America, 10%, and Asia/Pacific approximately 6%.
Strong Natura Brand: Natura has shown a favorable track record and
business position in the Cosmetics, Fragrances and Toilette (CF&T)
sector in Brazil and Latin America due to its strong brand value
and recognition, large operating scale, and extensive direct sales
structure. Natura has historically had a solid capital structure
with solid liquidity position. The global, but small operations of
the premium brand Aesop, as well as the ongoing positive turnaround
of TBS, are also incorporated into the ratings.
New Industry Dynamics: The CF&T industry is attractive due to its
resilience throughout economic cycles. Nevertheless, there is a new
business dynamic in the market, which is bringing more volatility
to results and altering traditional business models. With the
channel shifting toward e-commerce and specialty stores, direct
sales and traditional consumer companies are facing intense
competition from multi-national beauty giants that have implemented
omni-channel strategies, as well as smaller, nimbler, fast-growing
companies. To compete against this challenging backdrop, Natura
will not only have to manage two large integration projects, but
maintain a strong pipeline of innovation to compete in the fast
changing beauty trends and digitalize to engage more directly with
end consumers.
Challenge to Deleverage: The Avon transaction will likely postpone
Natura's deleveraging efforts until 2021. Excluding IFRS 16
impacts, Fitch expected Natura's net adjusted leverage, measured by
net adjusted debt/ EBITDAR to move toward 3.6x during 2019 prior to
this transaction. Once the transaction is approved, pro forma
leverage would increase to around 4.2x-3.7x by 2020, depending on
synergy gains. Fitch's leverage calculation includes adjustments
related to operating lease rentals. Fitch expects dividends to fall
to the minimum required by Natura's bylaws (30%) as the company
seeks to lower its leverage.
Higher Refinancing Risks: Natura will face a combined amount of
USD2.1 billion of bond coming due until 2023 plus the USD500
million of preferred shares at Avon. Natura has announced a bridge
loan of USD1.6 billion to support immediate refinancing risks in
case Avon's USD1.1 billion bondholders do not grant a waiver for
the breach of the change of control clause. Nevertheless, Natura
will have to seek long-term funding to avoid higher refinancing
risks by 2021-2023, when its USD750 million bonds is also due.
DERIVATION SUMMARY
Natura's 'BB/AA(bra)' ratings reflect its good business position in
the CF&T industry, underpinned by strong brand recognition, with a
focus on sustainability, large scale enabling a competitive cost
structure and a large direct-sales structure. Natura's brand and
product portfolio, with its higher-ticket products is well
positioned against its main competitor in the direct sales segment,
Avon Products, Inc. (IDR B+/Negative). The company also has a track
record of less volatile operating cash flow and more conservative
credit metrics. Even at this time, when Natura's leverage has
deteriorated following the debt-financed acquisition, it shows
lower leverage compared to Avon. Natura has the challenge to
continue to conduct its activities on a profitable basis while
preserving its strong market position in Brazil, within the context
of increasing competition. Natura's market share in the Brazilian
market has been recovering supported by pricing initiatives and
increasing consultant productivities. Despite the regular beauty&co
multinationals, Natura also faces strong competition from a local
player, O Boticario (not rated), which presents a stronger
financial profile and solid business profile, supported mainly by
its bricks-and-mortar franchise chain.
KEY ASSUMPTIONS
Fitch's Key Assumptions within Its Rating Case for the Issuer
Low-single-digit growth in volumes;
-- Consolidated EBITDA margins moving around 15%-16%, excluding
AVON and around 10%-12% with AVON;
-- Increase in Capex levels to around BRL550 million;
-- Dividend payouts at 30%;
-- Natura to maintain its proactive approach on refinancing its
local debt avoiding refinancing risks
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to
Positive Rating Action
The Negative Watch will be resolved after the successful
completion
of Natura's acquisition of Avon. The most likely outcome of this
resolution would be a one-notch downgrade of Natura's ratings, as
this transaction heightens existing execution risk, delays the
deleveraging process related to the earlier acquisition of TBS, and
increases the company's exposure to the direct sales channel.
