/raid1/www/Hosts/bankrupt/TCRLA_Public/230714.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
Friday, July 14, 2023, Vol. 24, No. 141
Headlines
A R G E N T I N A
ARGENTINA: Drought Slashes Soybean Production by 51.5%
B E R M U D A
SEADRILL LTD: Fitch Assigns First Time 'B+' IDR, Outlook Stable
SEADRILL LTD: Moody's Assigns First Time 'B1' Corp Family Rating
SEADRILL LTD: S&P Assigns Prelim. 'B+' LT ICR, Outlook Stable
B R A Z I L
AZUL SA: Moody's Upgrades CFR to Caa1 & Alters Outlook to Positive
AZUL SECURED: Fitch Assigns 'B-'(EXP)' Rating to 2028 Secured Debt
BANCO MODAL: Moody's Upgrades Long Term Deposit Ratings to Ba2
BRAZIL: Economists Foresee Deeper Monetary Easing, Lower Inflation
BRAZIL: General Price Index Declines 1.45% in June
BRAZIL: IDB OKs $54.5M Loan for Housing Vulnerable Populations
PETROBRAS: Allows Odebrecht to Reapply for Contracts
C H I L E
INVERSIONES LATIN AMERICA: Fitch Cuts $403.9MM Secured Notes to D
C O L O M B I A
UNE EPM: Moody's Puts 'Ba1' CFR Under Review for Downgrade
P E R U
MINSUR SA: S&P Affirms 'BB+' ICR & Alters Outlook to Stable
P U E R T O R I C O
PUERTO RICO: PREPA Bankruptcy Judge Advances Case as Appeal Looms
T R I N I D A D A N D T O B A G O
NATIONAL GAS: Moody's Alters Outlook on 'Ba2' Ratings to Positive
V E N E Z U E L A
VENEZUELA: Pursues Settlement with Crystallex, Conoco, Bondholders
- - - - -
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A R G E N T I N A
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ARGENTINA: Drought Slashes Soybean Production by 51.5%
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Buenos Aires Times reports that a punishing drought slashed soybean
production in Argentina this harvest to less than half of last
season's total, a new report has revealed.
Soybean production totalled 21 million tons in the 2022-2023
season, a year-on-year drop of 51.5 percent, according to Buenos
Aires Times. The figure is the lowest in more than 20 years and
the worst harvest since records began in 2000, according to data
from a study from the Buenos Aires Grain Exchange released, the
report notes.
In Argentina, one of the world's largest exporters of the oilseed,
total soybean production was 22.3 million tons lower than in the
previous season, when it reached 43.3 million tons, the report
relays.
"The drought, coupled with high temperatures recorded over the
centre of the agricultural region during much of the crop cycle,
have resulted in losses of harvestable area . . . and have
generated a significant decrease in yields," a statement from the
exchange said, the report says.
According to the report, almost all the nation's growing areas were
affected, with yields falling by 45 percent overall to the worst
level in 10 years, with an average of just 15.4 quintals per
hectare, the report notes.
President Alberto Fernandez's government estimates the drought will
lead to overall losses of around US$20 billion, almost three
percent of gross domestic product, the report discloses.
Argentina was the world's third-largest producer of soybeans in the
2021-2022 season, trailing Brazil and the United States, the report
says. The country is the globe's leading supplier of soybean meal
and soybean oil, as well as ranking third in global maize exports,
the report notes.
Two industry groups, CIARA (Cámara de la Industria Aceitera de la
República Argentina) and CEC (Centro Exportador de Cereales),
report that exporters liquidated US$1.58 billion in June, a 59
percent year-on-year drop and 62 percent less than in the previous
month, the report says. Measured by value, the grain and oilseed
sector lost 42 percent of exports in the first half of 2023,
compared to the same period the preceding year, the report relays.
Rosario, the country's largest agro-export hub, recorded a sharp
drop in the volume of grain unloaded in the first half of the year,
registering 12.6 million tonnes, 60 percent down on the previous
year and the lowest amount since 2001, according to the Rosario
Stock Exchange, the report adds.
About Argentina
Argentina is a country located mostly in the southern half of South
America. Its capital is Buenos Aires. Alberto Angel Fernandez is
the current president of Argentina after winning the October 2019
general election. He succeeded Mauricio Macri in the position.
Argentina has the third largest economy in Latin America. The
country's economy is an upper middle-income economy for fiscal year
2019, according to the World Bank. Historically, however, its
economic performance has been very uneven, with high economic
growth alternating with severe recessions, income maldistribution
and in the recent decades, increasing poverty.
On March 25, 2022, Argentina finalized agreement with the IMF for a
new USD44 billion Extended Funding Facility (EFF) intended to fund
USD40 billion in looming repayments of the defunct Stand-By
Arrangement (SBA), with an extra USD4 billion in up-front net
financing. This has averted the risk of a default to the IMF and is
facilitating a parallel rescheduling of Paris Club debt.
S&P Global Ratings, on March 29, 2023, lowered its long-term
foreign currency sovereign credit rating on Argentina to 'CCC-'
from 'CCC+'. S&P also affirmed its 'C' short-term foreign currency
sovereign credit rating and its 'CCC-/C' local currency ratings on
Argentina. The outlook on the long-term ratings is negative. S&P
also lowered the transfer and convertibility assessment to 'CCC-'
from 'CCC+'.
S&P's negative outlook on the long-term ratings reflects risks
surrounding pronounced economic imbalances and policy uncertainties
before and after the 2023 national elections. Divisions across the
political spectrum constrain the sovereign's ability to implement
timely changes in economic policy. Global capital markets are
closed to Argentina. In the local market, swaps are being deployed
to manage large maturities before placing debt through traditional
auctions. The central bank continues to play a key role as a
backstop for local debt management in the secondary market. The
ongoing severe drought has exacerbated pressures in the already
disrupted foreign exchange (FX) market.
Fitch Ratings, on March 24, 2023, downgraded Argentina's Long-Term
Foreign Currency Issuer Default Rating (IDR) to 'C' from 'CCC-',
and has affirmed the Long-Term Local Currency IDR at 'CCC-'.
Fitch's downgrade of Argentina's rating to 'C' from 'CCC-' follows
an executive decree that forces domestic public-sector entities
into operations involving their holdings of sovereign debt
securities, which would involve unilateral exchanges and forced
currency conversion that constitute default events under Fitch's
criteria. The 'C' rating reflects Fitch's view that default is thus
imminent. Fitch said the rating would be downgraded to 'Restricted
Default' (RD) upon execution of the exchanges.
Moody's Investors Service, in September 2022, affirmed Argentina's
Ca foreign-currency and local-currency long-term issuer and senior
unsecured ratings. The outlook remains stable. The decision to
affirm the Ca ratings balances Argentina's limited market access,
weak governance, and history of recurrent debt restructurings with
recent efforts to marshal fiscal and monetary measures to start
addressing underlying macroeconomic imbalances in the context of
the IMF program that was approved in 2022, according to Moody's.
DBRS, Inc. confirmed Argentina's Long-Term Foreign Currency Issuer
Rating at CCC and downgraded its Long-Term Local Currency Issuer
Rating to CCC from CCC (high) on March 3, 2023.
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B E R M U D A
=============
SEADRILL LTD: Fitch Assigns First Time 'B+' IDR, Outlook Stable
---------------------------------------------------------------
Fitch Ratings has assigned a 'B+' first-time Long-Term Issuer
Default Rating (IDR) to Seadrill Limited and Seadrill Finance
Limited with a Stable Rating Outlook. Fitch has also assigned
'BB+'/'RR1' ratings to the proposed senior secured first lien
revolving credit facility (RCF) and 'BB-'/'RR3' rating to the
proposed $450 million senior secured second lien note under
Seadrill Finance Limited.
Seadrill's rating reflects its improving leverage, strong liquidity
profile and well-positioned ultra-deepwater fleet. The company has
good visibility for 2023 and 2024 given the strong contract
coverage reflected in its $2.6 billion backlog at 1Q23. These
strengths are offset by high volatility in utilization and day
rates inherent in the offshore drilling market. Seadrill emerged
from chapter 11 restructuring on Feb. 22, 2022 and decreased debt
burden to $908 million. Since emergence, the company has been
actively managing its fleet, completing two divestitures with a
third announced and completion of the equity-funded acquisition of
Aquadrill.
The Stable Outlook is based on Fitch's expectation of broadly
stable day rates in 2023-2024 with gradual decreases thereafter.
Fleet utilization is expected to grow through 2024 before reversing
modestly thereafter in line with Fitch's oil price assumptions.
KEY RATING DRIVERS
Leader in Offshore Ultra-Deepwater Drilling: Fitch views Seadrill's
large and diverse fleet of drilling equipment as supportive of its
credit. The company owns twelve floater rigs, including ten
drillships and two benign semi-submersibles, in addition to three
harsh environment rigs (two semi-submersibles and one jackup), and
four additional jackups. The company also manages two floaters as
part of a joint venture with Sonangol. Seadrill announced the sale
of the three tender assist units, expected to be completed in
3Q23.
Seadrill operates in all major offshore oil and gas basins, such as
the Gulf of Mexico, Brazil, West Africa, the North Sea, Middle
East, Southeast Asia and India. Contract backlog at 1Q23 totaled
approximately $2.6 billion. Seadrill expects to convert
approximately $1.1 billion of backlog into revenue in 2023,
approximately $800 million into revenue in 2024 and approximately
$400 million into revenue in 2025.
Customer Concentration: Fitch views the concentration of Seadrill's
backlog with Petrobras, ConocoPhillips and Equinor (approximately
52%) as modestly positive. The typical concern around customer
concentration is offset somewhat by the credit strength of these
three counterparties.
Petrobras is a state-owned Brazilian entity, with Seadrill having
long relationship with Petrobras (BB-/AA(bra)) who is expected to
be at the forefront of rig demand in the short-term. ConocoPhillips
is rated 'A'/Stable by Fitch and Equinor ASA is a Norwegian
state-owned multinational energy company. Seadrill is in strategic
basins and plans to continue to build ultra-deepwater opportunities
in the Golden Triangle (Brazil, Gulf of Mexico and West Africa) to
seek economies of scale from rig clustering in the region.
