/raid1/www/Hosts/bankrupt/TCRLA

/raid1/www/Hosts/bankrupt/TCRLA_Public/210204.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 Thursday, February 4, 2021, Vol. 22, No. 20 Headlines B R A Z I L BRAZIL: 2020 Foreign Investment Down 50.6% From 2019 BRAZIL: Central Bank Mulls Cutting Monetary Stimulus BRAZIL: Soybean Harvesting Delays Seen in February GUARA NORTE: Fitch Gives BB+(EXP) Rating on Secured Notes GUARA NORTE: Moody's Assigns First Time Ba1 Rating to $850MM Notes ITAU UNIBANCO: Fitch Gives B+ Rating to US$500MM Tier 2 Sub. Notes TUPY OVERSEAS: Fitch Rates New US$375MM Unsec. Notes 'BB' TUPY OVERSEAS: S&P Rates New $375MM Senior Unsecured Notes 'BB' C A Y M A N I S L A N D S GLOBAL AIRCRAFT: Moody's Reviews B1 Sr. Unsec. Rating for Downgrade C H I L E INVERSIONES LATIN AMERICA: S&P Cuts ICR to 'BB', Outlook Stable J A M A I C A SANDALS RESORTS: Chairman Outlines Plans to Move Group Forward P E R U VOLCAN COMPANIA: Fitch Rates New US$450MM Notes Due 2026 'BB' VOLCAN COMPANIA: Moody's Rates New $450MM Sr. Unsecured Notes 'B1' - - - - - =========== B R A Z I L =========== BRAZIL: 2020 Foreign Investment Down 50.6% From 2019 ---------------------------------------------------- Richard Mann at Rio Times Online reports that foreign direct investments in the Brazilian economy totaled US$34.167 billion in 2020, down 50.6% from 2019, the Central Bank reported. It was the lowest inflow of direct investments into the Brazilian economy since 2009 (US$31.480 billion), and occurred amid the drop in Gross Domestic Product (GDP) and tension in the markets, caused by the novel coronavirus pandemic, according to Rio Times Online. Despite the drop, foreign investments were enough to cover the shortfall in external accounts last year, the report relays. About Brazil Brazil is the fifth largest country in the world and third largest in the Americas. Jair Bolsonaro is the current president, having been sworn in on Jan. 1, 2019. S&P Global Ratings affirmed on December 14, 2020, its 'BB-/B' long-and short-term foreign and local currency sovereign credit ratings on Brazil. The outlook on the long-term ratings remains stable. Fitch Ratings' credit rating for Brazil stands at 'BB-' with a negative outlook (November 2020). Moody's credit rating for Brazil was last set at Ba2 with stable outlook (April 2018). DBRS's credit rating for Brazil is BB (low) with stable outlook (March 2018). As reported in the Troubled Company Reporter-Latin America, S&P Global Ratings' stable outlook assumes that timely implementation of fiscal adjustment and modest economic recovery will help preserve market confidence and adequate funding conditions for the government in local markets in the next two years, despite a sustained increase in the debt burden. BRAZIL: Central Bank Mulls Cutting Monetary Stimulus ---------------------------------------------------- Rio Times Online reports that the Monetary Policy Committee (Copom) of the Central Bank of Brazil revealed, that it has begun to consider the possibility of cutting back on the "extraordinary" monetary stimulus it put in place due to the novel coronavirus pandemic. "Some members (of the committee) wondered whether it would continue to be appropriate to maintain the extraordinarily high degree of stimulus, given the normalization of the functioning of the economy seen in recent months," according to the just released minutes of Copom's meeting, according to Rio Times Online. About Brazil Brazil is the fifth largest country in the world and third largest in the Americas. Jair Bolsonaro is the current president, having been sworn in on Jan. 1, 2019. S&P Global Ratings affirmed on December 14, 2020, its 'BB-/B' long-and short-term foreign and local currency sovereign credit ratings on Brazil. The outlook on the long-term ratings remains stable. Fitch Ratings' credit rating for Brazil stands at 'BB-' with a negative outlook (November 2020). Moody's credit rating for Brazil was last set at Ba2 with stable outlook (April 2018). DBRS's credit rating for Brazil is BB (low) with stable outlook (March 2018). As reported in the Troubled Company Reporter-Latin America, S&P Global Ratings' stable outlook assumes that timely implementation of fiscal adjustment and modest economic recovery will help preserve market confidence and adequate funding conditions for the government in local markets in the next two years, despite a sustained increase in the debt burden. BRAZIL: Soybean Harvesting Delays Seen in February -------------------------------------------------- Rio Times Online reports that harvesting delays in Brazilian soybean fields should continue throughout February after a drought pushed back plantings of the oilseeds, Thais Italiani, market intelligence coordinator at Hedgepoint Global Markets, told a webinar. The situation may delay deliveries of this year's crop to global trading companies, as this is a season marked by strong pre-sales of Brazil's most prized agricultural commodity, according to Rio Times Online. Only up to 5 million tonnes of the new crop will be ready by end-January, according to calculations by another agribusiness consultancy, the report notes. About Brazil Brazil is the fifth largest country in the world and third largest in the Americas. Jair Bolsonaro is the current president, having been sworn in on Jan. 1, 2019. S&P Global Ratings affirmed on December 14, 2020, its 'BB-/B' long-and short-term foreign and local currency sovereign credit ratings on Brazil. The outlook on the long-term ratings remains stable. Fitch Ratings' credit rating for Brazil stands at 'BB-' with a negative outlook (November 2020). Moody's credit rating for Brazil was last set at Ba2 with stable outlook (April 2018). DBRS's credit rating for Brazil is BB (low) with stable outlook (March 2018). As reported in the Troubled Company Reporter-Latin America, S&P Global Ratings' stable outlook assumes that timely implementation of fiscal adjustment and modest economic recovery will help preserve market confidence and adequate funding conditions for the government in local markets in the next two years, despite a sustained increase in the debt burden. GUARA NORTE: Fitch Gives BB+(EXP) Rating on Secured Notes --------------------------------------------------------- Fitch Ratings has assigned the senior secured notes to be issued by Guara Norte S.a r.l. an expected rating of 'BB+(EXP)' with a Negative Outlook. The notes are collateralised by a charter agreement and the related proceeds from the operations of the Cidade de Ilhabela (CdI) floating-production storage and offloading (FPSO) vessel. DEBT RATING ---- ------ Guara Norte S.a r.l. Senior Secured Notes LT BB+(EXP) Expected Rating The rating covers the timely payment of both interest and principal components to the notes, including the principal amortization schedule, in line with the transaction documentation. TRANSACTION SUMMARY Proceeds of this transaction are expected, within 120 days of issuance, to refinance the original funding of the CdI FPSO, which operates in the BM-S-9 block within the Sapinhoá Field in the pre-salt layer of the Santos Basin, off the coast of Brazil. Key transaction parties are the two sides of a charter ending in 2034: the sponsor, Guara Norte S.