Improvements in Natura's margins, including TBS, in the next three
to four quarters and a stabilization of the performance of Avon
could be mitigating factors. Natura's IDR would be affirmed at 'BB'
if the acquisition does not proceed.
The regulatory approvals for the transaction are not likely to be
resolved during the next six months; this could result in a
prolonged period for the Rating Watch Negative status of Natura's
ratings.
Moody's Puts Avon's B1 CFR Under Review
Moody's Investors Service has placed on review with direction
uncertain the B1 Corporate Family Rating, the B1-PD Probability of
Default Rating and the B3 senior unsecured notes rating of Avon
Products, Inc.'s. Concurrently, Moody's has placed on review with
direction uncertain the Ba1 rating on the $500 million senior
secured notes due in 2022 issued by Avon International Operations,
Inc.'s, a wholly owned subsidiary of Avon Products, Inc. The
outlook on both entities has been changed to rating under review
from negative.
The review was prompted by the combined announcement on May 22,
2019 from both Avon and Brazilian beauty company Natura & Co that
they had reached an agreement on Natura's intention to make an
offer to acquire Avons's entire share capital in an all-share
transaction.
"The review reflects our view that, should the transaction be
finalized, the business profile and financial leverage of the
combined group would likely be stronger than those of Avon on a
stand-alone basis, resulting in positive rating pressure.
Conversely, the failure to complete the merger as scheduled, or a
further weakening trend in Avon's earnings or liquidity, could
result in a downgrade of Avon's rating, owing to the company's
continued weak operating performance to date, and an increase in
leverage to levels which are not commensurate with the current B1
rating, as well as the deterioration in the liquidity profile,"
says Lorenzo Re, a Moody's Vice President - Senior Analyst and lead
analyst for Avon.
RATINGS RATIONALE
Natura & Co and Avon jointly announced on May 22, 2019 that they
reached an agreement whereby Natura will acquire Avon's capital in
an all-share transaction. Avon's shareholders will be entitled to
receive 0.3 Natura shares per each Avon share. Avon Series C
Preferred Stock holders will receive a cash consideration of $530
million. The transaction is expected to close in early 2020, but is
subject to regulatory approval as well as Avon and Natura
shareholders' approval.
If successfully completed, the transaction may be credit positive
for Avon, because of the enhanced business profile of the combined
entity as one of the largest beauty companies in the world; and
Moody's estimate that the financial leverage of the combined entity
would be somewhat lower than the current high level of Avon.
Conversely, should the transaction not proceed, the rating review
process may conclude with a rating downgrade because of Avon's weak
operating performance and deteriorating liquidity. Moody's expects
that Avon's credit metrics will remain weak in the next 12 months,
with leverage (measured as Moody's-adjusted gross debt/EBITDA)
deteriorating to above 6.5x in 2019, which is well above its
guidance of 5.5x for the B1 rating. At this time, Moody's believes
that Avon's ability to reduce leverage will be challenged because
of its weak operating performance and the execution risk in its
restructuring plan. Although some of the actions that the company
is taking to revamp sales, such as better pricing and promotion
initiatives are bearing some fruits, the number of active
representatives continued to decline in 1Q 19 in all geographies,
with an acceleration in the negative trend (-9% from -5% in 2018).
In Moody's view, Avon's ability to stabilize the number of
representatives is key to improving operating performance. The
company's actions to address this problem have not yet produced
positive results, reflecting the execution risk on the company's
restructuring plan.
Avon's liquidity profile is deteriorating, owing to the high cash
burn reported in 1Q 2019 and Moody's expectation that its cash
generation will remain weak in 2019, with negative free cash flow
at around $70 million. The company has an outstanding $386 million
of senior unsecured notes maturing on March 15, 2020. If these
notes are not repaid or redeemed 91 days before maturity (i.e. 15
December 2019), this would also trigger the early maturity in
December 2019 of the EUR200 million revolving credit facility. As
the Natura acquisition is not expected to be completed before year
end, Moody's expects that Avon will address its upcoming maturity
in a timely manner. In this regard, Moody's notes that Natura has
secured $1.6 billion in committed financing to finance certain
payments that would be required under Avon's indebtedness as part
of the transaction. Moody's also notes that headroom under
covenants of the revolving credit facility is limited and tightens
over time.