Rebound in Floater Market: The recovery in floater day rates is a
credit positive for Seadrill. As long-term forward oil prices
started to increase in 2021, market day rates for floaters began
growing at a fast pace and almost doubled between end-2020 and
end-2022. Drillship utilization also improved toward 93% in 1Q23.
Fitch does not assume any significant growth in market day rates in
2H23-2024 and expects rates to decline in 2025 based on the
agency's oil price deck.
The number of contracted floaters has been largely stagnant
worldwide in 2017-2022, and Fitch expects this number to increase
in 2023-2024. The number of stacked floater rigs peaked in early
2017 after oil prices collapsed in 2014. More than half of stacked
rigs as of early 2017 exited the market by end-2022. One of
Seadrill's 12 floaters is currently stacked.
Elevated Near-Term Capex: Fitch believes that while capex is
elevated in 2023 and 2024 due to a high number of Special Periodic
Surveys (SPS), it is manageable within cashflow. In line with the
age of vessels, Seadrill has some regulatorily required SPS work to
do in 2023 and 2024. Capex in 2023 and 2024 is expected to be $250
million and $340 million, respectively, before declining to a
normal run-rate of around $170 million to $210 million.
Conservative Financial Policy: Fitch views Seadrill's conservative
financial policy as a credit positive. The company targets net
leverage at or below 2.0x through the cycle and less than 1.0x in
the current market conditions. While Seadrill has been acquisitive,
its Aquadrill merger was 100% equity funded. Fitch anticipates
future acquisitions to be completed in a similar manner.
Since emergence from Chapter 11, the two completed divestitures
have been used to reduce debt. A third divestiture was announced,
which is expected to be completed in 3Q23. Following the proposed
refinancing, the company will have no near-term debt maturities and
has targeted greater than 50% of FCF to shareholder returns over
the forecast period, which Fitch anticipates will be executed in a
manner that aligns with their financial policy.
DERIVATION SUMMARY
Seadrill's peers include Noble Corporation Plc. (BB-/Stable),
Valaris Ltd. (B+/Stable), Nabors Industries, Ltd. (B-/Stable) and
Precision Drilling Corporation (B+/Positive). Fitch expects
Seadrill to have similar scale, margins and leverage to Noble, but
less consistent generation of positive FCF. Nabors is larger than
Seadrill, with similar margins, but is meaningfully higher levered.
Fitch expects Precision to generate significantly lower revenue
than Seadrill with lower EBITDA margins and higher leverage over
the forecast. Nabors and Precision are involved in onshore drilling
segment, which is more stable than the offshore segment.
KEY ASSUMPTIONS
Key Assumptions for the Rating Case of the Issuer Include:
-- Brent oil price $80/bbl in 2023, $75/bbl in 2024, and $70/bbl
in 2025, $65/bbl in 2026 and $60/bbl thereafter;
-- Revenue growth of 64% in 2023 followed by higher single-digit
declines in 2024 and 2025;
-- EBITDA margins expand into the mid-to-high 30% range over the
forecast;
-- Capex increasing to $250 million in 2023 and $340 million in
2024 before returning to the normalized $170 million to $210
million range;
-- Following the completion of the Aquadrill acquisition in April,
the completion of the three tender assist unit divestitures in 3Q23
and the assumed sale of the jack-up rigs in 2H23, with no
additional M&A or divestitures assumed in the forecasts;
-- Dividends of $350 million in 2023, which includes a special
one-off dividend, normalizing between $100 million and $175 million
over the forecast.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Seadrill Limited would be
reorganized as a going-concern in bankruptcy rather than
liquidated.
Fitch has assumed a 10% administrative claim.
Going-Concern Approach
Seadrill's GC EBITDA estimate reflects Fitch's view of a
sustainable, post-reorganization EBITDA level upon which Fitch base
the enterprise valuation. The GC EBITDA assumption for commodity
price sensitive issuers at a cyclical peak reflects the industry's
move from top of the cycle commodity prices to mid-cycle conditions
and intensifying competitive dynamics.
The GC EBITDA assumption of $100 million represents a point between
a distress level EBITDA and a more mid-cycle level EBITDA. This
represents an emergence from a prolonged commodity price decline.
Fitch stress case assumes for Brent oil prices are $70/bbl in 2023,
$50/bbl in 2024, $35/bbl in 2025, $45/bbl in 2026 and $48/bbl for
the long term. These prices could lead to a marked difference in
the company's cash flow generation given the impact a period of
prolonged oil prices could have for day rates and rig utilization.
The GC EBITDA assumption reflects a loss of customers and lower
margins than the near-term forecast, as E&P companies cut their
costs.
The EBITDA assumption also incorporates weak offshore drilling
market fundamentals as well as overall high rig supply, but
improving demand.
The assumption reflects the material decrease in the company's
liabilities as well as the material write down in the value of the
company's PP&E following the company's debt restructuring. Seadrill
eliminated $5.0 billion of pre-petition debt from its balance sheet
after exiting bankruptcy procedures in 2022.
An enterprise value multiple of 5.5x EBITDA is applied to GC EBITDA
to calculate a post-reorganization enterprise value. The choice of
this multiple considered the following factors:
The historical bankruptcy case study exit multiples for peer energy
oilfield service companies have a wide range with a median of 6.1x.
The oil field service sub-sector ranges from 2.2x to 42.5x due to
the more volatile nature of EBITDA swings in a downturn. Fitch used
a multiple of 5.5x to estimate the enterprise value of Seadrill due
to concerns of a downturn with a longer duration, a high exposure
to offshore drilling rigs that can see meaningful volatility in
demand and continued capital investment to reactivate rigs.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of
balance sheet assets that can be realized in sale or liquidation
processes conducted during a bankruptcy or insolvency proceeding
and distributed to creditors.
Fitch assigns standard discounts to the liquidation value of the
company's cash, accounts receivable, Inventory and PP&E. Despite
the material write down on the company's PP&E, Fitch is still using
a 25% liquidation value to the company's 1Q23 book value due to the
high uncertainty of assets valuations during a downturn.
The $225 million first-lien senior secured RCF is assumed to be
fully drawn upon default and is the most senior in the waterfall.
The allocation of value in the liability waterfall results in
recovery corresponding to 'RR1' for the senior secured first lien
credit facility and a recovery rating of 'RR3' for the proposed
$450 million senior secured second lien note issuance.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Sustainably stronger offshore drilling market fundamentals,
including high day rates, longer contracts and growing backlog;
-- Track record of conservative financial policy that keeps gross
debt in check;
-- Midcycle EBITDA leverage below 2.0x.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Inability to complete the proposed note issuance under the
proposed terms in a timely manner;
-- Deteriorating market fundamentals such as decreasing day rates
and offshore rig utilization;
-- Significant increase in gross debt;
-- Weakening liquidity;
-- Midcycle EBITDA leverage above 3.0x.
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity: Seadrill has $376 million of cash on the balance
sheet, $225 million of expected RCF availability, and consistent
positive FCF over the forecast resulting in ample liquidity.
With the proposed refinancing transaction, Seadrill will push
maturities from 2026 and 2027 to 2030 and extend and increase the
revolver from 2026 to 2028. Even with elevated capital spending in
2023 and 2024 and shareholder distributions, Fitch expects the
company to consistently generate positive cash flow from operations
and maintain a strong cash balance. As long as Seadrill remains
disciplined in regards to capital spending, acquisitions, and stock
buybacks, the company is expected to have ample liquidity.
ISSUER PROFILE
Seadrill Limited is a leading ultra-deepwater offshore drilling
contractor to the oil and gas industry. Their primary business is
the ownership and operation of drillships, semi-submersible rigs
and jack-up rigs for operations in shallow-, mid-, deep- and
ultra-deepwater areas, as well as in benign and harsh
environments.
ESG CONSIDERATIONS
Seadrill has an ESG Relevance Score of '4' for Waste & Hazardous
Materials Management; Ecological Impacts due to the risk that a
possible offshore oil spill may affect the drilling company. This
factor has a negative impact on the credit profile, and are
relevant to the ratings 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.
SEADRILL LTD: Moody's Assigns First Time 'B1' Corp Family Rating
----------------------------------------------------------------
Moody's Investors Service assigned first-time ratings to Seadrill
Limited (Seadrill), including a B1 Corporate Family Rating, a B1-PD
Probability of Default Rating, a SGL-1 Speculative Grade Liquidity
Rating (SGL), and a B2 rating to senior secured notes issued by
Seadrill Finance Limited. The outlook is stable.
Seadrill Limited is a large international provider of offshore
contract drilling services to the oil and gas industry. The company
will use the proceeds of the proposed senior secured notes to repay
outstanding indebtedness and for general corporate purposes.
"Seadrill's high quality drilling fleet and focus on key regional
markets allow it to successfully compete with larger scale offshore
drillers" commented Thomas Le Guay, a Moody's Senior Analyst. "The
company's strong revenue backlog and commitment to conservative
financial policies should provide resilience in a highly
competitive and deeply cyclical industry."
Assignments:
Issuer: Seadrill Limited
- Corporate Family Rating, Assigned B1
- Probability of Default Rating, Assigned B1-PD
- Speculative Grade Liquidity Rating, Assigned SGL-1
Issuer: Seadrill Finance Limited
- Senior Secured Regular Bond/Debenture, Assigned B2
Outlook Actions:
Issuer: Seadrill Limited
Outlook, Assigned Stable
Issuer: Seadrill Finance Limited
Outlook, Assigned Stable
RATINGS RATIONALE
Seadrill's B1 CFR is supported by its low financial leverage of
about 1x Moody's projected EBITDA for 2023; high-quality offshore
rig fleet that has significant collateral value and competitive
advantages; substantial backlog of $2.6 billion as of March 31,
2023 providing good medium term cash flow visibility; and the
company's operating track record as one of the leading contract
drillers serving the offshore oil and gas industry. Seadrill will
need to demonstrate its ability to sustain its stated financial
policies which appear conservative, including holding net leverage
under 1x in the current market conditions, maintaining strong
liquidity and managing shareholder distributions, growth spending
and potential acquisitions prudently.
