/raid1/www/Hosts/bankrupt/TCRLA

/raid1/www/Hosts/bankrupt/TCRLA_Public/210610.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, June 10, 2021, Vol. 22, No. 110 Headlines B E R M U D A TEEKAY CORP: Completes Banff Decommissioning Agreement B R A Z I L AZUL SA: Fitch Affirms 'CCC+' LongTerm IDRs, Outlook Positive AZUL SA: Moody's Updates New Notes, No Impact on B3 CFR AZUL SA: S&P Rates New Unsec. Notes 'CCC+', Outlook Stable BRAZIL: Per Capita Meat Consumption Lowest in 25 Years C A Y M A N I S L A N D S EAGLE HOSPITALITY: Sells Four Properties Under Ch. 11 for $116M C H I L E CHILE: IDB Approves $50MM Loan to Speed Up Energy Transition C O L O M B I A COLOMBIA: Eyes Shorter-Term Debt as Yields Rise After Unrest FRONTERA ENERGY: Fitch Rates $350MM Unsecured Notes 'B' SIERRACOL ENERGY: Fitch Gives FirstTime 'B+' IDRs, Outlook Stable D O M I N I C A N R E P U B L I C [*] DOMINICAN REPUBLIC: Merchants Trust Recovery Will be Maintained G R E N A D A [*] GRENADA: Urges CDB to More Actively Assist Member Countries M E X I C O MEXARREND SAPI: Fitch Affirms 'B+' LT IDRs, Outlook Negative - - - - - ============= B E R M U D A ============= TEEKAY CORP: Completes Banff Decommissioning Agreement ------------------------------------------------------ Teekay Corporation (Teekay or the Company) (NYSE:TK) disclosed the completion of the remaining conditions precedent relating to the previously announced Decommissioning Services Agreement (DSA) with CNR International (UK) Limited (CNRI), on behalf of the Banff joint venture, whereby Teekay has engaged CNRI to decommission the Company's remaining subsea infrastructure located within the CNRI-operated Banff Field. As part of the DSA, which is now in full effect, CNRI has assumed full responsibility for Teekay's remaining asset retirement obligations (Phase II) for the above-mentioned facilities, which should enable CNRI to complete Teekay's Phase II work in conjunction with their other decommissioning work at the Banff Field in a more efficient manner. As part of the transaction, Teekay has now been deemed to have completed all of its prior decommissioning obligations associated with the Banff Field and as a result, the Company expects to reduce its accrued asset retirement obligations by approximately $30 million in the second quarter of 2021. "This agreement is a major milestone towards achieving our strategic goal of winding down our FPSO segment," commented Kenneth Hvid, Teekay's President and CEO. "This transaction also reflects the strong collaboration with our customer and represents the conclusion of our involvement on the Banff Field after over 20 years of successful operations." About Teekay Teekay is a leading provider of international crude oil and gas marine transportation services. Teekay provides these services primarily through its directly-owned fleet and its controlling ownership interests in Teekay LNG Partners L.P. (NYSE:TGP), one of the world's largest independent owners and operators of LNG carriers, and Teekay Tankers Ltd. (NYSE:TNK), one of the world's largest owners and operators of mid-sized crude tankers. The consolidated Teekay entities manage and operate total assets under management of approximately $9 billion, comprised of approximately 135 liquefied gas, offshore, and conventional tanker assets. With offices in 10 countries and approximately 5,350 seagoing and shore-based employees, Teekay provides a comprehensive set of marine services to the world's leading oil and gas companies. =========== B R A Z I L =========== AZUL SA: Fitch Affirms 'CCC+' LongTerm IDRs, Outlook Positive ------------------------------------------------------------- Fitch Ratings has affirmed Azul S.A.'s (Azul) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'CCC+' as well as the 'CCC+'/RR4 rating of the senior unsecured notes due in 2024 that were issued by Azul Investments LLP. Fitch has upgraded Azul's Long-Term National Scale rating to 'B' (bra) from 'CCC(bra)'. Fitch has assigned Positive Rating Outlooks to Azul's international and national scale ratings. Fitch has also assigned a 'CCC+/RR4' rating to up to USD600 million of five to seven years unsecured notes to be issued by Azul Investments, which will be fully guaranteed by Azul and its subsidiary Azul Linhas Aereas Brasileiras S.A. The use of the proceeds is for general corporate purposes. The Positive Outlooks reflect Azul's improved liquidity position and financial flexibility over the last few quarters. It also incorporates Azul's strong domestic business position and network that should benefit from a rebound in domestic air traffic during the second half of 2021 as the vaccination plan is rolled-out in Brazil. KEY RATING DRIVERS Strong Domestic Market Position: Azul's credit profile benefits from its unique regional airline market position in Brazil, with a strong presence in underserved markets and limited route overlap with competitors, GOL and LATAM. Azul is the sole provider of services on 77% of its routes and is one of the two largest airline companies in Brazil with a market share of around 31% as measured by revenues/passenger/kilometer in 2020. As Brazil is the company's key market, Azul's operating results are highly correlated to the Brazilian economy. Brazilian Vaccination Program: Experiences around the world indicate a strong correlation between vaccination levels and a rebound of domestic air travel. Azul is uniquely positioned as a leading domestic airline to benefit from a return to more normal travel activity during the next 12 to 24 months, as reflected by the Positive Outlook. Around 49 million people or 23% of the Brazilian population have received the first dose of the vaccine and around 23 million, or only 11% of the population, have received the second dose. Improved Financial Flexibility: Azul has improved its liquidity position over the past few quarters. The company continues to have access to credit market and has benefitted from the financial flexibility provided by its suppliers. Azul' strong cash position should help it withstand short-term volatility if a third wave of COVID-19 cases occurs during the vaccine rollout. Rebound in Mid-2022: Fitch's current base case for the Brazilian domestic airline industry assumes a recovery that will only reach 2019 levels of traffic by mid-2022. Giving its unique network, as well its more aggressive growth strategy, Azul has outperformed the overall market. Fitch expects Azul's RPKs to be 15% below pre-Covid 2019 figures during 2021. This compares with 2020 levels that were 40% below those of 2019. Industry dynamics should remain unchanged in the short to medium term, with leisure passengers representing a higher proportion of the mix, which should limit a more substantial recovery in yields. Cash Flow Pressure: Azul has made important advances in cost initiatives and on the renegotiation with suppliers, but the slow pace of air traffic recovery and BRL1.5 billion of capex will result in negative FCF of BRL1.9 billion in 2021. These figures compare with BRL453 million of capex in 2020 and BRL310 million of negative FCF. The company's financial flexibility has been aided by agreements of payment schedules with lessors that has provided working capital