à r.l., and the offtaker, Petróleo Brasileiro S.A. (Petrobras; as leader and operator of the BM-S-9 Consortium). KEY RATING DRIVERS CONSORTIUM OBLIGATION STRENGTH EXCEEDS PETROBRAS' The offtaking consortium is backed by Petrobras (45% share), the Shell subsidiary Shell Brasil Petróleo Ltda (30%) and the Repsol/Sinopec joint venture (25%); all the pro rata obligations are guaranteed by affiliate companies (for the Petrobras group, Petrobras International Braspetro B.V.). The offtakers' obligations related to the 20-year charter and joint operating agreements are several, but not joint, as each party guarantees that it will make its portion of the payment. However, these payments can be seen as joint and several as the underlying concession states that each party must support all the obligations related to ongoing production. Fitch expects the payments to continue given the high economic incentives to maintain the concession. Therefore, the rating of the lowest-rated member, Petrobras (BB-/Negative), does not strictly limit the notes' rating. SOVEREIGN EVENT RISK; T&C MITIGATED The transaction's reserve account of six months of debt service and the offshore payment obligations offer sufficient protection to mitigate potential transfer and convertibility (T&C) restrictions and exceed Brazil's Country Ceiling of 'BB' by one notch. However, the event risk linked to the operating environment, with Petrobras a state-owned enterprise, potentially subject to political interference, limits the uplift over Brazil's Issuer Default Rating (IDR) of 'BB-'/Negative to two notches and, therefore, to 'BB+' with a Negative Outlook. EXPERIENCED OPERATOR MITIGATES RISK The group of the operator, SBM Offshore, is a global player in building and managing FPSOs, a concentrated industry. Fitch views SBM's experience as the operator as a strength, given the past performance of rated transactions. CdI's record shows an excellent historical uptime, at 98.7%. Due to the complexities of replacing SBM as the operator, the credit quality remains a potential risk to the transaction, but Fitch views the credit quality of SBM as in line with investment grade, and the standalone strength of the underlying operator is well supported by the transaction's financials. STRONG FINANCIAL METRICS Fitch's cash flow analysis has assessed the repayment of the fully amortizing debt, assuming timely interest and principal payments according to a nondeferrable sculpted amortization schedule and a cash trapping condition should the debt service coverage ratio (DSCR) fall below 1.15x. In Fitch’s base case, the DSCR remains at 1.60x-1.70x through the life of the transaction, and stress case DSCRs remain well above the trigger levels. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- As described in Key Rating Drivers, the rating of the transaction is linked to Brazil's IDR, with an uplift of two notches. Therefore, a sovereign downgrade would trigger a downgrade of the notes. Both ratings are on a Negative Outlook. -- For offtakers, Fitch could assign a rating in excess of Petrobras' by two notches, and this remains possible as long as the other offtakers remain rated above the notes. Given the current ratings of the other offtakers, Fitch deems this risk particularly remote. -- The other counterparty that could constrain the rating is the operator, the SBM group, which Fitch considers to be of better credit quality than the senior notes. -- Finally, the cash flow analysis results in very robust output, consistent with ratings in the 'BBB' category. Although the DSCR and ultimate debt repayment depend on uptime, maintenance days, opex and CPI, none of these variables could drive ratings down under the stresses Fitch applied (and considering a cap for opex). -- Coronavirus Downside Scenario Sensitivity: Fitch has developed a common baseline and downside scenario, in which demand collapse would depress oil prices and constrain spending in oil economies, as described in "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update," dated 7 December 2020. Neither scenario is expected to affect the transaction directly, but the effects on the offtakers, country of the asset and operator could indirectly do so. Factor that could, individually or collectively, lead to positive rating action/upgrade: -- The rating is constrained by the operating environment and counterparty issues. An upgrade of Brazil (which would likely also result in an upgrade of Petrobras) may result in an upgrade. However, as the rating is currently on a Negative Outlook, such a scenario is not anticipated. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. CRITERIA VARIATION The rating assigned is two notches above the lowest-rated member of the BM-S-9 consortium (i.e. Petrobras), while Fitch’s "Oil Vessel-Backed Financing Rating Criteria" would set a maximum differential at one notch if the consortium's obligations are not joint and several. As the obligations are not fully joint and several from a legal standpoint, this is considered a criteria variation with an effect of the rating of the notes being rated one notch above the level it would without such variation. See more information in the presale report. Furthermore, the issuer can invest excess cash in money market funds with a minimum rating of 'AAmmf' by Fitch. Fitch’s "Structured Finance and Covered Bonds Counterparty Rating Criteria" expect this type of investment to have the maximum rating of 'AAAmmf'. However, considering the 'BB+' rating of the senior notes, Fitch sees this risk as immaterial. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS The rating of the senior secured notes is currently driven by the sovereign Local-Currency IDR of Brazil, with a two-notch uplift. As a result, they bear the same Outlook. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. GUARA NORTE: Moody's Assigns First Time Ba1 Rating to $850MM Notes ------------------------------------------------------------------ Moody's Investors Service has assigned a first time Ba1 rating to the senior secured notes to be issued by Guara Norte S.a r.l. in the amount of $850 million. The notes will have a 13.5-year term and will amortize in full, with a final maturity in June 2034. The rating outlook is stable. Proceeds of the issuance will be used to repay approximately $535 million in existing debt, with remaining proceeds being made available to the shareholders. Guara Norte is a special purpose company established in Luxembourg and is the owner of the floating production storage and offloading (FPSO) unit Cidade de Ilhabela. The Issuer is owned by SBM FPS Holding S.A. (75%) and Mitsubishi Corporation (25%, A2 negative). The vessel has been specifically designed and built to fit the characteristics of the Sapinhoa oil field (previously named Guara) in Brazil (Government of Brazil, Ba2 stable), and is chartered to Petroleo Brasileiro S.A. - PETROBRAS (Ba2 stable) as operator of the oil field and leader of the consortium with 45% ownership, until 2036. Remaining owners are, BG E&P Brasil Ltda. (30%) and Repsol Sinopec Brasil S.A. (25%). The vessel has been operational since 2014. In turn, Petrobras has contracted Guara Norte Operacoes Maritimas Ltda., a company owned by the sponsors, to operate the vessel pursuant to a services agreement. The assigned rating is based on preliminary documentation. Moody's does not anticipate changes in the main conditions of the notes. Should issuance conditions and/or final documentation deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly. RATINGS RATIONALE The assigned rating reflects Moody's view of the project's low fundamental risk profile, which is supported by (i) the terms of the charter and services agreements, which provide for a stable and predictable availability-based revenue stream set for a fixed price for a remaining period of fourteen years; (ii) the high weighted average credit quality of the offtake base, given the guarantees provided on a several basis by BG Energy Holdings Ltd. (30%), Repsol S.A. (15%, Baa2 negative), and China Petrochemical Corporation (Sinopec, 10%, A1 stable), in addition to Petrobras International Braspetro B.V. (PIB BV, 45%); (iii) the strong market position of the Cidade de Ilhabela FPSO, as one of the two tailored-made FPSOs operating at the Sapinhoa oil field; and (iv) the strong economics of the oil field as the third largest producing field in Brazil, carrying a pre-tax net present value of US$12 billion and a point-forward breakeven of US$22.7/barrel net of royalties and taxes. The rating takes into consideration the proven technology and strong historical track record of the Cidade de Ilhabela FPSO, presenting average commercial