As part of the rating review Moody's will primarily focus on
assessing: (1) the benefits which could result from combining the
two groups in terms of business profile and potential for
synergies; (2) the future strategy of the group; (3) expectations
around the combined entity's financial leverage on an ongoing
basis; and (4) the provision of guarantees from Natura on Avon's
debt.
LIST OF AFFECTED RATINGS:
Issuer: Avon International Operations, Inc.
Placed on Review Direction Uncertain:
Senior Secured Regular Bond/Debenture, currently Ba1
Outlook Action:
Outlook, Changed To Rating Under Review From Negative
Issuer: Avon Products, Inc.
Placed on Review Direction Uncertain:
LT Corporate Family Rating, currently B1
Probability of Default Rating, currently B1-PD
Senior Unsecured Regular Bond/Debenture, currently B3
Outlook Action:
Outlook, Changed To Rating Under Review From Negative
CORPORATE PROFILE
Avon is a global beauty product company and one of the largest
direct sellers through around five million active representatives.
Avon's products are available in over 70 countries and include
categories such as color cosmetics, skin care, fragrance and
fashion and home. Cerberus Capital Management L.P., through
controlled affiliates, owns around 16.6% of Avon through a
preferred stock investment. Avon generated about $5.4 billion in
revenue and $311 million in EBITDA (Moody's adjusted) in 2018.
PETROLEO BRASILEIRO: Plans to Sell 2 Onshore Oil Areas in Brazil
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EFE News reports that state-controlled oil giant Petroleo
Brasileiro S.A. (Petrobras) said it planned to sell its stakes in
two production areas that hold 22 onshore oil fields in Brazil as
part of an ongoing asset divestiture program.
Petrobras, Brazil's largest corporation, said in a statement that
it was selling the Reconcavo production area, which has 14 onshore
oil fields, and the Rio Ventura production area, which has eight
fields, according to EFE News.
Both production areas are in the northeastern state of Bahia,
Petrobras said, the report notes.
The report says that Reconcavo produced an average of 2,800 barrels
per day (bpd) of petroleum and 588,000 cubic meters of natural gas
per day in 2018.
Rio Ventura had production of 1,500 bpd of crude oil and 43,000
cubic meters of natural gas per day last year, the report relays.
In addition to selling 100 percent of its stakes in the two
production areas, Petrobras said it would include shared
transportation and processing facilities in Bahia, the report
notes.
Petrobras has a 100 percent operating interest in the onshore
areas, with the exception of Reconcavo's Cambacica and Guanambi
fields, in which it holds majority stakes of 75 percent and 80
percent, respectively, the report relays.
The oil giant launched an ambitious asset divestiture program
several years ago in an effort to deal with the financial crisis
caused by a huge corruption scandal and plunging oil prices, the
report notes.
Petrobras expects to sell assets worth between $30 billion and $40
billion this year, or about twice the target set in the current
divestiture plan, Chief Executive Officer Roberto Castello Branco
said, the report notes.
On May 27, Petrobras said it planned to sell its stakes in 27
mature onshore oil fields in the southeastern state of Espiritu
Santo, the report relays.
The fields, known as the Polo Cricare, are in the cities of Sao
Mateus, Jaguare, Linhares and Conceicao da Barra, the report
notes.
Petrobras's production has dropped as it has shed assets, falling
about 5 percent in the first quarter of 2019, compared to the same
period last year, the report says.
The company, however, is betting that the proceeds from the asset
sales will allow it to boost investment in core assets, the report
notes.
"The divestitures generate resources for investment in assets that
yield more production, like the pre-salt. We get out of low-return
assets, like the mature fields, and into high-return assets, like
the pre-salt, which has lower production costs that generate high
value," the CEO said in the most recent earnings release, the
report discloses.
The pre-salt reserves, which are in the deep waters off
southeastern Brazil and considered one of the largest oil finds in
recent decades, could make the South American country a major oil
exporter, the report relays.