relief of around BRL3.2 billion through 2021. The lower monthly lease rates will be compensated for by slightly higher rates starting in 2023 or by the extension of certain lease agreements at market rates. Growth Strategy to Watch: Azul has shown an aggressive growth strategy over the past years in terms of organic growth and has recently stated its interests in further consolidating the local domestic market. The company has declared its interest in merger/association with the operations of Latam Airlines in Brazil, and is in talks with creditors. The Chilean company, which is still under its Chapter11 Process in the U.S., has declared no interest in the deal. DERIVATION SUMMARY Azul's Positive Outlook reflects Fitch's expectation that the company is uniquely positioned to benefit from a recovery of domestic air travel demand. The 'CCC+' rating, however, reflects the continuation of a high degree of uncertainty as to the timing and scope of the recovery. Azul's liquidity position is positive and compares well with its most similarly rated peer, GOL Linhas Aereas Inteligentes S.A (CCC+). Azul's has higher operating leverage compared to GOL. Azul has a weaker position relative to global peers given its limited geographic diversification and relatively high operating leverage; nonetheless, its strong position in the Brazilian regional market, high operating margins and a track record of strong liquidity ratios have been key rating drivers. These positive factors are tempered by the company's ongoing business growth and operational volatility related to its key market, Brazil. FX risk exposure is a negative credit factor for Azul considering its limited geographic diversification; the company has implemented a currency hedge position that partially mitigates this risk. KEY ASSUMPTIONS -- During 2021, Fitch's base case includes a decrease in RPK by 15%, with a full rebound to 2019 levels occurring by 2022. -- Load factors around 80% during 2021 and 2022; -- Capex of BRL1.5 billion per year for 2021 and 2022. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Solid rebound domestic air traffic in Brazil; -- Material improvement in the company's liquidity position and debt amortization profile; -- Net leverage ratios below 4.5x by 2022. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Deterioration in Azul's liquidity profile or difficulties to continue to access credit lines; -- Slowdown in the pace of the rollout of vaccines in Brazil. 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 Good Cash Position: Azul held readily available cash of BRL2.3 billion as of March 31, 2021, per Fitch's calculation. This compares with BRL3.5 billion of short-term debt, including BRL3.0 billion of leasing obligations. In the same period, Azul's total debt was BRL21.9 billion. This primarily consists of BRL14.1 billion of leasing obligations, BRL2.5 billion of convertible debentures, BRL2.5 billion cross-border senior notes, BRL1.3 billion of aircraft and engine loans and BRL701 million in local debentures as of June 30, 2020. Azul does not have a committed standby credit facility, but it has the option to issue an additional BRL500 million of debt related to its convertible debentures. Giving the ongoing market volatilities, Azul's continuous ability to access credit/debt markets during 2021 and 2022 is key to maintain healthy cash levels. Azul consider its liquidity position is further enhanced by BRL1.0 billion in account receivables, BRL1.8 billion in security deposits and maintenance reserves, and BRL1.1 billion in long-term receivables. ISSUER PROFILE Azul is one of the largest local airlines in Brazil. It has an important presence in the regional market and is the sole airline on 77% of its routes. As of Dec. 31, 2020, 18% and 8% of its domestic network overlapped with GOL and LATAM, respectively. Azul's market share was 31% during 2020. 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. AZUL SA: Moody's Updates New Notes, No Impact on B3 CFR ------------------------------------------------------- Moody's Investors Service has updated the amount for the proposed senior unsecured notes due in 5-7 years to be issued by Azul Investments LLP and unconditionally guaranteed by Azul S.A. ("Azul") (B3 stable) and Azul Linhas Aereas Brasileiras S.A. to $300-$500 million. No other changes to the features of the issuance have been made. The proposed notes were rated with a published report on June 7, 2021. The updated amount does not affect the assigned Caa1 rating. Azul's existing B3 corporate family rating and Caa1 senior unsecured rating remain unchanged as well. The outlook for all ratings is stable. AZUL SA: S&P Rates New Unsec. Notes 'CCC+', Outlook Stable ---------------------------------------------------------- S&P Global Ratings affirmed its global scale 'CCC+' and national scale 'brBB' issuer credit rating on Brazilian airline Azul S.A. At the same time, S&P assigned its 'CCC+' issue-level rating and '4' recovery rating to the new senior unsecured notes. The '4' recovery rating indicates its expectation of average (30%-50%; rounded estimate: 30%) recovery in the event of a payment default. The stable outlook reflects lower liquidity pressure until 2022 when larger leasing payments start to come due, but uncertainty remains about the recovery path and large financial obligations ahead for Azul. Domestic travel has had a strong recovery in the last quarter of 2020 and the first of 2021. During the first quarter of 2021, Azul's domestic revenue passenger kilometers (RPK) was 2% and available seat kilometers (ASK) was 7% higher than in the first quarter of 2019. However, S&P forecasts a weaker second quarter because of historical seasonality and amid higher mobility restrictions imposed by Brazilian cities. S&P said, "In our base case, we assume a strong recovery of domestic air traffic resulting in 2021 ASK of about 3% lower than 2019 and 15%-20% higher in 2022, which should boost revenue and EBITDA. On the other hand, international air traffic will remain subdued, about 70% and 15% lower in 2021 and 2022, respectively. We also assume considerably higher fuel costs in the next two years amid higher crude oil prices and a weaker Brazilian real. Overall, we expect that EBITDA will recover to near pre-pandemic levels by 2022. We expect EBITDA of R$1.8 billion-R$1.9 billion in 2021 and R$3.0 billion-R$3.3 billion in 2022, compared to R$3.6 billion in 2019. "Following the issuance of the convertible debenture for R$1.75 billion in November, other refinancing, and further negotiations with lessors and other suppliers, the company has maintained a more comfortable liquidity position, with minor debt amortizations of R$525 million in 2021, and we believe that risks of default in the next 12 months are low." Additionally, if completed, the new senior unsecured bond issuance would give the liquidity position a larger cushion. However, lease liability payments will be about R$3.0 billion in 2022 and 2023, so their payment will depend on a sustained recovery of cash flows to minimize exposure to refinancing risks. Despite the improved liquidity and lower default risk, conditions remain uncertain for the sector. Depending on the number of COVID-19 