The inherently cyclical nature of the offshore drilling industry
and the high level of volatility in oil and gas prices constrain
Seadrill's rating because of the significant re-contracting risks
they entail. Oil and gas prices need to stay high to attract
continued upstream investment and Seadrill will have to
successfully recontract at higher dayrates to sustain and improve
its credit profile. The rating also reflects Seadrill's limited
track record under its new business strategy and financial policies
following its emergence from a bankruptcy in February 2022. In
particular, the company seeks to refocus its fleet on key strategic
markets which creates uncertainty regarding the timing, magnitude,
value and financing of future acquisitions and disposal of assets.
The stable outlook reflects Seadrill's low leverage and significant
revenue backlog.
Seadrill's SGL-1 rating reflects very good liquidity through 2024.
Pro forma for the refinancing transaction, the company will have
roughly $550 million of cash plus a $225 million undrawn revolving
credit facility that will have a five year maturity. Moody's
expects Seadrill to generate around $30 million of free cash flow
in 2023 and more than $200 million in 2024. The company should be
able to comply with its covenants comfortably through 2024,
including Consolidated Total Net Leverage Ratio below 3.0x and
Interest Coverage Ratio above 2.5x.
Seadrill's senior secured notes are rated B2, one notch below the
B1 CFR, given the significant size of the $225 million super senior
revolving credit facility, which is secured by a first lien claim
on Seadrill's assets in priority to the secured notes. The notes
are fully and unconditionally guaranteed on a second lien senior
secured basis by all of Seadrill's subsidiaries that are borrowers
or guarantors under the secured revolving credit facility.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
There is discernible negative impact on the current rating (CIS-4)
driven by high governance risks. Environmental and social risks
have limited impact, but will likely have more consequential
effects over time as the world transitions towards more sustainable
and cleaner energy sources. If the governance risks were
significantly mitigated, particularly through a longer track record
of conservative management, Seadrill's scale, competitive position
and contract backlog could support a higher rating.
Seadrill's governance score (G-4) considers its relatively short
operating and financial track record since emerging from bankruptcy
in early 2022. Despite recapitalizing with relatively low amount of
debt, Seadrill's business strategy and financial policies are
likely to evolve over time. These risks are tempered by
management's stated conservative financial policies including
maintaining low leverage and strong liquidity. Moody's also expect
strong support of these objectives from the company's board of
directors given that it was appointed by former creditors of the
company.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade would require Seadrill to successfully execute on its
strategy while demonstrating a track record of conservative
financial policies, including sustaining debt/EBITDA below 1x,
generating consistent free cash flow after sufficiently reinvesting
in the business and maintaining prudent shareholder distributions.
The ratings could be downgraded if earnings and backlog decline
materially, Seadrill generates negative free cash flow or the
debt/EBITDA ratio rises above 2x. Any leveraging acquisition or
shareholder distribution could also trigger a downgrade.
The principal methodology used in these ratings was Oilfield
Services published in January 2023.
Seadrill Limited is a large international provider of offshore
contract drilling services to the oil and gas industry. Seadrill's
rig fleet is comprised of 21 high-quality modern rigs, including 12
drillships, 4 semi-submersibles and 5 jack-ups. The company had
$2.6 billion of contracted backlog as of as of March 31, 2023 with
19 rigs actively drilling or having contracts in place.
SEADRILL LTD: S&P Assigns Prelim. 'B+' LT ICR, Outlook Stable
-------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B+' long-term issuer
credit rating to offshore drilling contractor Seadrill Ltd. and its
preliminary 'BB' issue rating to its proposed senior secured
notes.
The stable outlook reflects its expectation that Seadrill will
preserve the headroom under the preliminary rating in the coming 12
months, supported by healthy industry conditions.
S&P's preliminary 'B+' issuer credit rating balances Seadrill's
presence in a volatile offshore contract drilling market with its
expectation of healthy credit metrics in the coming years. After
years of low demand and poor day rates, the offshore drilling
market is recovering, thanks to exploration and production
companies' increasing capital expenditure (capex). Seadrill's
highly specified fleet should help it benefit from this recovery.
As fleet utilization improves, S&P anticipates EBITDA will increase
to $435 million-$485 million in 2023, compared with $261 million in
2022. Combined with relatively low debt, this will lead to healthy
credit metrics, with funds from operations (FFO) to debt of about
67% in 2023, compared with 37% in 2022.
The volatility of the offshore drilling industry constrains our
assessment of Seadrill. The industry dynamics depend on oil and gas
producers' capex, which, in turn, depends on volatile oil and gas
prices. The offshore drilling industry experienced a significant
downturn in the past few years, as oil and gas producers cut capex
in response to low prices and poor shareholder returns. Even though
we expect producers will invest more heavily over 2023-2024 than
they did in the past few years, they are refraining from long-term
commitments for now. Accordingly, contracts in offshore drilling
are relatively short and usually end after two years. This might
expose the drilling companies to sharp declines in day rates and
EBITDA at the end of the contract if commodity prices decrease. S&P
said, "That said, we expect that the supply of rigs in the industry
will remain constrained. Many drillers had to go through debt
restructurings and are now more conservative with investments in
new rigs. Hence, we anticipate only limited additions to the global
rig supply, which will soften the decrease in day rates in case
demand drops. Older rigs will gradually be removed from the market,
further constraining the supply."
Seadrill's focus on the premium part of the offshore drilling
market should help it win high-day-rate contracts. The company
mainly owns floating drillships and semi-submersible rigs that can
work in higher water depths, compared with jack-ups or
tender-assist units. S&P understands that the company will sell its
jack-ups and tender-assist units in the coming months. With an
average age of 11 years, the fleet is relatively new,
technologically advanced, and provides customers with more
efficient solutions, compared with older rigs. Seadrill therefore
contracts the rigs at higher day rates. For example, the day rate
for a seventh generation drillship is about $450,000 per day
(/day), compared with $200,000/day for a jack-up. The company is
therefore well placed to benefit from higher day rates once its
older contracts, with day rates for drillships of about
$250,000/day, expire.
Seadrill's narrow scope of work, compared with peers, is not a
material risk and may be an advantage in the long term. Similarly
rated offshore drillers such as Noble Corp. PLC (B+/Positive/--) or
Valaris Ltd. (B+/Stable/--) have larger fleets than Seadrill, with
a higher proportion of low-day-rate rigs. Although this leads to
more diversity in the types of work these companies engage in, the
profitability in the lower end of the market will be constantly
challenged, given the rising presence of low-cost competitors.
Hence, Seadrill's strategy might prove beneficial over time, with
fewer stacked rigs and less pronounced EBITDA declines, compared
with peers. At the same time, within its sector of the market, the
company is well diversified, both geographically and by customer.
Seadrill is present in offshore geographies such as the Gulf of
Mexico, offshore Brazil, and west Africa. Its clients are mainly
national oil companies and large international companies, including
Petrobras, ConocoPhillips, and Equinor, among others.
Seadrill is reshaping its asset portfolio after it emerged from
bankruptcy in early 2022. As was the case for many of its peers,
Seadrill's high debt burden ultimately pushed the company to
restructure the business through Chapter 11. After shedding about
$5 billion of debt and emerging from bankruptcy in early 2022, the
company continued to focus on optimizing its portfolio. In recent
quarters, it sold seven jack-ups to ADES Arabia Holding, divested
its interest in Paratus Energy Services (a holding company for
businesses operating in the drilling and services sectors), and
merged with offshore driller Aquadrill, previously known as
Seadrill Partners and partly owned by Seadrill. As a result,
Seadrill has reduced its exposure to the lower-day-rate jack-up
market and enhanced its presence in the higher-day-rate floaters
market. It also plans to realize about $70 million of cost
synergies from the merger with Aquadrill. Seadrill will continue to
reshape its portfolio, given its announced sales of three
tender-assist units and three jack-ups in Qatar. Overall, S&P
believes the reshaped portfolio will help the company become a more
focused and leaner organization. That is despite some potential
short-term uncertainties that are associated with contract
terminations or the successful achievement of cost efficiency
targets amid portfolio optimization.
Seadrill's financial policy targets are constructive, but it needs
to build a track record of adherence.The company aims to keep net
debt to EBITDA below 1x during healthy market conditions and to
limit it to a maximum of 2x during weaker market conditions. These
leverage targets compare with negative leverage, pro forma the
announced transaction, because of negative net debt. S&P Global
Ratings-adjusted debt of $515 million is on a gross basis, which is
our usual approach for companies of a similar size in this
industry. S&P does not expect that Seadrill will operate with
negative net debt for a considerable amount of time. Ultimately,
net debt evolution will depend on the company's capital allocation
priorities, including investing in growth and shareholder
remuneration. In its current fleet, capex will be primarily for
maintenance and rig reactivation over 2023-2024. Dividends will
likely follow once the company has accumulated some track record of
positive free operating cash flow (FOCF).
S&P said, "The stable outlook reflects our expectation that
Seadrill will benefit from the improving offshore drilling market
over the next 12 months, leading to comfortable headroom under the
preliminary rating. We also anticipate that the company will
integrate the recently acquired driller Aquadrill, realizing
synergies in line with its expectations.
"We expect Seadrill will post adjusted EBITDA of $435 million-$485
million in 2023, compared with $261 million in 2022. This should
result in broadly neutral FOCF and FFO to debt of close to 67%,
which we view as commensurate with the preliminary rating."
S&P might downgrade Seadrill if its credit metrics weakened, with
FFO to debt declining below 30% and no expectation of a near-term
recovery. This could result from the following:
-- Reduced demand for offshore drilling, likely because of lower
exploration and production industry capex amid low oil and gas
prices;
-- A deviation from the company's financial policy, with reported
net debt to EBITDA above 2x; or
-- Continuously negative FOCF, ultimately resulting in a weakening
liquidity headroom.