The pre-salt layer, which is estimated to hold vast reserves of
light crude oil and natural gas at depths of up to 7,000 meters
(22,950 feet), is found beneath the sea floor and contains a
gel-like deposit of salt that could be up to two kilometers (1.24
miles) thick, the report adds.
As reported in the Troubled Company Reporter-Latin America on Feb.
25, 2019, S&P Global Ratings raised the stand-alone credit profile
(SACP) on Petrobras to 'bb' from 'bb-'. S&P also affirmed its
global scale ratings on the company at 'BB-' and its Brazilian
national scale rating at 'brAAA'.
TUPY SA: Fitch Affirms 'BB' LongTerm IDRs, Outlook Stable
---------------------------------------------------------
Fitch Ratings has affirmed Tupy S.A.'s Long-Term Foreign and Local
Currency Issuer Default Ratings at 'BB' and Long-Term National
Scale Rating at 'AA(bra)'. In addition, Fitch has affirmed Tupy
Overseas S.A.'s USD350 million senior unsecured notes due 2024 and
guaranteed by Tupy at 'BB'. The Rating Outlook for the corporate
ratings is Stable.
The ratings incorporate Tupy's strong market position in the
production of high value-added cast iron engine blocks and cylinder
heads in the western hemisphere, long-term relationship with
several original equipment manufacturers (OEM), and large
application of its engines in transportation, infrastructure and
agricultural machinery. The analysis also incorporates the
company's proven capacity to maintain adequate operating margins,
even during macroeconomic slowdowns. The company benefits from its
high variable costs and efficient cost management, which provide
the company with the operating flexibility to rapidly adjust
production to the demand fluctuations of the automotive sector. The
ratings also incorporate Tupy's conservative capital structure,
comfortable liquidity profile and extended debt amortization
profile, and the maintenance of positive FCF.
Tupy's ratings are somehow constrained by its relatively small
scale and moderate geographic diversification when compared to
other global auto-part companies and by the high cyclicality and
competitive environment of the automotive industry. The ratings
also reflect customer concentration, challenging Brazilian economy,
and the capital and labor intensity characteristics of the auto
sector. Potential proposals from the U.S. administration to change
imported taxes of Mexican products (Tupy has two plants there) and
lower global economic growth could negatively affect Tupy's
operations.
In line with Fitch's "Rating Non-Financial Corporates Above the
Country Ceiling Rating Criteria", Tupy's ratings are not
constrained by Brazil's 'BB' Country Ceiling, given the company's
operating cash flow generation from its assets abroad in Mexico.
Tupy's country ceiling rating is the same as the Mexican
sovereign's.
KEY RATING DRIVERS
Strong Business Profile: Tupy mitigates the above average risk
associated with the auto-parts industry with its important position
as a manufacturer of high value-added engine blocks and cylinder
heads globally. The company's components have a wide application in
the industry, ranging from light vehicles, trucks, buses,
agricultural and construction machinery. The auto-parts and
automotive industries are cyclical and volatile, so this
diversification is a key rating factor. Tupy's increasing global
presence with sales to 40 countries (81.5% of sales derived from
exports) and its longstanding relationship with OEM, reinforce its
credit profile. Since OEMs predominantly have only one supplier of
engine blocks, switching costs are high.
Adequate Operating Margins: Tupy has maintained adequate operating
margins, even during macroeconomic slowdowns. Fitch projects an
EBITDA margin of 13.4% to 14.2% in the next three years, compared
to an average of 11.9% between 2016 and 2018. Despite some price
increases in raw material (mainly scrap), the company has
efficiently transferred higher costs to final prices. Tupy has
demonstrated some flexibility during the down-cycles to sustain
profitability and initiatives, including closing less profitable
assembly lines, allocating production to the most profitable ones,
and transferring production to other countries.
Conservative Capital Structure: Fitch expects Tupy to maintain a
conservative capital structure with net leverage close to 1.0x over
the next three years. In the LTM ended March 31, 2019, the company
reported net leverage of 1.4x, compared to an average of 1.6x from
2016 to 2018. During 2018, Tupy amortized about BRL400 million in
debt. Most of Tupy's BRL1.4 billion debt in March 2019 was composed
of the 2024 senior unsecured bond (USD350 million).