cases, pace of the vaccination campaign, the government's measures to contain the pandemic, and the economic recovery in Brazil, Azul's revenue, EBITDA, and liquidity could vary widely in the next few quarters. S&P said, "The second wave in Brazil of the COVID-19 pandemic and the quarantine measures implemented across the country in April caused some reversal in traffic recovery, and we think there's still risk of a third wave while the country progresses with its vaccination campaign, which could lead to additional lockdowns and travel restrictions and diminish consumer confidence. Meanwhile, Azul's balance sheet remains vulnerable, with sizable leasing liabilities and increasing related cash flow disbursement mainly starting in 2022, and increasing financial debt to support revamp of operations. Notably, in the first quarter of the year, the company's cash flow deficit amounted to almost R$800 million and we expect it to maintain large free operating cash flow (FOCF) deficits in 2021 and 2022 and very high leverage through 2022. We forecast its debt-to-EBITDA ratio to exceed 5.0x until 2023." BRAZIL: Per Capita Meat Consumption Lowest in 25 Years ------------------------------------------------------ Rio Times Online reports that this year, Brazilians will consume the lowest amount of beef per person in 25 years, estimates CONAB (National Foodstuff Supply Company). According to the agency, the crisis scenario of recent years - with the 2014 - 2016 recession, the slow recovery from 2017 to 2019 and the new crisis caused by Covid-19 since last year - has been driving down the total consumption of meat (beef, pork and chicken) since 2014, the report discloses. The lower domestic consumption has an explanation: the strong external demand, mainly from China, according to Rio Times Online. The drop in production in 2018 and 2019 was so large that it led the Chinese to expand their purchases abroad of all types of meat, not only pork, but also beef and poultry, Rio Times Online 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. Fitch Ratings' credit rating for Brazil stands at 'BB-' with a negative outlook (November 2020). Fitch's 'BB-' Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) has been affirmed in May 2021. Standard & Poor's credit rating for Brazil stands at BB- with stable outlook (April 2020). S&P's 'BB-/B' long-and short-term foreign and local currency sovereign credit ratings for Brazil were affirmed in December 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). =========================== C A Y M A N I S L A N D S =========================== EAGLE HOSPITALITY: Sells Four Properties Under Ch. 11 for $116M --------------------------------------------------------------- Ameya Karve of Bloomberg News reports that Eagle Hospitality Trust, whose units filed for bankruptcy protection earlier this year, sold four of its 15 properties under Chapter 11 for a total of $116 million. The company closed the sale of Sheraton Denver Tech Center, Four Points by Sheraton San Jose Airport, Embassy Suites by Hilton Anaheim North and Double Tree by Hilton Salt Lake City Airport on June 3, 2021, it said in an exchange filing. EHT expects to complete sale of one more property, the Hilton Atlanta Northeast, on or about June 8, 2021, for an estimated $37.4 million. About Eagle Hospitality Group Eagle Hospitality Trust -- https://eagleht.com/ -- is a hospitality stapled group comprising Eagle Hospitality Real Estate Investment Trust ("Eagle H-REIT") and Eagle Hospitality Business Trust. Based in Singapore, Eagle H-REIT is established with the principal investment strategy of investing on a long-term basis, in a diversified portfolio of income-producing real estate which is used primarily for hospitality and/or hospitality-related purposes, as well as real estate-related assets in connection with the foregoing, with an initial focus on the United States. EHT US1, Inc., and 26 affiliates, including 15 LLC entities that each owns hotels in the U.S., sought Chapter 11 protection (Bankr. D. Del. Lead Case No. 21-10036) on Jan. 18, 2021. EHT US1, Inc., estimated $500 million to $1 billion in assets and liabilities as of the bankruptcy filing. The Debtors tapped Paul Hastings LLP as bankruptcy counsel; FTI Consulting, Inc., as restructuring advisor; and Moelis & Company LLC, as investment banker. Cole Schotz P.C. is the Delaware counsel. Rajah & Tann Singapore LLP is Singapore Law counsel, and Walkers is Cayman Law counsel. Donlin, Recano & Company Inc. is the claims agent. ========= C H I L E ========= CHILE: IDB Approves $50MM Loan to Speed Up Energy Transition ------------------------------------------------------------ The Inter-American Development Bank (IDB) has approved a US$50 million loan to support Chile's policy reforms aimed at speeding up its energy matrix decarbonisation and transition to carbon neutrality. The program seeks to strengthen the energy sector's regulatory framework by promoting distribution market regulation improvements, fostering clean energy use by consumers, and encouraging women participation in the sector. In order to accelerate the energy matrix decarbonisation process the country plans to gradually retire coal power plants, which in 2019 accounted for 36.7% of energy generation and for 25% of greenhouse gas emissions. Chile's goal is to reach carbon neutrality by 2050. The program will also support Chile's fair energy transition strategy which, besides incorporating equitable social and environmental development components, will boost job creation in the transition to carbon neutrality. In addition, the project will encourage implementing policies and measures to advance the country's efforts to promote sustainable development, encourage large-scale adoption of renewables in its energy matrix, and pave the way for their expansion over the long term. Furthermore, the program will usher in energy technology innovation initiatives. In the area of electromobility, for example, the energy efficiency act plans to make urban public transport fully electric by 2040. Other goals of the project include enabling and expediting the incorporation of new renewable energy sources and energy vectors such as green hydrogen in the energy matrix. The national green energy strategy will promote the development of this vector and turn the country into a world-class exporter by 2040. Additionally, the operation will support key policy moves aimed at bridging the gender gap in a sector where women account for only 23% of the jobs, and boost female participation through public-private guidelines. This is the first operation in a series of two independent, programmatic policy-based loans. The US$50 million credit will be disbursed over a two-year period. It has a 5.5-year period of grace and an interest rate based on Libor. =============== C O L O M B I A =============== COLOMBIA: Eyes Shorter-Term Debt as Yields Rise After Unrest ------------------------------------------------------------ Oscar Medina and Andrea Jaramillo at Bloomberg News report that Colombia may start relying more heavily on shorter-term debt sales to cover its budget shortfalls, seeking to drive down interest costs after a failed tax-reform push triggered