S&P could upgrade Seadrill if it successfully integrated Aquadrill
and demonstrated improved operating results that would support FFO
to debt above 60%. In addition, S&P would require the following:
-- Strong positive FOCF, highlighting the company's ability to
reduce debt over time;
-- A longer track record of applying the financial policy,
including capital allocation priorities (capex, dividends,
acquisitions); and
-- At least adequate liquidity, supported by diverse liquidity
sources.
ESG credit indicators: E-4, S-3, G-3
S&P said, "Environmental factors are a negative consideration in
our credit rating analysis of Seadrill, similarly to its peers. We
expect that, over time, the energy transition will result in lower
demand for offshore drilling rigs and services, because the
accelerating adoption of renewable energy sources reduces the
demand for fossil fuels. Additionally, the industry faces an
increasingly challenging regulatory environment that includes
limits on drilling activity in certain jurisdictions. Given its
exposure to the offshore market, Seadrill faces higher
environmental risks than onshore rig contractors. This is because
of Seadrill's susceptibility to operational interruptions and
damage to its equipment from more challenging operating conditions
such as hurricanes, high waves, and winds.
"Social factors are a moderately negative consideration in our
credit rating analysis of Seadrill because we think deepwater
operations are more prone to fatal accidents, due to the inherent
risks of operating in more challenging environments."
Governance factors are a moderately negative consideration for
Seadrill, given its historically aggressive financial policies,
which led to bankruptcy, and its limited track record under the new
board and management.
===========
B R A Z I L
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AZUL SA: Moody's Upgrades CFR to Caa1 & Alters Outlook to Positive
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Moody's Investors Service has upgraded to Caa1 from Caa2 Azul S.A.
(Azul)'s corporate family rating, and upgraded to Caa2 from Caa3
the rating of the senior unsecured notes due 2024 and 2026 issued
by Azul Investments LLP and unconditionally guaranteed by Azul. At
the same time, Moody's has assigned a Caa1 rating to Azul's secured
notes due 2029 and 2030 and a B3 rating to Azul's proposed
first-lien secured notes due 2028 both issued by Azul Secured
Finance LLP (Delaware) and unconditionally guaranteed by Azul. The
outlook for Azul and Azul Investments LLP was changed to positive
from negative. A positive outlook was assigned for Azul Secured
Finance LLP.
The secured issuances are part of Azul's liability management
strategy and proceeds will be used for repayment of outstanding
indebtedness and to increase Azul's cash position, thus lengthening
the company's debt amortization schedule and improving its
liquidity.
The rating of the proposed notes assumes that the final transaction
documents will not be materially different from draft legal
documentation reviewed by Moody's to date and assume that these
agreements are legally valid, binding and enforceable.
Upgrades:
Issuer: Azul S.A.
Corporate Family Rating, Upgraded to Caa1 from Caa2
Issuer: Azul Investments LLP
Backed Senior Unsecured Regular Bond/Debenture due 2024, Upgraded
to Caa2 from Caa3
Backed Senior Unsecured Regular Bond/Debenture due 2026, Upgraded
to Caa2 from Caa3
Assignments:
Issuer: Azul Secured Finance LLP
Backed Senior Secured Regular Bond/Debenture due 2028, Assigned
B3
Backed Senior Secured Regular Bond/Debenture due 2029, Assigned
Caa1
Backed Senior Secured Regular Bond/Debenture due 2030, Assigned
Caa1
Outlook Actions:
Issuer: Azul S.A.
Outlook, Changed To Positive from Negative
Issuer: Azul Investments LLP
Outlook, Changed To Positive from Negative
Issuer: Azul Secured Finance LLP
Outlook, Assigned Positive
RATINGS RATIONALE
The upgrade of Azul's CFR to Caa1 reflects the material improvement
in liquidity following the execution of the company's financial
restructure. Azul has renegotiated lease payments with lessors,
exchanged its senior unsecured notes maturing in 2024 and 2026 for
new secured notes due 2029 and 2030 and will issue new first-lien
secured notes due 2028, all of which significantly reduced near
term cash needs and enhanced its cash position. Moody's estimates
that Azul's cash position will remain above BRL2 billion in 2023-25
after all initiatives, while its Moody's-adjusted leverage will
continue to decline to around 4.0x-5.0x over the same period, from
7.5x at the end of March 2023. Azul's annual cash outflows related
to lease and financial debt payments will decline to an accumulated
BRL12.8 in 2023-25 from BRL17 billion prior to the restructure.
Azul's Caa1 CFR also reflects the company's unique business
position in Government of Brazil (Ba2 stable) as the only carrier
in about 80% of its routes, resulting in lower competition and
strong pricing power. Azul's ability to reduce costs during the
pandemic and its conservative financial policies are additional
credit positives. The rating also takes into consideration the
faster-than-expected post-pandemic recovery in passenger traffic in
Brazil, and more rational competition and capacity in the Brazilian
market, which has enabled carriers to increase airfares, mitigating
the effect of higher jet fuel prices and other inflationary cost
pressures. Moody's also believes that Azul has strong potential to
substantially improve its key credit metrics toward the 2019 levels
through 2023.
The Caa1 rating is constrained by the continued fragile situation
of the airline industry in the context of the pandemic and rising
macroeconomic risks, combined with Azul's still-weak credit
metrics. Azul has a highly leveraged balance sheet and weak
interest coverage, which limits the company's free cash flow
generation. Azul's ability to raise liquidity, refinance its
financial obligations and control cash burn or cash needs during
the industry's recovery will still be key aspects in its rating
assessment. Finally, the rating incorporates the company's
intrinsic exposure to foreign-currency and fuel price volatility.
In June 2023, Azul announced a par-for-par exchange offer for its
2024 and 2026 unsecured notes. The offers will exchange the 5.875%
unsecured notes due 2024 for 11.500% secured notes due 2029 and the
7.250% unsecured notes due 2026 for 10.875% secured notes due 2030.
Azul has entered into an agreement with an ad hoc group of holders
of the 2024 and 2026 notes representing 65.5% of the aggregate
principal amount of the 2024 notes and 65.8% of the aggregate
principal amount of the 2026 notes. An amount of $291 million in
principal of the notes due 2024 representing 72.8% of the
outstanding principal, and $568 million in principal of the notes
due 2026 representing 94.6% of the outstanding principal, have been
validly tendered for exchange as of June 28, 2023. Despite the
par-for-par exchange, increase in coupon and collateral assignment,
Moody's views this deal as a distressed exchange given that the
deal avoids a potential default in light of Azul's weak liquidity
and untenable capital structure at the time of the exchange.
Azul's operations have outperformed the domestic industry, with a
fleet flexible enough to serve demand profitably in different
market and aircraft scenarios. As of June 2023, Azul's ASKs and
RPKs were at 122% and 126% of 2019 levels, respectively, compared
with 106% and 112% a year earlier. The company has generated 3.1
billion of EBITDA in the 12 months that ended in March 2023, while
generating BRL3.7 billion of operating cash flow and BRL53 million
of free cash flow.
NOTCHING CONSIDERATIONS
The Caa2 rating assigned to Azul's unsecured notes is one notch
lower than the company's Caa1 CFR, reflecting the effective
subordination of unsecured creditors. The senior unsecured notes
rank below Azul's existing and future secured claims that will
account for around 83% of the company's debt after the financial
restructure. Azul's consolidated debt is mainly composed of finance
leases collateralized by aircraft, secured notes collateralized by
cash flows and receivables generated by TudoAzul and Azul Viagens
and debentures collateralized by credit card receivables.
The new exchanged secured notes due 2029 and senior secured notes
due 2030 are rated Caa1, in line with Azul's CFR, primarily
reflecting the instruments' pool of collaterals, which includes a
second priority lien on, among other assets, certain cash flows and
receivables generated by TudoAzul and Azul Viagens , as well as
certain intellectual property of the two businesses, and
intellectual property of the Azul airline business; and a security
on a first lien basis (subject to future permitted priming debt) by
Azul Cargo.
The proposed first-lien secured notes due 2028 are rated B3, one
notch higher than the company's secured ratings, reflecting the
instruments' collateral package and protection features, which
include (i) first lien on among other assets, certain cash flows
and receivables generated by TudoAzul and Azul Viagens , as well as
certain intellectual property of the two businesses, and
intellectual property of the Azul airline business; (ii) fiduciary
assignments and transfers in place to ring fence the receivables
for the noteholder's protection even under a bankruptcy scenario;
(iii) high affirmation likelihood of the collateral due to the
mission critical intellectual property required for Azul to
continue operations under the airline brand; (iv) intellectual
property included in transaction scope will be owned by a
bankruptcy remote offshore SPV; and (v) segregated collection
accounts with a protective lock box structure, whereby cash
collections are blocked at all times until enough cash is reserved
for debt obligations due on the next payment date.
RATING OUTLOOK
The positive outlook on Azul's ratings reflects Moody's
expectations that the company's operations and credit metrics will
improve over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade Azul if risks and uncertainties are reduced
significantly, and passenger demand remains sustainable above
pre-coronavirus levels. An upgrade would also require Azul to
continue to improve its capital structure, maintain an adequate
liquidity profile, with cash consistently above 15% of revenues,
and key metrics to improve with debt-to-EBITDA below 6x and (funds
from operations + interest)/ interest above 3x on a sustained
basis.
Moody's could downgrade Azul's ratings if liquidity concerns
increase or if the company is unable to strengthen credit metrics,
and if the likelihood of a default in the company's financial
obligations increases.
COMPANY PROFILE
Headquartered in Barueri near the City of Sao Paulo, Brazil, Azul
S.A. is a Brazilian airline founded by David Neeleman in 2008. The
company is the largest airline in Brazil by number of cities
covered and departures, serving more than 160 destinations with an
operating fleet of 168 aircraft and operating more than 900 flights
daily. The company also flies its aircraft to select international
destinations, including Fort Lauderdale, Orlando, Paris, Punta del
Este and Lisbon. Azul is the sole owner of the loyalty program
TudoAzul, a strategic revenue-generating asset, which had more than
15 million members as of March 2023. In the 12 months that ended
March 2023, Azul generated BRL17.2 billion ($3.3 billion) in net
revenue.