CFFO to Remain Strong: Fitch forecasts Tupy generating EBITDA of
BRL703 million in 2019 and BRL707 million in 2020, and cash flow
from operations (CFFO) of BRL484 million and BRL602 million,
respectively. In the LTM ended March 2019, the company generated
BRL599 million of EBITDA and BRL563 million of CFFO. Strong cash
flow generation could lead to a more aggressive dividend
distribution strategy, or growth strategy through acquisitions.
Base case projections incorporate annual investments of around
BRL200 million to BRL240 million and high dividends of
approximately BRL300 million, which should result in FCF close to
break-even in 2019 and positive BRL102 million in 2020.
Potential Threats from Aluminum: Fitch believes Tupy will continue
to experience competition from aluminum products in the small
engine market for light vehicles. The agency estimates that 2%-3%
of Tupy's current revenues is somehow threatened by aluminum.
However, its cast iron and compact graphite iron (CGI) parts will
continue to have a lead in the light commercial vehicles and larger
trucks that represented 81% of revenues in 2018. Aluminum is
lighter but less resistant to pressure than iron. In addition to
the material, there is room to evolve on the geometry of the engine
blocks with thinner walls. Fitch believes the two metals will
co-exist for a long period of time and that changes favoring one or
the other in the small-engine segment will be gradual given the
long term contracts.
Low Scale in a Cyclical and Competitive Business: Tupy's scale is
relatively low, and the company has moderate geographic
diversification when compared with other global auto parts
companies. The company's business is concentrated in the highly
cyclical and competitive auto industry. The industry depends on
macroeconomic cycles and those that produce high-value added
products are concentrated in few original OEMs. Most of the
contracts with automakers are long term and have no minimum
volumes. The capital intensity is considered high to cope with
innovation, which works as an entry barrier; however, competition
with existing players remains intense. A large presence in the
aftermarket, which is countercyclical, is credit positive.
Concerns about the adverse economic environment in Brazil are
partially offset by the more favorable economic conditions in
Mexico, where Tupy has two plants, and by exports that represent
81.5% of sales in 2018. Also factored into the ratings is the
company's high customer concentration, with the five largest
clients representing 64% of net revenues in 2018.
DERIVATION SUMMARY
Most of the auto parts companies covered by Fitch are positioned in
the 'BB' category, and are constrained by the intrinsic volatility
of the sector, capital and labor intensity characteristics, and
natural client concentration. Metalsa, S.A. de C.V. (BBB-/ Stable)
and Nemak, S.A.B. de C.V. (BBB-/ Stable) are rated investment grade
due to their conservative capital structure, larger scale, and
wider geographical diversification. GKN Holdings Limited (BB+/
Stable) exhibits a business profile that is strong for a 'BB+'
rating, including its leading market positions in auto and
aerospace supply, although it was recently downgraded to reflect
its broader group structure context of Melrose Industries PLC
(unrated), which purchased GKN in the first half 2018.
Tupy's low leverage and strong liquidity compares well with its
peers. However, the 'BB' rating reflects its small scale and weaker
diversification within the sector, as well as its high exposure to
the automakers. Nemak is larger and more diversified than Tupy and
counts on a strong parent. Tupy's credit profile is, however,
stronger than those of Meritor, Inc. (BB-/ Positive), Tenneco Inc.
(BB-/ Stable), and Rassini Automotriz, S.A. de C.V. (BB-/ Stable).
While Meritor has substantially improved its credit profile after
reducing debt with proceeds from the sale of a JV, it remains
exposed to the high volatile North American Class 8 truck segment.