social unrest and sent yields higher. Yields on longer-term bonds fell. Public Credit Director Cesar Arias, a Finance Ministry official who is in charge of the government's borrowing, said in an interview that he will begin to discuss with investors whether to scale back the maturities on some of the bonds it sells at auction, according to Bloomberg News. "We plan to continue with what we have in terms of the amount," he said. "What we are beginning to discuss with the market is the optimal duration, given the steepness of the curve and overall investor appetite. My sense is that duration will probably be shorter." The potential shift comes after long-term yields have jumped, with President Ivan Duque in May dropping his tax-hike plan after it set off street protests and forced the resignation of his finance minister, Bloomberg News discloses. S&P Global Ratings cut the nation's foreign-currency debt rating to junk last month as the government contends with mounting deficits brought on by the pandemic. Steeper Curve Long-term borrowing costs have risen more following turmoil Yields on the country's peso bonds due in 2050 fell 17 basis points, the most in three weeks, to 8.07%. The potential maturity shift could "reduce supply pressures" in the long end of the curve, said Camilo Diaz, head strategist at the Itau Comisionista de Bolsa brokerage in Bogota, Bloomberg News says. Yet it would also lead to a higher concentration of maturities in the short end, which is concerning, he said. The recent bond-market rout has saddled investors in Colombia's peso-denominated debt with a loss of 11% this year in dollar terms, according to a Bloomberg Barclays index. That stands in contrast with an average gain of 0.2% for its emerging-market peers, Bloomberg News adds. But Arias said foreign investors continued to be net buyers of Colombia's peso bonds, known as TES, in May. He said foreigners bought 4.1 trillion pesos ($1.1 billion) of the securities last month, the same amount as in April, Bloomberg News notes. Foreigners own about a quarter of the bonds. Resilient to Shocks Every other week, the Andean nation currently offers fixed-rate bonds due in 2027, 2036 and 2050, and inflation-linked debt maturing 2029, 2037 and 2049, Bloomberg News relays. "The TES market has shown to be resilient to the shocks," said Arias. "Many forecast foreign capital outflows, and what data shows is the contrary." After the withdrawal of the tax bill, new Finance Minister Jose Manuel Restrepo is focusing on seeking a wide consensus before sending a new proposal to lawmakers, Bloomberg News notes. The new bill will likely include the elimination of the 5% tax on foreign holders of peso bonds, Arias added. Colombia will offer its first green bonds in the local market as soon as July, according to Arias. The ministry will issue as much as 2 trillion pesos of notes that will fund projects including renewable energy generation and to fight deforestation, Bloomberg News notes. The offering will either be carried out through auctions or through a syndication, Arias said. Starting in mid-June, the ministry will start "marketing" the bonds to determine the timing and bond maturity, he added. Bond ETF The finance ministry has also been working on the planned launch of an exchange-traded fund that Arias said could expand the buyer base for its peso bonds by attracting individual investors, Bloomberg News relays. The kick off is planned for the first half of 2022, when it would begin trading on the country's stock exchange, according to Arias. It may later also trade in the platform known as MILA that integrates the bourses of Chile, Colombia, Mexico, and Peru. After selling a net $1.6 billion of bonds in the overseas market in January and $3 billion in April, Colombia has completed 90% of its planned external bond offerings this year, said Arias, Bloomberg News relays. But he added that he expects no difficulties in tapping the market once again for the remaining amount "if needed," Bloomberg News added. As reported in the Troubled Company Reporter-Latin America on May 21, 2021, S&P Global Ratings lowered its long-term foreign currency sovereign credit rating on Colombia to 'BB+' from 'BBB-' and its long-term local currency rating to 'BBB-' from 'BBB'. FRONTERA ENERGY: Fitch Rates $350MM Unsecured Notes 'B' ------------------------------------------------------- Fitch Ratings has assigned a 'B'/'RR4' rating to Frontera Energy Corporation's proposed $350 million seven year senior unsecured notes. The proceeds of the issuance are to fund the company's announced tender offer for its $350 million 9.70% senior unsecured notes due June 2023. Fitch currently rates Frontera's Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with a Stable Outlook. Frontera's ratings and Outlook reflect a small and concentrated production profile, improved cost production profile preserving its reserve life, and strong liquidity and leverage profile. Collectively, the actions taken by Frontera have strengthened its position to absorb shocks in Brent prices, which were distressed in 2Q20. The company has implemented a dynamic hedging policy to offset higher production cost, which is caused by take-or-pay transportation contracts. Fitch estimates the company's actions improved proved (1P) reserve life to 6.2 years in 2020 compared with 4.4 years in 2019. Gross leverage, defined as to total debt/EBITDA, is estimated to have been 3.8x in 2020 and expected to be 1.6x in 2021 with net leverage expected to be below 1.0x over the rated horizon. KEY RATING DRIVERS Cost Production Profile: Fitch believes Frontera Energy's cost-cutting initiative and reduction in production volumes in 2020 were positive actions taken to preserve the company's strong credit and liquidity profiles. This is evidenced by a decline in half-cycle costs in 2020 to $28.60 per barrel (bbl) down from $30.60/bbl in 2018. Frontera's production profile is higher than peers, which mainly explains a fixed transportation cost estimated to average $11.00/bbl over the rated horizon limiting its profitability when compared with Colombian peers. The company's current hedging contracts for roughly 50% of total production offset the higher costs and protect it from price volatility. Strong Leverage Profile: Frontera's gross leverage, defined as total debt/EBITDA, is strong for its rating category. Fitch estimates gross leverage will be 1.6x in 2021, assuming an EBITDA of $330 million in 2021 and total debt of $540 million for YE 2021. Total debt/proved developed producing (PDP) is expected to be $19.72/bbl by YE 2021 and total debt/1P is expected to be $5.00 in 2021. EBITDA/ interest expense is estimated to be 8.0x in 2021 and average nearly 7.0x over the rated horizon. Small Production Profile: Frontera's ratings are constrained by its production size expected to average 40,000bbld over the rated horizon that is evenly split between light and heavy crude. The company has a concentrated production profile where Quifa represents 68% (27,578bbld) of daily production followed by Guatiquia at 27% (10,850) and CPE-6 at 6% (2,375bbld). The company operates all three blocks and owns 100% of both Guatiquia and CPE-6 and has a joint venture, working