The principal methodology used in these ratings was Passenger
Airlines published in August 2021.
AZUL SECURED: Fitch Assigns 'B-'(EXP)' Rating to 2028 Secured Debt
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Fitch Ratings has assigned an expected rating 'B-'(EXP)/'RR4'
rating to Azul Secured Finance LLP's benchmark-size proposed senior
secured debt issuance due 2028. The notes will be secured by a
shared collateral on a first priority basis by, among other assets,
certain cash flows and receivables generated by TudoAzul and Azul
Viagens, as well as certain intellectual property of both
businesses, as well as Azul's airline business.
Fitch has reviewed appraisals of the collateral that indicate a
strong security package; nonetheless, Fitch has assigned Brazil a
recovery cap of 'RR4', which limits any rating uplift.
The recommendation of an expected 'B-' rating reflects the overall
improvement in Azul's credit profile post restructuring plan,
including improved liquidity and, moreover, ongoing improvements on
operating cash flow and leverage ratios. Azul's recent
post-restructuring credit profile, limited financial flexibility
and high industry risks remain rating constrains.
Azul S.A.'s current Long-Term Foreign- and Local-Currency Issuer
Default Ratings (IDRs) of 'C', and National Scale Rating at
'C(bra)', reflect the announcement of an exchange offer. If the
proposed tender offer is successfully completed, the IDR will be
downgraded to Restricted Default (RD). Subsequently, Fitch will
re-rate Azul's IDRs to a level that is consistent with the
company's post-exchange capital structure, liquidity and risk
profile, which would likely be at the same level of this proposed
secured issuance. Upon completion, any remaining existing unsecured
bonds will likely be upgraded to levels below the secured notes due
to lower levels of credit protection and priority.
KEY RATING DRIVERS
Transaction Ratings: The 'B-'/'RR4' rating on the proposed secured
notes reflects the agency's country cap for recovery ratings in
Brazil. Per the transaction structure, Fitch would estimate that
creditors would likely receive superior recovery in a bankruptcy
scenario. Fitch's recovery analysis is based on a going-concern
scenario in which the agency uses an estimated sustainable EBITDA
of BRL2.2 billion adjusted by leasing expenses, and an EV multiple
of 5.5x (reflecting prior airline bankruptcies). Fitch's estimate
of a going-concern enterprise value is more than sufficient to
cover all secured claims.
Fitch believes that the importance of the collateral to Azul
creates a high level of incentive for the company to continue
servicing the debt even in a distress scenario. However, the value
of the assets largely rests on Azul continuing as a going concern.
Liquidation of the airline would materially impact the collateral
values and weaken recovery.
Transaction Description: The transaction includes intellectual
property owned by a bankruptcy remote SPV (lien over the
intellectual property of Azul, TudoAzul, and Azul Viagens),
fiduciary assignment over a majority of TudoAzul and Azul Viagens'
receivables and lockbox accounts with most of gross billing from
TudoAzul and Azul Viagens deposited into segregated collection
accounts in the name of a guarantor and subject to the lien of the
collateral agent.
Additional mechanisms are incorporated, as liquidated damages in
the event of a termination of the sublicense resulting in
substantial claims at one of the guarantors (Azul Linhas Aereas
Brasileiras S.A.) and USD50 million per quarter license fee payable
to SPV upon certain event of default.
The notes will have a five-year bullet maturity and proceeds will
be used for general corporate purposes, which involves repayment of
existing indebtedness to address near term maturities and liquidity
enhancement. The coupon will have a dependence on LTV ratio. If the
LTV ratio exceeds 62.5%, the interest rate on the notes will
increase to an annual rate that is 2.0% higher than the original
coupon until the LTV ratio does not exceed 62.5% (to be certified
annually).
Corporate Ratings
Exchange Offer Qualified as DDE: Azul's exchange offer transaction
has been considered a DDE under Fitch's criteria, due to the
involvement of a substantial portion of Azul's classes of obligors
(including lessors and OEMs refinancing agreements), leading to a
broader restructuring plan to avoid a payment default. The
extension of the maturity date, including of the local convertible
debentures, and material reduction in terms of bondholders that do
not accept the deal due to the elimination of some restrictive
covenants, as well as structural subordination, are also
incorporated in this assessment.
The new notes will be secured on a second out basis by a shared
collateral package, including certain brands and intellectual
property of Azul's group and certain receivables from TudoAzul,
Azul Viagens and Azul Cargo. The company has announced an early
acceptance rate of 86% (72.8% or USD291 million for the 5.875%
senior notes due 2024, and 94.6% or USD567 million of the 7.250%
senior notes due 2026).
Improving Credit Profile: The conclusion of Azul's full debt
restructuring plan, as well as the ongoing improvements of its
operating cash flow generation, are expected to help to restore its
credit profile in terms of leverage and refinancing risks. Fitch's
base case scenario forecasts the company's total and net adjusted
leverage/EBITDAR ratios at around 4.6x and 4.0x, respectively,
during 2023, an improvement from the 2022 levels of 7.4x and 7.1x.
The reduction in lease payment and the maturity extension of most
of its debt reduce the pressure on cash flow and address most
near-term maturities, leaving Azul with a manageable amount of
scheduled maturities until 2028. Lessors are exchanging COVID lease
deferrals for notes due 2030 and equity instrument convertible into
Azul's shares (40/60 split).
Limited Financial Flexibility: Azul's ability to continue to access
new credit lines, seeking to restore its liquidity position and to
improve its financial flexibility are key factors to support
continuous improvement on its credit risks profile. Azul has a
track record of maintaining strong cash balances, which in the past
helped reduce short-term refinancing risks and industry volatility.
Azul's readily available cash, per Fitch's criteria, declined to
BRL466 million as of March 31, 2023 from BRL668 million as of Dec.
31, 2022 and from BRL3.1 billion at end of December 2021.
Azul's increasing share of secured debt has a short to medium term
impact on its financial flexibility, given the likely weaker
unencumbered asset base, and should continue to constrain rating in
the medium term.
Stronger Operations: Fitch expects Azul's adjusted EBITDA to
improve during 2023 due to the solid domestic traffic level,
benefits from elimination of PIS/Cofins taxes, better FX rates and
lower fuel prices as well as cost efficiencies and capacity
expansion. Fitch forecasts Azul's adjusted EBITDA to reach around
BRL5.5 billion in 2023 and BRL6.2 billion in 2024, an increase from
BRL3.2 billion in 2022 and BRL3.6 billion during 2019
(pre-pandemic). Azul's traffic levels have been above 2019's levels
since mid-2021, given the company's strong growth strategy. Fitch
estimates Azul's 2023 total traffic volume are around 21% higher
than 2019, and capacity level at 25%.
FCF to Remain Negative: Fitch forecasts Azul's free cash flow
generation to remain negative during 2023 and 2024, at around
BRL1.6 billion and BRL0.9 billion, respectively. The lower lease
expenses related to pandemic-related deferral agreements brings
Azul some relief; however, the ongoing growth in operations,
increasing leases payments, higher interest rates and capex
continues to dent operating cash flow generation. For 2023 and
2024, Fitch estimates capex of around BRL1.8 billion and BRL1.4
billion for 2024. Azul is expected to marginally increase its fleet
during the next two years.
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 Linhas Aereas Inteligentes S.A. and LATAM
Airlines Group S.A. Azul is the sole provider of services on 80% of
its routes and is one of the three largest airline companies in
Brazil, with a market share of around 29%, as measured by
revenues/passenger/kilometer (RPK) in 2022.
As Brazil is the company's key market, Azul's operating results are
highly correlated to the Brazilian economy. During 2022, 91% of its
revenues derived from passengers and 9% from cargo and others, and
82% of its revenues were originated within local market.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Fitch Rating Case for the Issuer:
-- Fitch's base case during 2023 and 2024 includes an increase in
RPK by 14% and 4%;
-- Load factors around 80% during 2023 and 2024;
-- Capex of BRL1.8 billion in 2023 and BRL1.4 billion in 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Improved liquidity position, and maintenance of well-spread
debt amortization profile with no major refinancing risks in the
medium term;
-- EBITDAR fixed-charge coverage sustained at or above 1.5x;
-- FCF generation above Fitch's base case expectations;
-- Continued solid rebound of the Brazilian domestic air traffic;
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Liquidity deterioration and/ or difficulties to continue to
access credit lines;
-- Gross and net leverage ratios consistently above 6.5x and
6.0x;
-- EBITDA fixed-charge coverage sustained at or below 1x;
-- Competitive pressures leading to severe loss in market-share or
yield deterioration;
-- Aggressive growth strategy leading to consolidation movement
financed with debt.
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
Limited Financial Flexibility: Azul's post restructuring process is
likely to present an improvement in terms of liquidity and debt
schedule amortization, but financial flexibility will remain poor.
Azul's increasing share of secured debt pressures its financial
flexibility, given the likely weaker unencumbered asset base.
Pos-restructuring, around 67% of Azul's debt, excluding leases,
will be secured. Considering the current issuance and the
completion of the exchange offer, Azul will have a more manageable
amount of scheduled maturities with no major pressure until 2028.
Fitch estimates Azul's proforma financial debt will be around BRL15
billion, excluding leasings.
ISSUER PROFILE
Azul is one of Brazil's largest local airlines, with significant
presence in the regional market and the sole position on 80% of its
routes. During 2022, 91% of its revenues were derived from
passengers and 9% from cargo and others.