uptime and planned maintenance day usage of 98.6% and 4.9 days per year up until November 2020, respectively, since starting operations in 2014. Another positive consideration is the strong profile of the sponsors, led by SBM Offshore N.V., a market leader with global presence and long-standing ties with Petrobras. SBM Offshore N.V. and the Mitsubishi Corporation have partnered to develop other FPSOs in the country over the past 10 years, and together currently own three additional FPSOs. The robust operating record of the sponsors' fleet combined with their strategic relationship with Petrobras are credit positives. The rating also incorporates the lowly levered nature of the transaction, with DSCRs yielding an average 1.77x assuming average historical uptime of 98.6% over the life of the transaction, eight planned maintenance days for 2021 and six planned maintenance days per annum thereafter, and operating expenses set at the capped amount of US$186k/day. The low leverage is further strengthened by the resilience of revenue upon significant stresses to unplanned maintenance and downtime. DSCRs reach 1.0x when uptime is of 65%. The rating recognizes the short tail between debt maturity, charter agreement expiration, and oil field reserve life, but the protections embedded in the charter agreement and the combination of the robustness of estimations of reserve life and complexities surrounding the setting of oil field production plans are mitigating factors. In general, FPSOs are specifically designed to suit the characteristics of the oil field requiring investments between US$1.25-2.5 billion to build and two-to-three years lead time. Additionally, their charter accounts for less than 15% of oil field revenues for the oilfield consortium. Those characteristics generate strong economic incentives to the oil field consortium and protects FPSOs against the volatility of oil prices. Furthermore, FPSOs constitute essential infrastructure assets for the successful development and production of oil in Brazil's pre-salt ultradeepwater fields, supporting its strategic importance to production companies and the sovereign. The Ba1 rating considers various linkages, direct and indirect, with both Brazil and Petrobras in light of its operation in Brazilian waters. Sovereign risks are mitigated by the substantial royalty and tax generation upon normal operation of the oil field and the recognition that all cash flow under the charter agreement is paid and deposited offshore. In addition, the contractual framework substantially mitigates foreign exchange risks, with BRL-services revenues sized to cover onshore expenses. The Ba1 rating balances the asset's strong intrinsic features and the linkages with Petrobras, reflecting the company's important role as operator of the oil field, controlling party in the consortium, and as the principal voice interacting with regulatory authorities. The rating considers the in-principle ability of remaining members of the consortium to replace Petrobras's leading role if needed, but not without execution risks and impinging temporary disruption to normal operations. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING Upward pressure on the ratings could develop over time if Petrobras is upgraded. Conversely, downward pressure on the ratings could arise if operational performance deteriorates substantially or additional debt is issued such that DSCRs reach below 1.4x, or upon downgrades to the ratings of Petrobras, the charter agreement guarantors, or the Government of Brazil. DEBT STRUCTURE AND SECURITY Incorporated in the rating is the fully amortizing nature of the debt structure, which includes a full collateral package typical to project finance transactions, including a mortgage over the asset, assignment of rights over cash balances and cash flows, a six-month DSRA, and a restrictive payments test DSCRs of 1.15x. The transaction waterfall recognizes the one-off annual maintenance day bonus payment and allocates 50% of the annual payment to each semi-annual principal and interest payment. It also recognizes the ability of the issuer to contract additional debt without the consent of noteholders, subject to a minimum 1.30x DSCR, mitigated by the requirement of ratings reaffirmation. OUTLOOK The stable outlook reflects Moody's expectation that the project will operate in line with its historical performance, leading to DSCRs above 1.70x, and that the economics of the oil field will remain attractive to the offtakers. ISSUER PROFILE Guara Norte S.a r.l. is the SPV owner of the Cidade de Ilhabela FPSO, which carries a production capacity of 150,000 barrels of oil equivalent per day (boed) and a storage capacity of 1,600,000 barrels of oil. The vessel was specifically designed and fit for the characteristics of the Sapinhoa oil field, which is located 300 km off the coast of Brazil and achieved commercial operations in November 2014. It is chartered to Petrobras, as operator of the oil field and leader of the consortium which holds the concession to operate the oil field until 2036. Sapinhoa produces oil through two FPSOs, with a total production capacity of 240,000 boed, and is one of the few oil fields which operate with more than one FPSO. In 2019, Guara Norte held uptime of 99.3%, used six days of planned maintenance, received $223 million in charter agreement payments, and generated $183 million in operating cash flow (before interest payments). Uptime in the eleven months up to November 2020 has averaged 99.02%, and aside from a slight increase in operating expenses related to additional safety measures and other protocol, the vessel has operated without major consequences from the spread of the coronavirus. METHODOLOGY The principal methodology used in this rating was Generic Project Finance Methodology published in November 2019. ITAU UNIBANCO: Fitch Gives B+ Rating to US$500MM Tier 2 Sub. Notes ------------------------------------------------------------------- Fitch Ratings has assigned Itau Unibanco Holding S.A.'s (IUH) USD500 million Tier 2 subordinated notes 'B+' final rating. The notes were issued through IUH's Grand Cayman Branch and have a 10-year tenor, but may be redeemed in whole at the option of the Issuer on the fifth anniversary of the issuance. Interest rate frequency will be semi-annual. The net proceeds of the Tier 2 subordinated notes will be used to finance or refinance, in whole or in part, sustainable projects. According to the draft terms, the notes are U.S. dollar subordinated liabilities, have no coupon flexibility, coupons must be paid and cannot be deferred, and are subject to permanent partial or full write-off upon the occurrence of a non-viability event (NVE) as determined by the Brazilian regulator or if IUH's Common Equity Tier 1 (CET1) capital falls below 4.5% of its risk-weighted assets. The final rating is in line with the expected rating that Fitch assigned to the proposed debt on Jan. 11, 2021. KEY RATING DRIVERS The notes are rated two notches below IUH's Viability Rating (VR) of 'bb'. The notching is driven by the subordinated status and the expected high loss severity of the notes. No notching for non-performance is applied, because there is no coupon flexibility (i.e., coupons must be paid as they are not deferrable and the write-off trigger is close to the point of non-viability. As a result, Fitch believes that the incremental non-performance risk is not material from a rating perspective. RATING SENSITIVITIES Factor that could, individually or collectively, lead to positive rating action/upgrade: -- Upgrades on debt ratings depend on upgrades of the IUH VR, given it serves as an anchor rating for issuances. The two notch difference will likely be maintained under most circumstances, in the event of a change in IUH's ratings. Factor that could, individually or collectively, lead to negative rating action/downgrade: -- Debt rating downgrades will depend on downgrades of IUH's VR, given that its serves as an anchor rating for issuances. The two-notch difference will likely be maintained under most circumstances, in the event of a change in IUH's ratings. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. TUPY OVERSEAS: Fitch Rates New US$375MM Unsec. Notes 'BB' --------------------------------------------------------- Fitch Ratings has assigned a 'BB' rating to Tupy Overseas S.A.'s USD375 million proposed unsecured notes due in 2031. The notes will be fully and unconditionally guaranteed by Tupy S.A. (Tupy) and will be used to exchange the notes due in 2024. Fitch rates Tupy's Foreign and Local Currency Issuer Default Ratings (IDRs) 'BB', with a Stable Outlook and Long-Term National Scale Rating 'AA(bra)', with a Stable Outlook. The ratings incorporate Tupy's strong market position in the production of high-value-added cast iron structural components, such as engine blocks and cylinder heads in the Western Hemisphere, its long-term relationships with several original equipment manufacturers (OEMs), and the significant use of its products in transportation, infrastructure and agricultural machinery. Fitch's analysis also incorporates the company's proven capacity to maintain adequate operating margins during adverse economic environments. Tupy benefits from high variable costs and efficient cost management, which provide it with operating flexibility to rapidly adjust production to demand fluctuations according to the volatility of the automotive sector. Tupy's conservative capital structure, comfortable liquidity and extended debt amortization schedule, as well as its maintenance of positive FCF, were also embedded in its ratings. Ratings remain somewhat constrained by its relatively small scale and moderate geographic diversification when compared with other global auto parts companies and by the high cyclicality and competitive environment of the auto industry. The acquisition of Teksid SpA's (Teksid) iron casting operations will improve Tupy's geographic and customer diversification. KEY RATING DRIVERS Strong Business Profile: Fitch believes the acquisition of Teksid's iron casting business, which pending approval, will increase Tupy's scale, improve its business diversification and further strengthen the company's important position as a manufacturer of high-value-added cast iron structural components globally. The company's components have a wide application in the industry, including in light vehicles, trucks, buses, and agricultural and construction machinery. The auto parts and automotive industry are cyclical, volatile and have intense competition, so Tupy's diversification is a key rating factor. The company's increasing global presence, with 85% of sales from exports in 9M20, and its longstanding relationship with OEMs reinforce its credit profile. Because most OEMs tend to have few suppliers of critical components, switching costs are relatively high. Recovering Margins: Fitch forecasts Tupy's EBITDA to reach BRL892 million in 2021, aided by the incorporation of the Teksid assets, from an expected BRL597 million in 2020, which has been affected by coronavirus pandemic-related restrictions. In the LTM ended Sept. 30, 2020, Tupy generated BRL586 million of EBITDA and cash flow from operations (CFFO) of BRL361 million, as per Fitch metrics. Although Teksid's operating margins are lower than Tupy's, the company is expected to capture significant synergies in the short to medium term, improving EBITDA margins to Tupy's historical level. Conservative Capital Structure: Fitch expects Tupy to preserve a conservative capital structure despite volume slowdowns from the pandemic. Fitch forecasts net leverage of 1.6x in 2020, increasing to 2.1x in 2021 on Teksid's acquisition, compared with 0.9x in 2019. In the LTM ended Sept. 30, 2020, net debt/EBITDA was 2.0x, per Fitch's calculations. Considering the debt to finance the acquisition, Fitch projects net debt to increase to about BRL1.9 billion in 2021, from an estimated BRL939 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. Fitch estimates that 2%-3% of Tupy's revenues are 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 approximately 86% of revenues in 9M20. Aluminum is lighter but less resistant to pressure than iron. There is also room to evolve on the geometry of cast iron engine blocks with thinner walls. Fitch believes the two metals will coexist for a long period and that changes favoring one or the other in the small engine segment will be gradual, given long-term contracts. Low Scale and Competition: Tupy's scale remains relatively low, and the company has moderate geographic diversification compared with other global auto parts companies. The company's business is concentrated in the highly cyclical and competitive auto industry, which is affected by macroeconomic cycles; most of Tupy's contracts with automakers are long term and contain no minimum volumes. Companies that produce high-value-added products, including Tupy, usually generate their revenues from few OEMs. Capital intensity is considered high to address innovation, which works as an entry barrier; a large presence in the aftermarket, which is countercyclical, is seen as positive for auto-related credit profiles. Teksid Transaction: Tupy has entered into a share purchase agreement in December 2019 with Fiat Chrysler Automobiles N.V. for the debt-funded acquisition of 100% of Teksid's iron castings business for EUR210 million. The acquisition includes Teksid's operations in Brazil, Mexico, Poland, Portugal and China, which is a 50% joint venture, and offices in the U.S. and Italy. The transaction is subject to antitrust approval and is expected to be concluded in 1H21. The acquisition of the Teksid assets will increase the scale and diversification of Tupy's operations, with a moderate effect on consolidated credit metrics. Teksid is complementary to Tupy, with low overlap. The acquisition will allow Tupy to better access the European and Chinese markets, which is important to face global competition. Tupy will be able offer high-value-added services, such as machining to Teksid's clients. Mexican Country Ceiling Applied: In line with Fitch's Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria, Tupy's ratings are not constrained by Brazil's 'BB' Country Ceiling, given the company's operating cash flows from assets in Mexico and from maintaining cash in hard currency. Tupy's rating is capped by Mexico's 'BBB+' Country Ceiling. DERIVATION SUMMARY Ratings of auto parts companies are usually constrained by the sector's volatility, 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-/Negative) are rated at investment grade due to their conservative capital structures, larger scale and wider geographic diversification. GKN Holdings Limited (BB+/Negative) continues to incorporate a business profile that is strong for a 'BB+' rating and adequate financial flexibility. The Negative Outlook reflects the likelihood that the effects of the coronavirus pandemic could materially hinder or delay the previously expected recovery in cash generation and leverage to levels consistent with a 'BB+' rating. Tupy's low leverage and strong liquidity compares well with its peers. However, the 'BB' rating reflects its small scale and moderate diversification, as well as its high exposure to OEMs. Tupy's credit profile is stronger than those of Meritor, Inc. (BB-/Stable) and Tenneco Inc. (B+/Negative). Meritor's rating reflects the anticipated extreme cyclicality of the global commercial truck and off-highway vehicle markets and intense competition in the commercial driveline sector. Tenneco's rating reflects its more leveraged capital structure, which has been magnified by the pandemic. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- Sales volumes fall 31% in 2020 and rise 83% in 2021 due to the Teksid transaction; -- Average price increases in Brazilian reals of 5.1% domestically and 20.8% for exports in 2020, and flat in 2021; -- Cost of raw materials, mainly scrap, in U.S. dollars per ton in line with 9M20 values; -- Average wages, energy, general and administrative and other operating expenses grow in line with inflation; -- Addition of 6,000 employees from Teksid as of March 2021; -- Capex at 3.8% and 4.3% of net revenues in 2020 and 2021, respectively; -- No dividends in 2020 and 25% payout in 2021. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Further expansion of Tupy's geographic footprint while materially improving FCF; -- FFO gross leverage below 2.5x; -- EBITDA gross leverage sustained below 3.0x; -- EBITDA net leverage consistently below 2.0x; -- Maintenance of robust liquidity. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- A severe decline in U.S. pickup and truck production that leads to sustained reduced demand for Tupy's products; -- FFO gross leverage above 3.5x for a prolonged period; -- EBITDA gross leverage sustained above 4.0x; -- EBITDA net leverage above 3.0x on a recurring basis; -- Significantly negative FCF, eroding the company's liquidity. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. LIQUIDITY AND DEBT STRUCTURE Strong Liquidity: Fitch believes Tupy will maintain strong liquidity over the rating horizon. Cash and marketable securities of BRL1.4 billion covered short-term debt of BRL614 million by 2.3x at Sept. 30, 2020. Short-term debt is mostly related to trade finance, which funds company exports and also counts with liquidity raised during the pandemic. The refinancing of the USD350 million notes due 2024 to 2031 opens an opportunity for Tupy to reduce its coupon between 50 bps and 100bps, as per Fitch's estimate, while significantly lengthening its debt amortization schedule. Tupy expects to finance the Teksid transaction though a standby committed bridge loan. Upon the transaction's closing, Tupy will have 12 months to replace the loan with long-term funding. SUMMARY OF FINANCIAL ADJUSTMENTS -- Net balance of derivatives was added to debt; -- Extraordinary item were excluded from EBITDA. TUPY OVERSEAS: S&P Rates New $375MM Senior Unsecured Notes 'BB' --------------------------------------------------------------- S&P Global Ratings assigned its 'BB' issue-level rating and recovery rating of '3' to Tupy Overseas S.A.'s proposed senior unsecured notes of $375 million due 2031. The rating reflects the credit quality of the Brazil-based auto supplier, Tupy S.A. (Tupy; BB/Negative/--), which unconditionally and irrevocably will guarantee the notes, which rank pari-passu to other unsecured debts. Tupy intends to use the proceeds from the issuance to repurchase the outstanding 2024 senior notes, extending its debt maturity profile to close to five years from 3.3 years as of Sept. 30, 2020. S&P's credit rating on Tupy reflects its solid position in the auto parts industry, with exposure to the transportation, infrastructure, and agriculture segments, which demonstrated certain resilience during the COVID-19 pandemic. The outlook is currently negative, reflecting the public health and economic crises and their impact on the auto industry, which could hinder Tupy's recovery in the coming months, distancing the company's operations from S&P's 2021 forecast. Issue Ratings--Recovery Analysis Key analytical factors -- S&P assesses Tupy's recovery prospects using a simulated default scenario with an EBITDA multiple valuation approach. Its simulated default scenario assumes a payment default in 2026. The default would result from a severe economic slowdown and heightened competition, mainly in international markets, eroding cash flows. -- In S&P's simulated default scenario, it estimates EBITDA would decline about 49% from the last three-year average to trigger a payment default. At that level, S&P estimates the company's cash flows might be insufficient to cover interest expenses and maintenance capex. -- S&P has valued Tupy on a going-concern basis, using a 5.0x multiple applied to its projected emergence-level EBITDA, in line with the multiple of industry peers, which results in an estimated gross enterprise value (EV) of about R$1.6 billion. Simulated default assumptions -- Simulated year of default: 2026 -- EBITDA at emergence: R$322 million -- EBITDA multiple: 5.0x -- Estimated gross EV: R$1.6 billion -- Net EV, after 5% of administrative expenses: R$1.5 billion -- Jurisdiction: Brazil Simplified waterfall -- Senior unsecured debt: R$2 billion (proposed bond issuance and bank loans) -- Recovery expectations of the existing unsecured notes: 65% Note: all debt amounts include six months of prepetition interest. Ratings List New Rating Tupy Overseas S.A. Senior Unsecured BB Recovery Rating 3(65%) =========================== C A Y M A N I S L A N D S =========================== GLOBAL AIRCRAFT: Moody's Reviews B1 Sr. Unsec. Rating for Downgrade ------------------------------------------------------------------- Moody's Investors Service is reviewing for downgrade the Baa3 backed long-term issuer rating of Avolon Holdings Limited and the Baa3 long-term senior unsecured ratings of subsidiary Avolon Holdings Funding Limited. This follows the January 29, 2021 announcement of the bankruptcy reorganization filing of HNA Group, the controlling shareholder of Avolon's 70% shareholder Bohai Leasing Co. Ltd. Moody's is also reviewing for downgrade the B1 long-term senior unsecured rating of Global Aircraft Leasing Co., Ltd. (GALC), which holds Bohai's 70% interest in Avolon. Neither Avolon, Bohai nor GALC are involved in HNA's bankruptcy filing. The following ratings/assessments are affected by the action: On Review for Downgrade: Issuer: Avolon Holdings Funding Limited Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency), Placed on Review for Downgrade, currently Baa3 Issuer: Avolon Holdings Limited Backed LT Issuer Rating (Foreign Currency), Placed on Review for Downgrade, currently Baa3 Issuer: Avolon TLB Borrower 1 (US) LLC Backed Senior Secured Bank Credit Facility, Placed on Review for Downgrade, currently Baa2 Issuer: Global Aircraft Leasing Co., Ltd. Senior Unsecured Regular Bond/Debenture (Foreign Currency), Placed on Review for Downgrade, currently B1 Issuer: Park Aerospace Holdings Limited Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency), Placed on Review for Downgrade, currently Baa3 Outlook Actions: Issuer: Avolon Holdings Funding Limited Outlook, Changed To Rating Under Review From Negative Issuer: Avolon Holdings Limited Outlook, Changed To Rating Under Review From Negative Issuer: Avolon TLB Borrower 1 (US) LLC Outlook, Changed To Rating Under Review From Negative Issuer: Global Aircraft Leasing Co., Ltd. Outlook, Changed To Rating Under Review From Negative Issuer: Park Aerospace Holdings Limited Outlook, Changed To Rating Under Review From Negative RATINGS RATIONALE Moody's is reviewing Avolon's ratings because the company's significant number of aircraft on lease to HNA's airlines exposes Avolon to higher cash flow performance risks, given the lease restructuring likely to occur during HNA's reorganization. Aircraft Avolon leases to HNA's airlines represented an estimated 11% of the total carrying value of Avolon's approximately $23 billion commercial aircraft fleet, as at December 31, 2020, a higher exposure concentration than other aircraft leasing companies. HNA will likely seek to revise its fleet plan during its reorganization, which could result in the rejection of aircraft leases it no longer deems core to its airlines' operations, while also renegotiating the terms on affirmed leases, likely to the detriment of Avolon's revenues. Additionally, rental payments owed by certain of HNA's eleven majority and minority-owned airlines to aircraft leasing companies are in arrears, including to Avolon, reflecting the airlines' reduced operations during the coronavirus pandemic. Moody's expects that during its reorganization, HNA will seek to settle outstanding amounts owed to lessors, but