interest of 60%, with Ecopetrol for Quifa. Improved Reserve Life: Frontera's swift adjustment to decrease production to an average of 43,000 barrels of oil equivalent per day (boed) in 2020, a 40% decline from a 2019 average of 70,875boed, materially improved its 1P reserve life to 6.5 years from 4.4 year in 2019. Fitch does not expect Frontera will revert to its previously weaker reserve life, as the pricing environment over the rated horizon for Brent does not warrant the amount of capex needed to increase production to previous levels in Colombia of 61,000boed. The company has suspended production of its Block 192 in Peru, and Fitch is assuming this block will be closed indefinitely. DERIVATION SUMMARY Frontera Energy's credit and business profile is comparable to other small independent oil producers in Colombia. The ratings of Geopark (B+/Stable) and Gran Tierra Energy International Holdings Ltd. (CCC) are all constrained to the 'B' category or below, given the inherent operational risk associated with small scale and low diversification of oil and gas production. Frontera's production profile compares favorably with other 'B' rated Colombian oil exploration and production companies. Over the rated horizon, Fitch expects Frontera's production will average 40,000bbld slightly less than Geopark with an average of 45,000bbld and higher than Gran Tierra at 30,000bbld. Frontera's PDP reserve life is 1.6 years and 6.2 years for 1P in 2020 is below Geopark at 4.0 years for PDP and 7.4 years for 1P, while Gran Tierra is at 5.7 years for PDP and 9.5 years for 1P. Frontera's half-cycle production cost was $28.60/bbl in 2020 and full-cycle cost was $42.20/bbl higher than Geopark, who is the lowest cost producer in the region at $13.60/bbl and $23.40/bbl and Gran Tierra at $24.50/bbl and $42.60/bbl. Frontera's higher production cost is mainly attributed to a fixed transportation cost estimated to average $11.00/bbl. Frontera's strong capital structure is expected to have gross leverage that will average 1.5x over the rated horizon and pro forma total debt/PDP of $19.93/bbl and total debt/1P of $4.98/bbl. Geopark is forecast to have gross leverage of 3.3x and debt/PDP of $10.24/bbl and 1P of $5.48/bbl, while Gran Tierra's metrics are at 7.8x, $20.38/bbl and $12.16/bbl, respectively. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- Fitch's price deck for Brent oil prices of $58.00/bbl in 2021 and $53.00/bbl in the long term. -- Vasconia discount to Brent average of $5/bbl over the rated horizon. -- Average Production of 40,000boed between 2021-2023. -- Peruvian production is suspended indefinitely. -- Production costs averaging $11.50/bbl. -- Transportation costs averaging $11.00/bbl. -- SG&A cost averaging $2.50/bbl. -- Indefinite suspension of Peruvian asset over the rated horizon. -- Average annual capex of $250 million between 2021-2023. -- Annual dividends received from ODL of $25 million per year through 2023. -- Stock repurchase of 6.5 million (10% of outstanding) shares in 2021. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Net production maintained at 45,000boed or more, while maintaining a 1P reserve life of seven years or greater; -- Maintain a conservative financial profile with gross leverage of 2.5x or below and total debt/1P reserves of $8/bbl or below. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Sustainable production size declines to below 30,000boed; -- 1P reserve life declines to below seven years on a sustained basis; -- A significant deterioration of credit metrics to total debt/EBITDA of 3.0x or more; -- A persistently weak oil and gas pricing environment that impairs the longer-term value of its reserve base; -- Sustained deterioration in liquidity and operating profile, particularly in conjunction with more aggressive dividend distributions than previously anticipated. 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 views the company's liquidity position as strong, supported by cash on hand and a manageable debt amortization profile. As of March 31, 2021, Frontera reported $337 million of unrestricted cash, of which $89.1 million is restricted. Frontera has $52 million LOC. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of Environmental, Social and Corporate Governance (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. SIERRACOL ENERGY: Fitch Gives FirstTime 'B+' IDRs, Outlook Stable ----------------------------------------------------------------- Fitch Ratings has assigned first time Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'B+' to SierraCol Energy Limited. Outlook is Stable. Fitch has also assigned a 'B+/'RR4' to the proposed $500 million Sr. Unsecured Notes issuance due 2028 that will be issued by SierraCol Energy Andina LLC, which will be fully guaranteed by SierraCol Energy Limited. SierraCol's ratings reflect its small but stable low-cost production profile of roughly $13.70 bbl in 2020, which is balanced across its two main asset Caño Limon (CLM) and La Cira Infantas (LCI), which collectively represent 90% of total production. SierraCol has a long track record of operating in Colombia (formerly Occidental Petroleum Corporation Colombian onshore operations) with a solid production expected to average 38,000 bbld in 2021 and 1P reserve life of 6.3 years. The company has a strong proforma leverage profile, which assumes an issuance of $500 million Sr. Unsecured Note, of 1.0x in 2021, assuming a 2021 EBITDA of $511 million and a total debt to 1P of $5.43 bbl. Gross leverage is expected to remain below 1.0x across the rating horizon. Despite strong operating metrics, the ratings remain constrained by the company's relatively small size and the low diversification of its oil fields. Increasing production levels while maintaining its reserve life and capital structure at existing levels bodes well for SierraCol's credit quality. The rating also reflects Fitch's expectations that SierraCol will maintain conservative leverage profile of around 1.0x and strong liquidity over the rated horizon. KEY RATING DRIVERS Small Production Profile: SierraCol's ratings are constrained by its production size of 38,000 bbld expected in 2021 and average production of 36,000 bbld expected between 2021 through 2024. The company has a concentrated production profile, split between its mains assets (CLM and LCI) representing 90% of total production, which it operates as a Joint Venture with Ecopetrol ('BBB-'/Negative), and produces light crude (API 25-30) giving the company preferential treatment to sell crude locally to Ecopetrol. SierraCol sells 95% of its crude to Ecopetrol and 5% to BP with contracts in place with an average tenor of 1-2 years and priced at a premium to vasconia discount. Efficient Cost Producer: SierraCol is one of the lowest-cost producers in Latin America. Its half-cycle costs were estimated to be $13.70 bbl in 2020, and are expected to increase to $16.20 bbl after the issuance of the $500 million bond. It's full-cycle cost is estimated to be $26.60 bbl in 2020, which is the half-cycle cost plus the 3-year average FD&A for 1P of $12.90 bbl in 2020. SierraCol's realized oil price is higher than its peers due to producing light crude oil, and the company realized an average