BANCO MODAL: Moody's Upgrades Long Term Deposit Ratings to Ba2
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Moody's Investors Service has upgraded Banco Modal S.A.'s (Modal)
long-term global local and foreign currency deposit ratings to Ba2,
from Ba3, the long-term counterparty risk ratings, both in local
and foreign currency to Ba1, from Ba2, and the long-term
counterparty risk assessment (CRA) to Ba1(cr), from Ba2(cr). At the
same time, Moody's affirmed the baseline credit assessment (BCA) at
ba3 and upgraded the Adjusted BCA to ba2, from ba3. The bank's
short-term local and foreign currency counterparty risk and deposit
ratings at Not Prime and counterparty risk assessment at Not
Prime(cr) were also affirmed. The outlook on the long-term deposit
ratings was changed to stable, from positive.
RATINGS RATIONALE
The upgrade of Modal's deposit ratings to Ba2 reflects the
incorporation of affiliate support from XP Inc. (XP, Ba2 stable),
following the completion of the acquisition process, announced on
June 30, 2023, when Modal delisted its sharesfrom the Brazilian
stock exhange and XP acquired 100% of the bank's equity. Moody's
assumes a very high likelihood of support from XP to Banco Modal,
leading to one notch of uplift to the bank's Adjusted BCA. Under
the new ownership structure, Modal becomes part of XP's ecosystem,
investment product and banking services, which will likely enhance
the bank's funding structure and leverage its customer growth
potential. Modal will be able to lower its funding costs as it
benefits from having a large and profitable shareholder that will
provide it opportunities to access an ample base of retail and
institutional base. On the other hand, during this transition
period, Moody's expect Modal's standalone solvency and liquidity
profile to remain broadly consistent with its current ba3 BCA.
The affirmation of Modal's BCA acknowledges the bank's established
business model as a retail investment platform focused on
medium-income individuals and investment banking operation to small
and medium sized entities (SMEs), complementary activities to XP.
Following two years of strong business expansion, since the
announcement of the acquisition in January 2022, Modal has been
focusing on adjusting its operating structure, resulting in a sharp
reduction of bottom- line results in the end of 2022. In March
2023, the bank reported net losses, which combined with high loan
growth between 2020 and 2022, resulted in a decline of the bank's
tangible common equity (TCE) to risk weighted assets (RWA) ratio to
8.5% as of March 2023, from 10.5% in December 2022 and a peak of
16% in April 2021, after the IPO.
In terms of asset risks, Modal's problem loan ratio stood at 1.5%
of gross loans in March 2023, and its net charge off ratio was
2.0%. While the bank's disciplined risk management has supported
asset quality ratios in the past six years, Moody's expect asset
risk to remain pressured by the still challenging operating
environment that will continue to affect the retail loan portfolio,
including the SME portfolio.
Modal's ba3 BCA also acknowledges an increased share of deposits
from individuals in the bank's funding mix, a supportive driver to
the bank's financial profile, with demand and time deposits
representing 66% of total third-party resources as of March 2023.
This deposit inflows have benefited from the consolidation of the
bank's proprietary digital platform that consistently and gradually
reduced its reliance on more volatile and expensive
institutional-investor resources since 2016.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Modal's Ba2 deposit ratings are unlikely to be upgraded because
they are already positioned at the same level of its parent company
XP. Positive upward movement on its BCA would arise from improved
profitability, sustained capitalization at higher levels and lower
reliance on market funding.
Downward rating pressure would arise if the bank experiences
greater than expected fall in its capitalization ratio as a result
of a rapid expansion or unexpected loss and sees sustainable asset
risk pressures from its new retail business that could arise from
an aggressive growth strategy. In addition, a downgrade on XP's
rating could lead to a downgrade of Modal's deposit ratings.
The principal methodology used in these ratings was Banks
Methodology published in July 2021.
BRAZIL: Economists Foresee Deeper Monetary Easing, Lower Inflation
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globalinsolvency.com, citing Reuters, reports that private
economists in Brazil anticipate deeper monetary easing this year
and improved inflation prospects until 2026 following the
government's decision to maintain the country's inflation goal at
3%, a weekly central bank poll showed.
President Luiz Inacio Lula da Silva has consistently blasted the
country's central bank for keeping interest rates at a cycle-high
of 13.75% even as inflation slows, according to
globalinsolvency.com.
During the first months of his administration, he also criticized
inflation targets as too low, arguing that they led to an overly
restrictive monetary policy, the report notes.
Such remarks contributed to the deviation of long-term inflation
expectations from official targets, viewed as concerning by the
central bank, which described the development as a rationale for
maintaining interest rates at their highest in six years, the
report relays.
However, the National Monetary Council (CMN), Brazil's top economic
policy body, set the 2026 inflation target at 3%, maintaining the
same goal for 2025 and 2024, the report adds.
About Brazil
Brazil is the fifth largest country in the world and third largest
in the Americas. Luiz Inacio Lula da Silva won the 2022 Brazilian
general election. He was sworn in on January 1, 2023, as the 39th
president of Brazil, succeeding Jair Bolsonaro.
In mid-June 2023, S&P Global Ratings, revised the outlook on its
long-term global scale ratings on Brazil to positive from stable.
S&P affirmed its 'BB-/B' long- and short-term foreign and local
currency sovereign credit ratings on Brazil. S&P also affirmed its
'brAAA' national scale rating, and the outlook remains stable. The
transfer and convertibility assessment remains 'BB+'. The positive
outlook reflects signs of greater certainty about stable fiscal and
monetary policy that could benefit Brazil's still-low GDP growth
prospects. Continued GDP growth plus the emerging framework for
fiscal policy could result in a smaller government debt burden than
expected, which could support monetary flexibility and sustain the
country's net external position.
Moody's credit rating for Brazil was last set at Ba2 in 2018 with
stable outlook. Moody's affirmed the Ba2 issuer ratings and senior
unsecured bond ratings in April 2022.
Fitch, in December 2022, affirmed Brazil's Long-Term Foreign
Currency Issuer Default Rating (IDR) at 'BB-' with a Stable
Outlook. The ratings are constrained by high government
indebtedness, a rigid fiscal structure, weak economic growth
potential, and a record of governability challenges that have
hampered efforts to address these fiscal and economic issues and
clouded policy predictability. The Stable Outlook reflects Fitch's
expectation that growth will slow in 2023 and that recent fiscal
improvement will erode under a new government, but within a margin
consistent with the current rating, and from a better starting
point than previously expected.
DBRS's credit rating for Brazil is BB (low) with stable outlook
(March 2018).
BRAZIL: General Price Index Declines 1.45% in June
--------------------------------------------------
Rio Times Online reports that IGP-DI, the General Price Index -
Domestic Availability in Brazil, declined by 1.45% in June,
following a 2.33% drop the previous month.
The index has experienced a cumulative decrease of 4.96%
year-to-date and a decrease of 7.44% over the past 12 months,
according to Rio Times Online.
Notably, prices of corn and soybeans showed less significant
declines, helping contain deflationary pressures for producers, the
report notes.
The Consumer Price Index (IPC) also decreased by 0.10%, with food
prices and reduced taxes on new vehicles contributing to the
decline, the report adds.
About Brazil
Brazil is the fifth largest country in the world and third largest
in the Americas. Luiz Inacio Lula da Silva won the 2022 Brazilian
general election. He was sworn in on January 1, 2023, as the 39th
president of Brazil, succeeding Jair Bolsonaro.
In mid-June 2023, S&P Global Ratings, revised the outlook on its
long-term global scale ratings on Brazil to positive from stable.
S&P affirmed its 'BB-/B' long- and short-term foreign and local
currency sovereign credit ratings on Brazil. S&P also affirmed its
'brAAA' national scale rating, and the outlook remains stable. The
transfer and convertibility assessment remains 'BB+'. The positive
outlook reflects signs of greater certainty about stable fiscal and
monetary policy that could benefit Brazil's still-low GDP growth
prospects. Continued GDP growth plus the emerging framework for
fiscal policy could result in a smaller government debt burden than
expected, which could support monetary flexibility and sustain the
country's net external position.
Moody's credit rating for Brazil was last set at Ba2 in 2018 with
stable outlook. Moody's affirmed the Ba2 issuer ratings and senior
unsecured bond ratings in April 2022.
Fitch, in December 2022, affirmed Brazil's Long-Term Foreign
Currency Issuer Default Rating (IDR) at 'BB-' with a Stable
Outlook. The ratings are constrained by high government
indebtedness, a rigid fiscal structure, weak economic growth
potential, and a record of governability challenges that have
hampered efforts to address these fiscal and economic issues and
clouded policy predictability. The Stable Outlook reflects Fitch's
expectation that growth will slow in 2023 and that recent fiscal
improvement will erode under a new government, but within a margin
consistent with the current rating, and from a better starting
point than previously expected.
DBRS's credit rating for Brazil is BB (low) with stable outlook
(March 2018).
BRAZIL: IDB OKs $54.5M Loan for Housing Vulnerable Populations
--------------------------------------------------------------
The Inter-American Development Bank (IDB) approved a $54.5 million
loan to Brazil to launch new housing strategies and improve
dwelling quality, primarily for low-income people. This is the
first operation of a conditional credit line for investment
projects (CCLIP) that can fund up to $600 million in individual
investment operations.
The loan's cross-cutting themes are gender and diversity, climate
change and environmental sustainability, and digitalization.
This loan, which was approved by the IDB's Board of Executive
Directors, will fund the creation of new, federal-level tools that
public, private, and civil society actors can use to facilitate and
diversify access to quality housing. The operation's specific
objectives are to connect housing supply and demand; develop and
implement a national microfinance program that allows low-income
families to make sustainable improvements to their homes; and
strengthen the national housing plan by promoting social and
environmental sustainability and by training subnational government
officials and industry professionals.
According to data from 2019, about 30 million households in Brazil
live in substandard homes or lack housing altogether, a problem
that overwhelmingly affects the low-income population. Of this
total, the quantitative housing deficit is estimated at 5.9 million
households and is expected to increase by 1.2 million per year
until 2030 as new households are formed. But the largest portion of
Brazil's housing deficit is qualitative: inadequate homes exceeded
24 million in 2019. Housing in this category lacks basic
infrastructure (water, sanitation, energy) or legal land tenure, or
the structures are precarious.