At the same time, Tenneco's and Rassini's rating are penalized by
acquisitions that led to a more leveraged capital structure for a
prolonged period of time.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer
-- Sales volume growth of 3% in 2019 and 1% in 2020;
-- Flat average prices in both domestic markets and exports;
-- Cost of raw material, mainly scrap, in USD per ton in line
with 2018. Average wages, energy, G&A, and other operating
results growing in line with inflation (IPCA);
-- Capex at 3.8% and 4.6% of net revenues in 2019 and 2020,
respectively;
-- Dividends payout rates of 120% in 2019 and 95% in 2020.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
-- An upgrade is unlikely in the short to medium term. However,
an expansion of Tupy's geographic footprint while improving
FCF materially and net leverage below 1.0x, combined
maintenance of robust liquidity could trigger a positive
rating action.
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
-- Severe decline in the American pick up's and truck's
production that leads to reduced demand for Tupy's products;
-- Net leverage above 3.0x for a prolonged period;
-- FCF turning negative, eroding the company's liquidity.
LIQUIDITY
Strong Liquidity: Fitch expects Tupy to maintain strong liquidity
in the next three years as part of the conservative financial
policy. In March 2019, the company reported cash and marketable
securities of BRL533 million and short-term debt of BRL20 million.
Short-term debt is mostly related to trade finance, funding company
exports that are backed by receivables. Tupy's extended debt
amortization schedule and cash position is enough to cover total
debt maturities until 2023. The company has higher debt maturities
of its USD350 million senior notes only in 2024. Liquidity will
also benefit from the expected positive FCF generation.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Tupy S.A.
-- Long-Term Foreign Currency IDR at 'BB';
-- Long-Term Local Currency IDR at 'BB';
-- Long-term National Scale Rating at 'AA(bra)'.
Tupy Overseas S.A.
-- USD350 million senior notes guaranteed by Tupy due in 2024 at
'BB'.
The Outlook for the corporate ratings is Stable.
===================================
D O M I N I C A N R E P U B L I C
===================================
DOMINICAN REPUBLIC: $584MM Reserves Tagged for Loans to Companies
-----------------------------------------------------------------
Dominican Today reports that Dominican Central banker Hector Valdez
Albizu called a meeting of the Dominican Republic Commercial Banks
Association (ABA) and the Dominican League of Savings and Loan
Associations (Lidaapi) to inform them of the RD$29.2 billion
(US$584 million) from the bank reserve to be channeled towards
loans for the productive sectors.
"The international scenario continues to be affected by convulsive
and unstable situations, such as the dispute between US and Chinese
trade policies, as well as the volatility of oil prices, among
others, that influence the creation of a climate of uncertainty in
international financial markets that could eventually affect the
Dominican Republic, so it is necessary to react, providing greater
and better financing possibilities for Dominican economic agents,"
Mr. Valdez said in a statement, according to Dominican Today.
As reported in the Troubled Company Reporter-Latin America on June
3, 2019, Fitch Ratings has assigned a 'BB-' rating to Dominican
Republic's DOP50.523 billion notes (equivalent to USD1 billion ),
maturing 2026 and to the USD1.5 billion bonds maturing
2049.
DOMINICAN REPUBLIC: 1st Quarter Growth Plummets to 2.6%
-------------------------------------------------------
Dominican Today reports that in the first quarter, retail sustained
one of the most intense slowdowns of all Dominican economic
sectors, from a 7.8% growth from January to March 2018, to just
2.6% this year, Dominican Republic's Central Bank revealed.
National Merchants and Entrepreneurs Council (Conacerd) vice
president Antonio Cruz said the result, which denotes a drop in
demand in that period, is explained by a smaller amount of money
circulating in the economy, according to Dominican Today.
He said the Central bank had to apply the restriction to control
inflationary pressures and avoid currency depreciation, the report
notes.
However, National Commercial Companies Organization president Mario
Lama, preferred not to comment on the results because "they haven't
been analyzed by its board of directors yet, the report relays.
Lama however acknowledged the slowdown in the sector, the report
adds.
As reported in the Troubled Company Reporter-Latin America on June
3, 2019, Fitch Ratings has assigned a 'BB-' rating to Dominican
Republic's DOP50.523 billion notes (equivalent to USD1 billion ),
maturing 2026 and to the USD1.5 billion bonds maturing 2049.