oil price of $39.80 bbl in 2020. Further, the company average transportation cost is $1 bbl. Strong Leverage Profile: SierraCol's proforma leverage is strong, estimated to be 1.0x in 2021, assuming the issuance of $500 million bond and an EBITDA of $511 million when applying Fitch's price deck. The proceeds for the issuance are to repay the $195 million Reserve Based Loan Facility, $350 million dividend to Carlyle, and the general corporate purposes. The company's proforma total debt to PDP of $7.50 and total debt to 1P is expected to be $5.68 bbl in 2021. Leverage is expected to remain around 1.0x over the rated horizon and total debt to PDP and 1P are expected to improve in line with reserve replacement ratio, assumed to be 105% per annum. Financial Flexibility: Fitch's rating case assumes SierraCol will have conservative financial policies which incorporates hedging a portion of its production, supporting its cost production profile. Over the rating horizon, funds from operations are estimated to cover capex by an average of 2.5x times under Fitch's price deck assumption. Further, the company has a healthy PDP and 1P reserve life of 4.8 years and 6.3 years respectively, giving the company flexibility in allocating capital in the event of price volatility. The rating case is assuming dividends will be paid each year to its controlling shareholder, The Carlyle Group, but Fitch does not expect dividends to materially exceed FCF. Prudent Risk Management policy: The rating case assumes a robust risk management policy over the rated horizon which will comprise of a non-speculative hedging policy that will target 40%-60% of post-tax production over a 12-month period, and the company is expected to maintain appropriate levels of insurance that will cover property damage, business interruption, environmental, and other. DERIVATION SUMMARY SierraCol Energy credit and business profile is comparable to other small independent oil producers in Colombia. The ratings of Geopark (B+/Stable), Frontera Energy Corporation (B/Stable), and Gran Tierra Energy International Holdings Ltd. (CCC) are all constrained to the 'B' category or below, given the inherent operational risk associate with small scale and low diversification of their oil and gas production. SierraCol's production profile compares favorably with other 'B' rated Colombian oil exploration and production companies. Over the rated horizon, Fitch expects SierraCol's production will average 36,000 bbld, slightly lower than Geopark and Frontera both of which are expected to be 45,000 bbld and slightly higher than Gran Tierra Energy at 30,000 bbld. SierraCol's PDP reserve life of 4.8 years and 1P reserve life of 6.3 years in 2020 compares favorably to Frontera at 1.6 years and 6.2 years, Geopark at 4.0 years and 7.4 years, and Gran Tierra at 5.7 years and 9.5 years. SierraCol's half-cycle production cost was $13.70 bbl in 2020 and full-cycle cost was $26.60 bbl in line with Geopark, who is the lowest cost producer in the region at $13.60 bbl and $23.40 bbl and below Gran Tierra at $24.50 bbl and $42.60 bbl, and Frontera at $28.60bbl and $42.20 bbl. SierraCol's has strong capital structure expected to have a gross leverage that will average 1.0x over the rated horizon and a pro-forma total debt to PDP of $7.50 bbl and total debt to 1P of $5.68 bbl, which is lower than all peers: Geopark gross leverage of 3.3x and Debt to PDP of $10.24bbl and 1P of $5.48 bbl, Gran Tierra at 7.8x, $20.38 bbl and $12.16 bbl, and Frontera at 2.3x, $19.93 bbl and $4.98 bbl. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: -- Annual realized oil prices at a $5 discount to Fitch's price deck for Brent of $58 in 2021 and $53 thereafter; -- Average daily production of 36,000 bbld from 2021 through 2024; -- Reserve replacement ratio of 105% per annum per rated horizon; -- Lifting and transportation cost average of $12bbl over rated horizon; -- SG&A cost average of $3.0 bbl over rated horizon; -- Hedging cost average of $1.0 bbl over rated horizon; -- Consolidated capex of $570 million from 2021 through 2024 averaging $143 million per year; -- Dividends of $500 million paid in 2021, $198 million in 2022, $150 in 2023 and $125 million in 2024; -- Effective tax rate of 30% over rated horizon; -- Repayment of $195 million RBL through dividend to shareholder in 2021. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Net production rising consistently to 75,000 boed on a sustained basis while maintaining a total debt 1P reserves of $5.00 barrel or below; -- Reserve life is unaffected as a result of production increases, at approximately seven to eight years; -- The company is able to maintain a conservative financial profile, with gross leverage of 2.5x or below. Factors that could, individually or collectively, lead to negative rating action/downgrade: -- Extraordinary dividend payments that exceed FCF and weaken liquidity; -- Sustainable production falls below 30,000 boed; -- Reserve life declines to below six years on a sustained basis; -- A significant deterioration of total debt/EBITDA to 3.0x or more. 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 Adequate Liquidity Post Transaction: SierraCol's proforma cash balance by year end 2021 is expected to be $94 million after the $500 million Sr. Secured bond offering issuance covering proforma interest expense of $35 million and at least two years. Further, the company's liquidity is supported by a $75 million revolving credit facility. 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. CRITERIA VARIATION The initial rating committee assigned a rating without audited financials, but Fitch has since received and analyzed the audited financials. =================================== D O M I N I C A N R E P U B L I C =================================== [*] DOMINICAN REPUBLIC: Merchants Trust Recovery Will be Maintained ------------------------------------------------------------------- Dominican Today reports that business people and merchants in the Dominican Republic expect the economy to continue its growth rate for the second half of 2021, despite the health crisis hitting the world. That has generated serious disruptions in the local economy and external factors that influence directly over the country, according to Dominican Today. The executive vice president of the National Council of Private Enterprise (Conep), Cesar Dargam, considers that tourism and MSMEs have been the hardest hit by the pandemic, which has affected their development and growth, the report notes. "However, we remain optimistic that the Dominican Republic will maintain the rate of economic growth that has so far shown above 5.5% of gross domestic product (GDP) with the creation of jobs, increased exports and the attraction of more investment," Dargam assured, the report relays. The report notes that for the vice president of Conep, the economic recovery during this second semester will depend, to a great extent, on the success of the vaccination process and compliance with health measures. Likewise, the former president of the National Federation of Merchants of the Dominican Republic (Fenacerd), Ricardo Rosario, assured that the country had a good growth rate this year and that