The new national housing program "My house, my life," launched in
2023 under the leadership of the National Housing Secretariat (SNH)
of Brazil's Ministry of Cities, addresses these two challenges. It
seeks to boost the number of new houses being built, improve
existing housing, and strengthen institutions. The initiative
focuses on the most vulnerable groups, like low-income people,
women, and people with disabilities.
To enable this housing transformation, Brazil will become the
region's first country to create a national digital platform with
information on housing demand and supply, which will allow it to
respond more effectively to the housing deficit. The creation of a
federal first-loss guarantee for housing improvement microloans
will attract private investment to the housing sector and promote
more affordable financing. In addition, the program will implement
training plans for architects and engineers so they can specialize
in housing improvements that are socially and environmentally
sustainable and climate resilient.
The final beneficiaries of this program will be low-income
families, subnational governments (states and municipalities),
private-sector agents, and civil society.
About Brazil
Brazil is the fifth largest country in the world and third largest
in the Americas. Luiz Inacio Lula da Silva won the 2022 Brazilian
general election. He was sworn in on January 1, 2023, as the 39th
president of Brazil, succeeding Jair Bolsonaro.
In mid-June 2023, S&P Global Ratings, revised the outlook on its
long-term global scale ratings on Brazil to positive from stable.
S&P affirmed its 'BB-/B' long- and short-term foreign and local
currency sovereign credit ratings on Brazil. S&P also affirmed its
'brAAA' national scale rating, and the outlook remains stable. The
transfer and convertibility assessment remains 'BB+'. The positive
outlook reflects signs of greater certainty about stable fiscal and
monetary policy that could benefit Brazil's still-low GDP growth
prospects. Continued GDP growth plus the emerging framework for
fiscal policy could result in a smaller government debt burden than
expected, which could support monetary flexibility and sustain the
country's net external position.
Moody's credit rating for Brazil was last set at Ba2 in 2018 with
stable outlook. Moody's affirmed the Ba2 issuer ratings and senior
unsecured bond ratings in April 2022.
Fitch, in December 2022, affirmed Brazil's Long-Term Foreign
Currency Issuer Default Rating (IDR) at 'BB-' with a Stable
Outlook. The ratings are constrained by high government
indebtedness, a rigid fiscal structure, weak economic growth
potential, and a record of governability challenges that have
hampered efforts to address these fiscal and economic issues and
clouded policy predictability. The Stable Outlook reflects Fitch's
expectation that growth will slow in 2023 and that recent fiscal
improvement will erode under a new government, but within a margin
consistent with the current rating, and from a better starting
point than previously expected.
DBRS's credit rating for Brazil is BB (low) with stable outlook
(March 2018).
PETROBRAS: Allows Odebrecht to Reapply for Contracts
----------------------------------------------------
Rio Times Online reports that Petrobras has lifted the ban on
Odebrecht, allowing the contractor to participate in contract
bidding processes.
Odebrecht, along with Andrade Gutierrez and UTC, was previously
barred from doing business with Petrobras due to their involvement
in corruption schemes investigated by Operation Lava Jato,
according to Rio Times Online.
Petrobras has stated that a total of 31 companies, both domestic
and foreign, are qualified to provide services, the report notes.
However, any company interested in working with Petrobras must
demonstrate compliance with the Petrobras Compliance Program,
commit to anti-corruption laws and integrity policies, and be free
from any sanctions, the report adds.
About Petrobras
Petroleo Brasileiro S.A. or Petrobras (in English, Brazilian
Petroleum Corporation - Petrobras) is a semi-public Brazilian
multinational corporation in the petroleum industry headquartered
in Rio de Janeiro, Brazil. Petrobras control significant oil and
energy assets in 16 countries in Africa, the Americas, Europe and
Asia. But, Brazil represents majority of its production.
The Brazilian government directly owns 54% of Petrobras' common
shares with voting rights, while the Brazilian Development Bank and
Brazil's Sovereign Wealth Fund (Fundo Soberano) each control 5%,
bringing the State's direct and indirect ownership to 64%.
A corruption scandal was uncovered in 2014 that involved
Petrobras.
The scandal related to money laundering that involved Petrobras
executives. The executives were alleged to get received kickbacks
from overpriced contracts, to the tune of about $3 billion in
total. Over a thousand warrants were issued against politicians
and businessmen in relation to the scandal. In 2016, Marcelo
Odebrecht, CEO of Odebrecht, was sentenced to 19 years in prison
after being convicted of paying more than $30 million in bribes to
Petrobras executives.
In January 2018, Petrobras agreed to pay $2.95 billion to settle a
U.S. class action corruption lawsuit. In September 2018, Petrobras
agreed to pay $853.2 million to settle with Brazilian and U.S.
authorities.
In July 2022, Fitch Ratings affirmed Petrobras' BB- Long-Term
Issuer Default Rating. In addition, Fitch has revised the Rating
Outlook to Stable from Negative following a similar revision to
Brazil's Sovereign Rating Outlook. Also in July 2022, Egan-Jones
Ratings Company upgraded the foreign currency and local currency
senior unsecured ratings on debt issued by Petrobras to BB+ from
BB.
=========
C H I L E
=========
INVERSIONES LATIN AMERICA: Fitch Cuts $403.9MM Secured Notes to D
-----------------------------------------------------------------
Fitch Ratings has downgraded Inversiones Latin America Power
Limitada's (ILAP) USD403.9 million senior secured notes to 'D' from
'C'. The notes are supported by cash flows from two windfarms in
Chile, San Juan, S.A. (San Juan) and Norvind, S.A. (Totoral).
The downgrade reflects project's default on the coupon payment due
on July 3 not cured in the five-day period established under the
notes.
RATING RATIONALE
The company announced it has entered into a standstill and
forbearance agreement with 75% of the noteholders until Aug. 3. The
agreement can be extended until Sept. 3. Meanwhile the company and
creditors are expected to discuss solutions for project's stressed
liquidity.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
—- Downgrade sensitivities are not applicable, as the rating is
currently at the lowest possible rating.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
-- Fitch will review the rating after the new conditions agreed
with noteholders are disclosed.
TRANSACTION SUMMARY
ILAP issued USD403.9 million in partially amortizing senior secured
notes, with a balloon payment due in 2033. This debt is principally
secured by a first priority security interest in all assets, the
material project documents and the project accounts. The proceeds
of the issuance were used to refinance existing debt; pay
transaction fees, expenses and general corporate purposes; and pay
for financing costs associated with the transaction and other
corporate purposes.
The transaction consists of the holding company, ILAP, which issued
all of the transaction debt and receives upstreamed cash flows in
the form of shareholder loan payments from the project companies
and guarantors, San Juan, S.A. and Norvind, S.A. San Juan, S.A.
owns and operates the San Juan windfarm in Vallenar, within the
Atacama region in Chile, with an installed capacity of 193.2 MW
that consists of 56 Vestas V117-3.45MW wind turbine generators.
This windfarm began commercial operations in March 2017. Norvind,
S.A. owns and operates the Totoral windfarm in Canela, within the
Coquimbo region in Chile, with an installed capacity of 46 MW that
consists of 23 Vestas V90-2.0MW wind turbine generators. This
windfarm began commercial operations in January 2010.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF
RATING
The principal sources of information used in the analysis are
described in the Applicable Criteria.
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.
===============
C O L O M B I A
===============
UNE EPM: Moody's Puts 'Ba1' CFR Under Review for Downgrade
----------------------------------------------------------
Moody's Investors Service assigned a Ba1 Corporate Family Rating to
UNE EPM Telecomunicaciones, S.A.'s ("Tigo Une") and simultaneously
withdrew the company's Baa3 long-term issuer rating. At the same
time, Moody's placed the Ba1 CFR under review for downgrade.
Assignments:
Issuer: UNE EPM Telecomunicaciones, S.A.
Corporate Family Rating, Assigned Ba1; Placed Under Review for
further Downgrade
Withdrawals:
Issuer: UNE EPM Telecomunicaciones, S.A.
Issuer Rating, Withdrawn, previously rated Baa3
RATINGS RATIONALE
The Ba1 rating reflects Tigo UNE's persistently weak profitability
when compared to peers in the same rating category despite the
positive trend in subscriber growth, as well as tight liquidity
position when considering upcoming debt maturities and capex
deployment needs. The rating also considers the company's strong
position in the Colombian market, holding about 26% of the mobile
market share and about 29% of the fixed broadband market, as well
as its small scale when compared to global peers.
Tigo UNE operates in a competitive operating environment, which
weighs on profitability and organic growth. Moody's believes that
the company's operating performance over the rating horizon will
continue to be pressured by intense competition as well as the
country's challenging economic environment. In 2022 operating
performance showed positive momentum, with service revenue growing
6.6% and mobile costumer base reaching 11 million. Over the next
two years, although Moody's expects this positive subscriber growth
trend to continue, Moody's Adjusted EBITDA margin should remain
below 30%, as subscriber growth will not be enough to fully offset
the competitive impact on ARPU.
Tigo UNE has posted negative free cash flow as adjusted by Moody's
since 2021, a trend that should continue over the next two years.
Moody's expects that high capex investments required to expand and
enhance the network and defend market share will consume all
internal cash generation during this period. In addition, ongoing
renewal of the company's share of the 1900 spectrum as well as the
possibility of a 5G spectrum auction over the next 12 months should
further pressure liquidity. Spectrum renewal negotiations are still
under way, cost and timing of payments are still undefined but
Moody's expects a down payment to be made still in 2023.
Tigo UNE's liquidity is weak when considering upcoming debt
maturities, costs associated with spectrum renewal and capex
deployment needs. As of March 2023, the company had approximately
$18 million (COP82 billion) in cash on hand and, at the end of
June, liquidity was enhanced by a $20 million liquidity facility
provided by Millicom. The company's upcoming maturities amount to
approximately $51 million (COP235 billion) due in October 2023 and
$86 million (COP396 billion) due in the second quarter of 2024.