===========
M E X I C O
===========
CTI INDUSTRIES: Credit Facility Breaches Cast Going Concern Doubt
-----------------------------------------------------------------
CTI Industries Corporation filed its quarterly report on Form 10-Q,
disclosing a net loss of $942,808 on $12,536,389 of net sales for
the three months ended March 31, 2019, compared to a net loss of
$470,551 on $13,979,177 of net sales for the same period in 2018.
At March 31, 2019 the Company had total assets of $41,384,086,
total liabilities of $35,206,322, and $6,177,764 in total equity.
The Company's primary sources of liquidity are cash and cash
equivalents as well as availability under the Credit Agreement with
PNC Bank, National Association ("PNC"). Twice during 2018, the
Company violated covenants in its credit facility and as of March
2019, it entered into a forbearance agreement with PNC. Under the
terms of this agreement, financial covenants as of March 31, 2019
will not be considered and all previously identified compliance
failures will be waived, but the Company remains out of compliance
with the terms of its credit facility, as amended.
In addition, due to financial performance in 2016, 2017 and 2018,
including net income/(losses) attributable to the Company of US$0.7
million, (US$1.6 million), and (US$3.6 million), respectively, the
Company says it believes that substantial doubt about its ability
to continue as a going concern exists at March 31, 2019.
Additionally, the Company has experienced challenges in maintaining
adequate seasonal working capital balances, made more challenging
by increases in financing and labor costs. These changes in cash
flows have created strain within its operations, and have therefore
increased its desire to incorporate additional funding resources.
Management's plans include:
* Pursuing a strategically significant major capital event.
* Working with its bank to resolve its compliance failure on a
long-term basis.
* Evaluating and potentially executing a sale/leaseback
transaction of its facility in Lake Barrington, IL.
* Continuing to monitor the equity market for the potential to
complete the transaction attempted during 2018, and
* Exploring alternative funding sources.
Considering both quantitative and qualitative information, the
Company continues to believe that its plans to obtain additional
financing will provide it with an ability to finance its operations
through 2019 and, if adequately executed, will mitigate the
substantial doubt about its ability to continue as a going
concern.
A copy of the Form 10-Q is available at:
https://is.gd/jS6Tx9
About CTI Industries
CTI Industries Corporation develops, produces, and distributes
consumer and film products for commercial and industrial uses in
the United States, the United Kingdom, Europe, and Mexico. The
company sells its products directly, as well as through a network
of distributors and wholesalers, and independent sales
representatives. CTI Industries was founded in 1975 and is
headquartered in Lake Barrington, Illinois.
MEXICO: 20K Hirings Expected for Oil Refinery Project
-----------------------------------------------------
EFE News reports that some people camped out overnight to be at the
front of the line Monday in Mexico to apply for jobs building a oil
refinery that Mexican President Andres Manuel Lopez Obrador has
made a signature project of his administration.
The federal and Tabasco state governments disclosed the hiring of
up to 20,000 people, including electricians, engineers and
mechanics, to construct the refinery in the Gulf coast port of Dos
Bocas, according to EFE News.
=====================
P U E R T O R I C O
=====================
SEARS HOLDINGS: Unsecured Creditors to Get 2.5% Under Amended Plan
------------------------------------------------------------------
Sears Holdings Corporation and its debtor affiliates filed an
amended Chapter 11 plan of reorganization and accompanying
disclosure statement to include provisions on:
* appointment of a fee examiner
* de minimis claims settlement procedures
* designation of additional executory contracts and
unexpired leases
* executory contracts rejection procedures
* marketing of remaining nonresidential real property
* PBGC settlement
* risks that PBGC Settlement and Substantive Consolidation
Settlement may not be approved
Class 4 - General Unsecured Claims are impaired with estimated
recovery of 2.5%. Except to the extent that a holder of an Allowed
General Unsecured Claim agrees to less favorable treatment, in full
and final satisfaction, settlement, release, and discharge of an
Allowed General Unsecured Claim, each such holder thereof shall
receive its Pro Rata share of (i) the General
Unsecured Liquidating Trust Interests and (ii) the Specified
Unsecured Liquidating Trust Interests.