the size of the haircut lessors ultimately incur is currently undetermined. HNA Group, a China-based conglomerate with interests primarily in the aviation and tourism sectors, said that it received formal notice of the filing of reorganization from the Hainan High People's Court on January 29, 2021, on the grounds that it cannot repay its debts. HNA and Bohai have experienced significant financial challenges that have been exacerbated by the coronavirus pandemic. But Avolon's governance and financial stability are strengthened by ORIX Corporation's (A3 negative) 30% investment in Avolon. During its review of Avolon's ratings, Moody's will seek to understand the potential effect on Avolon's operating performance and cash flows of HNA's restructuring, and the implications for Avolon's ability to timely return to strong performance as recovery in air travel strengthens. Should Moody's determine that HNA's reorganization will materially weaken Avolon's revenue-generating capacity for a sustained period, Moody's could downgrade the company's ratings. Avolon's effective management of liabilities and liquidity during the downturn in the aviation sector continues to be a credit strength. The company's January 2021 issuance of $1.5 billion of senior notes bolstered its cash position, resulting in 12-month liquidity coverage of debt maturities and aircraft purchase commitments of more than 220%, Moody's estimates. Avolon's ratings also reflect the company's relatively young commercial aircraft fleet and established competitive position as one of the largest aircraft leasing companies globally, which supports Moody's expectation that the company's operating performance will strengthen as the aviation sector recovers from the current downturn. Additionally, Avolon's fleet includes fewer older, out-of-production aircraft that are likely to suffer significantly lower demand during the sector downturn. Avolon's credit challenges include its business concentrations with HNA's airlines, as well as the heightened operating and financial risks stemming from the severe disruption in the aviation sector that have weakened leased aircraft demand, earnings and cash flow, and capital position. Moody's is reviewing GALC's senior unsecured notes rating based on the heightened financial performance challenges of GALC's parent Bohai and its controlling shareholder HNA Group (HNA), as well as the higher risks to the dividend paying performance of Avolon, whose distributions service the GALC notes. Moody's believes that the weakened Bohai and HNA credit profiles have also increased GALC's governance related risks. GALC has higher governance risks than Avolon, which contributes to GALC having a higher probability of default. GALC's senior unsecured debt ratings also incorporates the structural subordination of GALC's creditors to Avolon's creditors. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The rating action reflect the negative effects on Avolon and GALC of the breadth and severity of the downturn in aviation, and the deterioration in credit quality, profitability, capital and liquidity it has triggered. The rating actions also reflect heightened governance risks associated with the influence and control by Bohai and HNA. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Avolon's ratings could be downgraded upon conclusion of the review if: (1) liquidity in relation to expenditures and debt maturities (one-year horizon) declines to less than 150%, (2) revenues weaken, including as a result of foregone revenues from its lease business with HNA's airlines, and costs increase to the extent that the company will be unable to generate materially positive profits and operating cash flow by the end of 2023; (3) debt-to-equity leverage increases more than Moody's expects due to high impairment charges; (4) the company's competitive positioning otherwise weakens. Avolon's ratings could be confirmed upon conclusion of the review if: (1) the company generates consistently stronger and more stable profitability and cash flow ratios, (2) the company continues to demonstrate effective liquidity management during the aviation sector disruption as well as post-recovery, (3) fleet residual value risks and composition are well managed including through the downturn, (4) the company's debt-to-tangible net worth leverage ratio declines to less than 3.0x, and (5) the financial profiles of HNA and Bohai Leasing stabilize. Moody's could downgrade GALC's rating upon conclusion of the review if: (1) Avolon's ratings are downgraded, (2) Bohai's leverage increases, its liquidity weakens, or its earnings materially diminish; or (3) GALC's cushion with respect to its bond covenants materially deteriorates. Moody's could confirm GALC's rating upon conclusion of the review if: (1) Avolon's ratings are confirmed; (2) Bohai's credit profile improves further due to lower leverage and strengthened liquidity; or (3) GALC's governance risks decline. The principal methodology used in these ratings was Finance Companies Methodology published in November 2019. ========= C H I L E ========= INVERSIONES LATIN AMERICA: S&P Cuts ICR to 'BB', Outlook Stable --------------------------------------------------------------- S&P Global Ratings lowered its rating on Chile-based wind power project Inversiones Latin America Power Limitada's (ILAP) $412 million senior secured notes due 2033 to 'BB' from 'BB+'. S&P said, "The stable outlook reflects our view that in the next 12-24 months the project will deliver about 520 gigawatt hours (GWh) under regulated and fixed-price bilateral contracts out of a total generation of close to 610 GWh. As a result, we expect an average debt service coverage ratio (DSCR) in the 1.20x area next year. "We initially expected ILAP to receive payments for accounts receivables, stemming from the October 2019 rate freeze, under a securitization program led by the Inter-American Development Bank. We also expected the project to use those funds to partly repay its notes, reducing the projected debt service. We now expect ILAP to accumulate these accounts receivables in installments until 2024, and start to collect the amounts in 2025. This will slightly improve cash flows in 2025-2028, but won't reduce debt service. "Moreover, we continue to expect low electricity demand in the regulated segment for the next few years. We assume demand to be about 25% lower for the 2021-2023 contracted PPAs, 20% for 2024-2029, which finally converges to a long-term excess of 10% haircut after 2029. The discos' demand for ILAP's output started to contract in early 2019 due to Chile's slowing GDP growth and the migration of clients from the regulated market to the unregulated one. In addition, we project spot prices to be $40 per MWh in real terms, given that renewable energy generation will be added to the system in the next two years. "Therefore, we continue to believe that ILAP will post tight credit metrics with a minimum DSCR of 1.15x in 2033 and average DSCR of about 1.28x during the notes' term." ============= J A M A I C A ============= SANDALS RESORTS: Chairman Outlines Plans to Move Group Forward -------------------------------------------------------------- RJR News reports that the Executive Chairman of Sandals Resorts, Adam Stewart, has outlined plans to move the group forward. He was speaking with the Financial Report in one of his first media interviews since taking control of the group after his father's death, according to RJR News. "I know what I need to do, I have been prepared for this moment for many many years, we are in a complicated period. But I believe the worst is behind us. Although we haven't formally announced a couple of the acquisitions in Jamaica, it is fairly common knowledge that we acquired two new hotels. We announced Curacao, the first time in the Dutch Caribbean. We had announced St. Vincent - our first Beaches resort in the Eastern Caribbean. We have expansion plans in Jamaica from Beaches Negril to Sandals Royal Caribbean - we have lands in St. Lucia for a beaches . . ." Stewart says the plans in place give him enough to do for at least the next five years, before creating new ones, the report notes. He also said that thoughts about divesting Sandals resorts have been shelved and his focus is getting the hotel chain through the Covid-19 pandemic which has decimated the hospitality sector worldwide, the report relays. "The real recovery will come on the backside of this year for tourism and 2022 will be a strong year. We still don't have all of our hotels open across the Caribbean. But between today and the next 60 days from now, we should have all of our resorts operating again - all things being equal . . . ," he added. ======= P E R U ======= VOLCAN COMPANIA: Fitch Rates New US$450MM Notes Due 2026 'BB' ------------------------------------------------------------- Fitch Ratings has affirmed Volcan Compania Minera S.A.