it has been interrupted by the new outbreak of coronavirus that the country is experiencing currently, the report relates. "The government and financial authorities have taken the correct measures to boost the economy and generate more jobs, with assistance and financing programs for SMEs, which should be increased so that there is more money," said the commercial leader, the report notes. Rosario recalled that accumulated inflation forces an increase in the minimum wage and an adjustment to the salaries of public and private employees, for which he understands that the government does not have the conditions at this time, the report says. Recommends that the authorities make the collection of taxes more efficient, reduce State expenses and face tax evasion, the report discloses. "In a general sense, we understand that for the rest of this year the Dominican economy will go through adverse situations that will depend, to a great extent, on the success of the vaccination campaign carried out by the Dominican government. This would make it possible to resume economic activities that stimulate spending and generate more jobs, in addition to the increase in remittances that reach the country, which has represented a real relief for the Dominican economy," the report says. Another factor that business people and merchants have pointed out is the increase in the price of commodities and raw materials in international markets, which is directly reflected in the rise in food prices and almost all industrialized products within the DR, the report adds. About Dominican Republic The Dominican Republic is a Caribbean nation that shares the island of Hispaniola with Haiti to the west. Capital city Santo Domingo has Spanish landmarks like the Gothic Catedral Primada de America dating back 5 centuries in its Zona Colonial district. Luis Rodolfo Abinader Corona is the current president of the nation. The Troubled Company Reporter-Latin America reported in April 2019 that the Dominican Today related that Juan Del Rosario of the UASD Economic Faculty cited a current economic slowdown for the Dominican Republic and cautioned that if the trend continues, growth would reach only 4% by 2023. Mr. Del Rosario said that if that happens, "we'll face difficulties in meeting international commitments." An ongoing concern in the Dominican Republic is the inability of participants in the electricity sector to establish financial viability for the system. Fitch Ratings on Jan. 18, 2021, assigned a 'BB-' rating to Dominican Republic's USD1.5 billion 5.3% notes due Jan. 21, 2041. Concurrently, the Dominican Republic reopened its 2030 4.5% notes for an additional USD1.0 billion, which Fitch rates 'BB-', raising the total outstanding amount of the 2030 notes to USD2.0 billion. Standard & Poor's, on December 4, 2020, affirmed its 'BB-' long-term foreign and local currency sovereign credit ratings on the Dominican Republic. The outlook remains negative. S&P also affirmed its 'B' short-term sovereign credit ratings. The negative outlook reflects S&P's view that it could lower the ratings on the Dominican Republic over the next six to 18 months, given the severe impact of the COVID-19 pandemic on the sovereign's already vulnerable fiscal and external profiles, as well as the potential for a weaker-than-expected economic recovery. Moody's credit rating for Dominican Republic was last set at Ba3 with stable outlook (July 2017). Fitch's credit rating for Dominican Republic was last reported at BB- with negative outlook (May 8, 2020). ============= G R E N A D A ============= [*] GRENADA: Urges CDB to More Actively Assist Member Countries --------------------------------------------------------------- RJR News reports that Grenada Prime Minister Dr. Keith Mitchell has challenged the Barbados-based Caribbean Development Bank (CDB) to be more aggressive in its approach to helping borrowing member countries address developmental challenges. Mr. Mitchell told newly appointed CDB President Dr. Gene Leon, during an introductory virtual call, that these are tough times for the region, according to RJR News. Mr. Mitchell, who has in the past served on the CDB Board of Governors, said from his experience, the region's premier financial institution tends to be too bureaucratic when dealing with regional governments and this compounds the problem, the report notes. Dr. Leon agreed that the CDB must be adaptable, nimble, and responsive to the needs of members and it must communicate better, the report relays. =========== M E X I C O =========== MEXARREND SAPI: Fitch Affirms 'B+' LT IDRs, Outlook Negative ------------------------------------------------------------ Fitch ratings has affirmed Mexarrend, S.A.P.I. de C.V. (Mexarrend) Long-Term (LT) Local and Foreign Currency Issuer Default Ratings (IDRs) at 'B+', Local and Foreign Currency Short-Term (ST) IDRs at 'B' and the senior unsecured LT debt rating at 'B+'/'RR4'. Fitch also affirmed Mexarrend LT and ST National Ratings at 'BBB+(mex)' and 'F2(mex)'. The Rating Outlook of the LT IDRs and LT National Rating is Negative. The rating of the ST portion of the senior unsecured notes program was also affirmed at 'F2(mex)', which will be increased to MXN1,500 million from MXN1,000 million if approved by the banking regulator (CNBV). KEY RATING DRIVERS Despite the company's solid profile as one of the main three independent leasing companies in Mexico and its long history, its specialized business model focused on financing small and medium-sized enterprises (SMEs), as well as its modest size in the Mexican financial system highly influence Mexarrend's IDRs and national ratings. The company's deteriorated profitability and its consistently high tangible leverage are also high importance factors and constrain the rating at current levels. The Negative Outlook reflects Fitch's expectation that the challenging operating environment will continue to weigh on profitability and asset quality. Mexarrend's tangible leverage ratio improved to 6.9x in March 2021 from 8.6x in December 2020, supported by a USD10 million capitalization. While this level remains commensurate with the company's rating category, it is still high compared to peers (similarly rated LatAm finance & leasing companies). Adjusted tangible leverage, which excludes temporary effects on capital through other comprehensive income and valuation on derivatives, was slightly lower at 6.7x and 7.9x as of March 2021 and December 2020, respectively. Fitch believes Mexarrend's adjusted tangible leverage could be sustained below Fitch's trigger of 9.0x if profitability and operating conditions improve. Profitability is a credit weakness. Mexarrend posted a negative, although contained, core profitability metric (Pre-tax Income/Average Assets) in December 2020 and March 2021, of -0.8% and -0.1% respectively. Pretax losses reflected high credit costs since 2019, lower growth, FX and derivatives valuation volatility and negative carry from high liquidity. In the agency's view, additional pressures on profitability may arise if restrictions on partial mobility continue to affect SMEs, which could restrict portfolio growth or increase its deterioration. In Fitch's view, profitability is highly