Class 3 - PBGC Claims are impaired with estimated recovery of
14.7%. Confirmation of the Plan shall constitute approval of the
PBGC Settlement Agreement. In accordance therewith, PBGC shall
receive from the Liquidating Trust, (i) the PBGC Liquidating Trust
Priority Interest and (ii) in respect of the Allowed PBGC Unsecured
Claims, PBGCâ's Pro Rata share of (x) the General Unsecured
Liquidating Trust Interests and (y) the Specified Unsecured
Liquidating Trust Interests, in full and final satisfaction,
settlement, release, and discharge of all PBGC Claims.
A full-text copy of the Disclosure Statement dated May 16, 2019, is
available at https://tinyurl.com/y46gsoqy from PacerMonitor.com at
no charge.
The Debtors also filed exhibits to the Plan -- Plan Settlement
Liquidation Analysis and the Toggle Plan Liquidation Analysis --
full-text copies of which are available at
https://tinyurl.com/y5lrnj9y from PacerMonitor.com at no charge.
Attorneys for the Debtors are Ray C. Schrock, P.C., Esq.,
Jacqueline Marcus, Esq., Garrett A. Fail, Esq., and Sunny Singh,
Esq., at Weil, Gotshal & Manges LLP, in New York.
About Sears Holdings
Sears Holdings Corporation (NASDAQ: SHLD) --
http://www.searsholdings.com/-- began as a mail ordering catalog
company in 1887 and became the world's largest retailer in the
1960s. At its peak, Sears was present in almost every big mall
across the U.S., and sold everything from toys and auto parts to
mail-order homes. Sears claims to be is a market leader in the
appliance, tool, lawn and garden, fitness equipment, and automotive
repair and maintenance retail sectors.
Sears and Kmart merged to form Sears Holdings in 2005 when they had
3,500 US stores between them. Kmart emerged in 2005 from its own
bankruptcy.
Unable to keep up with online stores and other brick-and-mortar
retailers, a long series of store closings has left it with 687
retail stores in 49 states, Guam, Puerto Rico, and the U.S. Virgin
Islands as of mid-October 2018. The Company employs 68,000
individuals, of whom 32,000 are full-time employees.
As of Aug. 4, 2018, Sears Holdings had $6.93 billion in total
assets, $11.33 billion in total liabilities and a total deficit of
$4.40 billion.
Unable to cover a $134 million debt payment due Oct. 15, 2018,
Sears Holdings Corporation and 49 subsidiaries sought Chapter 11
protection (Bankr. S.D.N.Y. Lead Case No. 18-23538) on Oct. 15,
2018.
The Hon. Robert D. Drain is the case judge.
The Debtors tapped Weil, Gotshal & Manges LLP as legal counsel;
M-III Partners as restructuring advisor; Lazard Freres & Co. LLC
as
investment banker; DLA Piper LLP as real estate advisor; and Prime
Clerk as claims and noticing agent.
The U.S. Trustee for Region 2 appointed nine creditors, including
the Pension Benefit Guaranty Corp., and landlord Simon Property
Group, L.P., to serve on the official committee of unsecured
creditors. The committee tapped Akin Gump Strauss Hauer & Feld
LLP
as legal counsel; FTI Consulting as financial advisor; and Houlihan
Lokey Capital, Inc. as investment banker.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Latin America is a daily newsletter
co-published by Bankruptcy Creditors' Service, Inc., Fairless
Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C.,
USA, Marites O. Claro, Joy A. Agravante, Rousel Elaine T.
Fernandez, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A.
Chapman, Editors.
Copyright 2019. All rights reserved. ISSN 1529-2746.
This material is copyrighted and any commercial use, resale or
publication in any form (including e-mail forwarding, electronic
re-mailing and photocopying) is strictly prohibited without prior
written permission of the publishers.
Information contained herein is obtained from sources believed to
be reliable, but is not guaranteed.
The TCR Latin America subscription rate is US$775 per half-year,
delivered via e-mail. Additional e-mail subscriptions for members
of the same firm for the term of the initial subscription or
balance thereof are US$25 each. For subscription information,
contact Peter A. Chapman at 215-945-7000.
.
* * * End of Transmission * * *