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB', as well as its unsecured notes due in 2022 at 'BB'. The Rating Outlook is revised to Positive from Negative. In conjunction with these rating actions, Fitch has assigned a 'BB' rating to the company's proposed issuance of USD450 million notes due 2026. Proceeds from this issuance will be used to repay a portion of the company's 2022 notes as well as part of its syndicated bank loan. The rating affirmations reflect Fitch's expectation that Volcan will be able to successfully refinance its USD535 million notes due in 2022 due to the decision by the company to issue equity. They also reflect Fitch's expectation of a strong operating performance for Volcan during 2021 due to increased output and favorable commodity prices. The Positive Outlook reflects Volcan's decision to raise USD400 million in equity, which is significantly higher than the USD200 million expectation Fitch previously factored into its 'BB' rating through a combination of asset sales or equity raises. An upgrade to 'BB+' of the aforementioned ratings is likely if the company successfully executes an issuance of this size. KEY RATING DRIVERS Favorable Pricing Environment: A shortage of zinc concentrate developed during 2020 as zinc smelters continued to operate throughout the crisis, while mine supply declined by about 3.5% due to pandemic-related restrictions. The shortage of zinc concentrates in combination with strong demand for products produced by Volcan should lead to a favorable pricing environment during 2021. Key factors supporting demand for zinc, lead and silver are increasing auto production, the building of inventory levels by the State Reserve Bureau in China, massive amounts of fiscal and monetary stimulus globally, and optimism surrounding the vaccine rollouts. Improving Cash Flow: Fitch expects Volcan's EBITDA to increase to USD294 million in 2021 from Fitch’s forecast of USD150 million in 2020. Fitch's 2021 projection is based upon a conservative forecast price of USD2,350 per tonne for zinc in 2021, which is 10% below the 2021 forward price of USD2,607 per tonne, and 250,000 tonnes of zinc production. Volcan's mines were closed for more than two months during 2020 due to restrictions imposed by the Peruvian government to control the coronavirus pandemic, which resulted in the company producing less than 170,000 tonnes of zinc. Diminished Refinancing Risk: Volcan is seeking to issue USD450 million in callable bonds and raise USD400 million in equity during 2021. The presence of Glencore in the company's capital structure, as well as the favorable outlook for zinc, make it highly likely that the company will be successful with these ventures. Proceeds from these capital market activities will be used to refinance the company's USD535 million bond that falls due in 2022, reduce the company bank debt, and to fund capex related to the Romina expansion in its Alpamarca mining unit. Glencore Ownership: Volcan's ratings have not been uplifted from its standalone credit profile due to Glencore's majority voting rights. Glencore's 55% voting and 22% economic stakes in the company is a positive consideration, however, as it enhances Volcan's ability to receive financing from various sources. Glencore is a leading producer of zinc and has curtailed the operations of its higher cost mines, which has supported prices, during times of suppressed prices. Volcan is considered a key asset by Glencore due to its low-cost zinc operations, as well as its extensive mining rights within Peru. Competitive Cost Position: Due to operational disruptions the company's cash cost of production was distorted during 2020 due to lower production volumes and lower dilution of fixed costs, together with lower prices for Volcan's main by-products. The company's consolidated operations exhibited a reasonable cost position with a C1 cash cost net of by-products of USD1,400/metric tonne for zinc during 2019, which fell within the third quartile of the global zinc cost curve. Asset Sales Headwinds: Pursuing measures such as selling noncore assets remains challenging. Key assets that could be sold are Volcan's approximate 20% stake in Polpaico, a Chilean cement producer, and its hydro assets. The company also owns a port project, which is not expected to be sold. Assets disposals may be used as a contingent source of cash should the company not succeed with its bond issuance and/or equity offering. DERIVATION SUMMARY Volcan benefits from a fairly diversified production of base and precious metals, similar to peers Compania de Minas Buenaventura S.A.A. (BB+/Stable) and Nexa Resources Peru S.A.A. (BBB-/Negative), and is more diversified than Minsur S.A. (BBB-/Negative). The company's scale of operations is larger than Nexa Resources Peru and Minsur, yet considerably smaller than higher-rated miners such as Industrias Penoles S.A.B. de CV (BBB/Stable) and Southern Copper Corporation (SCC; BBB+/Stable). Volcan has a weaker capital structure than these peers, as it did not use elevated prices in 2017 and 2018 to reduce debt or build cash. The company also has a much poorer liquidity position than its peers. The company's ratings continue to reflect a competitive cost position and moderate scale, with its Positive Outlook focused on the company's decision to raise USD400 million in equity, which is significantly higher than previously anticipated amid an improved operational environment. Similar to peers, Volcan demonstrated a willingness and ability to reduce development and exploration expenditure during periods of lower commodity prices to preserve cash flow. The company's consolidated life of mine of four years of reserves is also on the lower end, when compared with Peruvian and other global mining peers. KEY ASSUMPTIONS -- Average zinc price of USD2,350/tonne in 2021, USD2,000/tonne in 2022 and USD2,100/tonne thereafter; -- Average silver price of USD20.00/oz in 2021, and USD17/oz in 2022 and thereafter; -- Average lead prices of USD2,100/tonne in 2021, and thereafter; -- Capex of USD210 million, USD260 million, USD300 million in 2021, 2022, and 2023; -- Zinc output of 250,000 MT, 280,000 MT and 300,000 MT in 2021, 2022 and 2023. Silver output of 18 million oz, 13 million oz, and 16 million oz in 2021, 2022, and 2023; -- Yauli's zinc and silver production rise more than 50% and 80% while mineral treated rises 40% in 2021 due to better grades. Programmed Silver Oxides plant stoppage expected in 2022; -- Equity issuance of USD 400 million in 2021; no asset sales; -- Debt issuance of USD 450 million five-year senior unsecured debt in 2021, loan agreement of USD125 million in 2022; USD535 million in 2022 bonds and short-term debt with banks will be repaid. RATING SENSITIVITIES Factor that could, individually or collectively, lead to positive rating action/upgrade: -- Fitch would upgrade Volcan's rating if the proposed equity raise successfully reaches USD400 million and uses proceeds to lower gross debt to below USD700 million. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- The failure to raise at least USD200 million in equity; -- An inability to issue a new bond during 2021 that would allow the company to prepay at least USD300 million of its bond due in 2022 during the first half of 2021. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. LIQUIDITY AND DEBT STRUCTURE Skewed Maturity Profile: Volcan has a sizable portion of its total debt maturing in the next 18 months. The company had USD98 million of cash and marketable securities as of Sept 30, 2020. This compares with USD893 million of total debt. Refinancing risk is high due to the maturity of a USD300 million syndicated loan in January 2022 and a USD535 million bond in February 2022. Refinancing Plan Lowers Risk: Volcan plans to issue USD450 million of five-year callable bonds in 2021 and to raise USD400 million of equity. Proceeds from these activities will be used to repay the bond due in 2022, lower bank debt, and fund capex. Key investments for the company are related to improved mining plans at Yauli, its largest mining unit, and improving production at Alpamarca through the Romina expansion. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. VOLCAN COMPANIA: Moody's Rates New $450MM Sr. Unsecured Notes 'B1' ------------------------------------------------------------------ Moody's Investors Service has affirmed Volcan Compania Minera S.A.A. y Subsidiarias' B1 corporate family rating and senior unsecured notes due February 2022. At the same time, Moody's assigned a B1 rating to the company's proposed up to $450 million in senior unsecured notes. The outlook was changed to stable from negative. The rating of the notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and that these agreements are legally valid, binding and enforceable. The new notes will rank pari passu with all other unsecured and unsubordinated debt obligations of Volcan. RATINGS RATIONALE The change in Volcan's outlook to stable was prompted by the company's announcement on February 1st of a couple of transactions that, if successfully executed, would materially reduce refinancing risk. Accordingly, in addition to the proposed $450 million bond offering, the plan also includes a $400 million equity injection in the 3Q21, for a total combined $850 million cash inflow. Proceeds will be used to refinance the bulk of its $835 million in debt maturing in February 2022 with an effective 25% debt reduction at closing of the transactions. The stable outlook also reflects Moody's view that the company's operating performance will continue improving on the back of more favorable base metals prices and Volcan's competitive cost position. This should support adequate credit metrics including Moody's adjusted leverage at 2.6 times once the company completes its liability management in Q1 2022, from 8.6 times as of September 2020. Volcan's B1 ratings incorporate the company's competitive cost position, its operational diversity in terms of metals produced and assets; and its position as a leading producer of zinc and silver globally, with some of the largest zinc reserves. Glencore plc (Glencore, Baa1 negative) became a controlling shareholder of Volcan in November 2017, with positive implications for Volcan's strategy, operations, corporate governance standards and financial policies. Volcan's ratings are constrained by the company's modest scale (with expected revenue of $535 million in 2020) compared with that of its global peers and its concentration in one country, as well as its high earnings volatility because of its exposure to commodity prices. Volcan will use the proceeds from the $450 million bond issuance to fund up to $120 million in a tender offer for its outstanding $535 million notes maturing in February 2022, and repayment of its term loans. Assuming acceptance of the tender offer as proposed, Volcan will use the remaining proceeds in cash and the equity injection to repay the remaining outstanding $415 million in its 2022's senior unsecured notes at maturity. The $850 million in cash inflow will not be simultaneous, but Volcan expects it will happen before the third quarter of 2021, once the company completes all the regulatory procedures pertaining the equity offering, including obtaining approval in the annual shareholders meeting. On January 19, 2021, Volcan's board of directors agreed to submit for approval the equity increase for up to $400 million in the annual shareholders meeting that will take place around March 2021. Moody's believes the announced transactions have positive implications for Volcan's liquidity and refinancing risk but there are relevant risks in the execution of the plan, including potential delays in the capital increase and another lock-down related to COVID-19 that disrupts supply chain or even the company's production levels, as it happened in 2020. Volcan has some pulls it can lever to protect its liquidity profile including a $50 million committed revolving credit facility available until October 2022 and its historically easy access to low-cost, short-term advised credit lines with local banks in Peru, as well as some capex flexibility. However, none of these would be enough to fully service the total of $835 million in debt coming due in February 2022. Volcan's operating performance was affected by a combination of lower volumes from the strict lockdowns in Peru and also persistently low zinc prices during 2020. Accordingly, volumes for zinc declined 32.6% in September 2020 in comparison with September 2019, with production declines of 25.5% for silver, 18.2% for lead, 32.1% for copper and 56.8% for gold during the same period. At the same time, zinc prices averaged $1.03/pound in 2020, which negatively compares to the $1.14/pound average price in 2019. As a consequence, the company's EBIT margin (including Moody's adjustments) declined to -11.8% for the last twelve months ended September 2020, from -0.5% in 2019 and 16.3% in 2018. This led to a Moody's adjusted debt/EBITDA of 8.6x as of the 12 months that ended September 2020. Volcan's performance started recovering in 3Q20 posting a 14.1% EBIT margin for the quarter and we project further recovery in 2021 on the back of normalized mining production volumes and higher commodity prices. Moody's estimate adjusted debt/EBITDA will decline to around 2.6 times in the next twelve to eighteen months. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Positive actions could arise if Volcan maintains its competitive cost position, while continue investing for growth, achieving higher scale; and maintaining a conservative approach towards short term debt. Quantitatively, an upgrade would require an EBIT margin above 10% and a total adjusted debt/EBITDA below 3.5x on a sustained basis. Negative action could materialize if Volcan fails to execute the refinancing as proposed or substantially underperforms current expectations with Moody's adjusted EBIT margins falling below 5% and interest coverage measured as EBIT/interest expenses below 1 time. The principal methodology used in these ratings was Mining published in Septmeber 2018. Volcan is a Peruvian mining company which primarily produces zinc and lead concentrate and some copper concentrate, all with high silver content. The company operates through five operating units including eight operating mines, six concentrator plants and one leaching plant for silver oxide production. All of Volcan's operations are located in Peru and it reported revenue of $563 million for the last twelve months ended September 2020. Volcan is a holding company listed on the stock exchanges of Lima, Santiago and Madrid (Latibex). Since November 2017, Glencore has a controlling stake of 55% in Volcan's Class A voting shares, which is equivalent to a 22% economic interest in Volcan. ********* 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 2021. 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 * * *