dependent on asset growth and on improving funding and pricing on individual transactions. Timely relief programs for debtors that reached a maximum participation of close to 50% of the loan portfolio during the second quarter of 2020, expired in December 2020. As of March 2021, the impaired loans and leases/gross loans and leases ratio included all leasing and loan contracts with payments overdue by more than 90 days and differs from the ratio from the financial statements because Mexarrend registers its loan portfolio at future value. As of March 2021, this ratio remained stable at 6.5% relative to YE20, but it was higher than previous years (2016-2018: 5.6% average). Mexarrend's Fitch's adjusted NPL ratio which includes charge-offs and foreclosed assets, increased to 7.1%. Mexarrend reports as investments in property non-earning assets for 7.3% of total assets which negatively weigh on Fitch's asset quality assessment. Mexarrend's funding profile is a rating strength. The funding structure is more flexible in terms of unsecured sources than those of the smaller Fitch-rated Mexican non-bank financial institutions. The company sustained a high proportion of unsecured debt at 89.7% of total debt as of March 2021; however, it is highly concentrated in market debt through access to international and local markets. The company has maintained funding access and ample cash and available funding to cover expected payments for the next 12 months, which reached 53.4% as of March 2021. Although Mexarrend has consistently been able to refinance short-term debt in the local market during times of stress, Fitch believes debt markets remain very sensitive to investor sentiment which deteriorated heavily due to a payroll lender error finding in 2021 and remaining economic uncertainties. The company's recent funding agreements with DFC (Development Finance Corporation) for USD45 million, with a 10-year term and warehouse facility with Credit Suisse AG, for MXN3 billion, with the option of reaching MXN4.2 billion, diversify funding sources and are consistent with the company's intention of reducing funding costs. The senior unsecured debt program rating is at the same level as Mexarrend's IDR because the probability of default on the debt is the same as that of the company. In Fitch's view, simplification of the organizational structure, lower ownership concentration, reduced key person risk and lower related-party transactions are positive developments in Mexarrend's governance structure. However, risks remain present and these have a negative, albeit moderate, influence on Mexarrend's rating. The company's board still includes a lower share of independent members (one in seven voting directors) compared to peers. The successful execution of strategy still needs to be tested as profitability remains a weakness, raising some concerns about management strategy; these concerns also have a moderately negative impact on the rating. Consistent improvements in financial transparency and timely provision of information are monitored by the agency; however, the level of detail between audited financial statements and quarterly financial report and the level of disclosure differ, and in 2019 there were differences between 4Q financial statements and the audited financial statements of that year.. This has a moderately negative impact on the rating. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: -- The ratings could be downgraded if sustained losses continue to erode Mexarrend's capital position, resulting in a sustained deterioration of the debt/tangible equity metric adjusted by the temporary effects from derivatives valuation to levels consistently above 9.0x; -- A substantial deterioration of its funding mix or liquidity profile could also trigger a downgrade. Factors that could, individually or collectively, lead to positive rating action/upgrade: -- Rating upside potential is unlikely in the near term given the Negative Outlook; -- The Outlook could be revised to Stable if profitability improves above 1% and if the adjusted tangible leverage metric stabilizes, once downside risks from the pandemic decline; -- The ratings could be upgraded in the medium term if the company materially improves its company profile through orderly growth and business model diversification, together with improving asset quality; -- A tangible leverage ratio adjusted by the temporary effects from derivatives valuation consistently below 5.5x and enhanced profitability ratios sustained above 2% could also trigger an upgrade. SENIOR DEBT -- The ratings of Mexarrend international and local debt issues are sensitive to a change in the company's LT IDRs and National Ratings, respectively, as the likelihood of default of these notes is the same as that of the company; -- The notes' rating may diverge from the IDRs if asset encumbrance increases to the extent that it relevantly subordinates senior unsecured bondholders. 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. SUMMARY OF FINANCIAL ADJUSTMENTS For comparability and analytical purposes, Fitch reclassified certain income statement and balance sheet accounts. Accounts receivable from factoring and cash financing are classified as loans, fixed assets under operating leased contracts were classified as the operating lease portfolio, pre-paid expenses and some other assets were reclassified as intangibles given their low loss absorption capacity, gross operating and finance lease income is composed of interest, operating lease and equipment financing income net of the cost of equipment, and related services and supplies revenue is presented net of cost as other operating income. ESG CONSIDERATIONS Mexarrend has an ESG Relevance Score of '4' for or Management Strategy, in contrast with a standard scoring of '3'. In Fitch's view, the risks associated with the execution of strategy have subsided since 2019, following a period of rapid expansion through mergers and acquisitions. However, financial performance still remains a weakness, impacted by the challenging operating environment. Additional time is required for management to demonstrate its ability to successfully execute its operational and financial strategies. This has a moderately negative impact on the rating in conjunction with other factors. Mexarrend has an ESG Relevance Score of '4' for Governance Structure given some concerns regarding board independence which may impact strategic decisions. This has a moderately negative impact on the rating in conjunction with other factors. Mexarrend has an ESG Relevance Score of '4' for Financial Transparency to highlight that the level of detail between audited financial statements and quarterly financial report and the level of disclosure differ, and in 2019 there were differences between 4Q financial statements and the audited financial statements of that year. Such differences could limit Fitch's ability to assess the company's financial profile. While financial transparency is improving, these concerns still have a moderately negative impact on the rating in conjunction with other factors. 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. ********* 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 * * *