Moody's expects Tigo UNE to raise additional debt to meet these
maturities as well as capex needs, including spectrum costs,
increasing the company's Moody's adjusted leverage to around 2.9x
in 2023, up from 2.5x as of December 2022.
Moody's review for downgrade will focus on the company's ability to
reinforce its liquidity position, liability management plans as
well as its strategy to improve its competitive position and
ability to expand operating margins. The review will also take into
consideration Tigo UNE's shareholders ability and willingness to
support the company's strategic plan and liability management
efforts.
Tigo Une is owned by Millicom International Cellular S.A. (Ba1
stable) and Empresas Publicas de Medellin E.S.P (Baa3 stable) a
wholly owned subsidiary of the City of Medellin (Baa2 stable). Tigo
UNE is controlled by Millicom, which holds the majority of voting
shares. Despite the size and importance of its shareholders, Tigo
UNE's rating does not consider any formal support or rating uplift
from its ownership structure.
Governance factors are important considerations for Tigo UNE's
rating and reflect the company's operating track record, which has
been impacted by loss of profitability in recent years, as well as
the company's tolerance for higher liquidity risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade is unlikely at this point given the ongoing review for
downgrade. However, Moody's could stabilize the rating outlook if
there is strong evidence that the company will be able to convert
the positive momentum in subscriber growth into sustained
improvement in profitability over the rating horizon, while
maintaining leverage below 2.5x and interest coverage measured by
(EBITDA-CAPEX)/Interest Expense at 2.5x or higher on a sustained
basis. In addition, the company needs to demonstrate adequate
liquidity and the ability to secure financing to timely meet
upcoming debt amortization and capex needs.
The ratings could be downgraded if liquidity is expected to remain
weak due to persistent negative free cash flow generation driven by
continued low profitability and high capex needs, including
spectrum renewal requirements. Ratings could also be downgraded if
the company is not able to secure financing to meet upcoming debt
maturities, operating performance deteriorates further, or leverage
is expected to remain at a level higher than 2.5x without a clear
path for deleveraging.
The principal methodology used in this rating was
Telecommunications Service Providers published in September 2022.
Moody's has decided to withdraw the rating for its own business
reasons.
Tigo UNE is a leading, integrated telecommunications provider in
Colombia offering mobile, fixed, pay TV and B2B services. The
company is Colombia's third largest mobile operator with over 12
million subscribers. Tigo UNE is Millicom's second largest market
in terms of revenues, accounting for about 23% of consolidated
revenue and about 15% of consolidated EBITDA in the twelve months
ended in March 2023. Tigo UNE reported $1.23 billion in revenues
and EBITDA of $383 million in the twelve months ended in March
2023.
=======
P E R U
=======
MINSUR SA: S&P Affirms 'BB+' ICR & Alters Outlook to Stable
-----------------------------------------------------------
S&P Global Ratings affirmed its 'BB+' issuer credit and
issue–level ratings on Minsur S.A. and revised the outlook to
stable from positive.
The stable outlook for the next 12 months reflects S&P's
expectation of debt to EBITDA below 1.5x given Minsur's
conservative financial policy and prudent use of debt amid Peru's
political and social instability.
Political and social turmoil in Peru is raising operating risks for
the domestic miner Minsur S.A., in S&P's opinion, given its asset
concentration in that country.
However, the company integrated the Mina Justa copper mine into its
operations, which will allow the company to maintain leverage below
2x through periods of lower copper and tin prices.
The outlook revision back to stable reflects the inherent
sensitivity of Minsur's operations to Peru's political and social
instability. S&P said, "In our opinion, the asset concentration in
two mining complexes in Peru continues to constrain Minsur's credit
quality and hampers the ratings upside potential. Even though
Peru's mining industry is well established with world-class assets,
it also confronts a long history of conflicts between local
communities and some mining companies. In addition, the country's
socio-political situation has worsened during the first quarter of
2023, which resulted in the preventive and voluntary operations
stoppage of Minsur's main tin producing facility, the San Rafael
mine, for nearly two months, even when the company maintains a good
relationship with its surrounding communities. In our opinion,
Minsur faces the risk that political impasse or further adverse
developments reduce the predictability of policymaking or erode
institutional stability, resulting in economically harmful policies
in Peru."
The ratings affirmation indicates Mina Justa's integration into the
company's operations, which will allow the company to maintain low
leverage through periods of lower copper and tin prices. S&P said,
"The ratings affirmation primarily reflects our expectation that
that the company will maintain low adjusted debt to EBITDA over the
following years, increasing the company's ability to withstand
future decreases in prices, mainly for copper and tin. Minsur
completed the incorporation of the Mina Justa mine in May 2021 into
its operations, reducing the reliance on one metal and integrating
copper production into its portfolio, while maintaining low
leverage metric of 1.2x as of March 31, 2023. Moreover, we don't
expect that the company will incur additional debt or capital
expenditures (capex). We believe the current strength in copper and
tin prices may be temporary. We acknowledge that persistent
political and social disruptions in Peru risk eroding investments
further, with perverse consequences for the country's economic
growth, which could weaken Minsur's operating and financial
performance, and thus its credit quality."
S&P said, "We believe Minsur has a strong position in the tin and
copper cash cost curves that will boost its EBITDA margin amid
price volatility. The cost profiles of Minsur's main tin and copper
mines (San Rafael and Mina Justa) are among the lowest in the
industry, which stems from high ore content of the deposits. This
provides cash-flow resiliency against price downturns and enables
strong cash flows. As a result, the company's EBITDA margins are
robust at about 55% as of March 2023 (compared with the six-year
average of 35%) and given our expectation of an average C1 cash
cost of $1.58/lb for Mina Justa and cash cost of $120 per treated
ton (tt) for San Rafael. We expect that margin will stabilize at
53% after 2023.
"The stable outlook on our rating on Minsur for the next 12 months
reflects our expectation of debt to EBITDA below 1.5x and free
operating cash flow (FOCF) to debt above 40%, given Minsur's
conservative financial policy and prudent use of debt amid Peru's
political and social instability."
S&P could lower the rating in the next 12 months if:
-- Minsur has to shut down one of its main mines for a prolonged
period of time stemming from from Peru's instability;
-- Minsur doesn't meet its production and sale targets due to
lower-than-expected ore grades or lower-than-expected market
demand;
-- The company's capex increases significantly or it incurs
additional debt; or
-- The aforementioned actions will raise debt to EBITDA above 1.5x
and reduce FOCF to debt below 40%.
A positive rating action is unlikely in the next 12-24 months
because it would require Minsur to increase significantly its
operational scale and to further diversify its business by mines
and metals, while keeping its net debt to EBITDA consistently below
1.5x and FOCF to debt above 40%.
ESG credit indicators: E-3, S-3, G-2
=====================
P U E R T O R I C O
=====================
PUERTO RICO: PREPA Bankruptcy Judge Advances Case as Appeal Looms
-----------------------------------------------------------------
Michelle Kaske of Bloomberg News reports that the judge overseeing
the bankruptcy of Puerto Rico's Electric Power Authority signaled a
preference to let the case proceed even if some bondholders appeal
her ruling to limit investors' claim to $2.38 billion.
US District Court Judge Laura Taylor Swain on June 28, 2023, urged
the island's financial oversight board, manager of the utility's
bankruptcy, to work with creditors to determine procedures and
solutions that serve the residents of Puerto Rico.
"There needs to be a future that makes sense for that community,"
Swain said during a hearing.
About Puerto Rico
Puerto Rico is a self-governing commonwealth in association with
the United States. The chief of state is the President of the
United States of America. The head of government is an elected
Governor. There are two legislative chambers: the House of
Representatives, 51 seats, and the Senate, 27 seats. The
governor-elect is Ricardo Antonio "Ricky" Rossello Nevares, the
son
of former governor Pedro Rossello.
In 2016, the U.S. Congress passed PROMESA, which, among other
things, created the Financial Oversight and Management Board and
imposed an automatic stay on creditor lawsuits against the
government, which expired May 1, 2017.
The members of the oversight board are: (i) Andrew G. Biggs, (ii)
Jose B. Carrion III, (iii) Carlos M. Garcia, (iv) Arthur J.
Gonzalez, (v) Jose R. Gonzalez, (vi) Ana. J. Matosantos, and (vii)
David A. Skeel Jr.
On May 3, 2017, the Commonwealth of Puerto Rico filed a petition
for relief under Title III of the Puerto Rico Oversight,
Management, and Economic Stability Act ("PROMESA"). The case is
pending in the United States District Court for the District of
Puerto Rico under case number 17-cv-01578. A copy of Puerto Rico's
PROMESA petition is available at
http://bankrupt.com/misc/17-01578-00001.pdf
On May 5, 2017, the Puerto Rico Sales Tax Financing Corporation
(COFINA) commenced a case under Title III of PROMESA (D.P.R. Case
No. 17-01599). Joint administration has been sought for the Title
III cases.
On May 21, 2017, two more agencies -- Employees Retirement System
of the Government of the Commonwealth of Puerto Rico and Puerto
Rico Highways and Transportation Authority (Case Nos. 17-01685 and
17-01686) -- commenced Title III cases.
U.S. Chief Justice John Roberts named U.S. District Judge Laura
Taylor Swain to preside over the Title III cases.
The Oversight Board has hired as advisors, Proskauer Rose LLP and
O'Neill & Borges LLC as legal counsel, McKinsey & Co. as strategic
consultant, Citigroup Global Markets as municipal investment
banker, and Ernst & Young, as financial advisor.
Martin J. Bienenstock, Esq., Scott K. Rutsky, Esq., and Philip M.
Abelson, Esq., of Proskauer Rose LLP; and Hermann D. Bauer, Esq.,
at O'Neill & Borges LLC are onboard as attorneys.
Prime Clerk LLC is the claims and noticing agent. Prime Clerk
maintains the case web site
https://cases.primeclerk.com/puertorico
Jones Day is serving as counsel to certain ERS bondholders.
Paul Weiss is counsel to the Ad Hoc Group of Puerto Rico General
Obligation Bondholders.
=====================================
T R I N I D A D A N D T O B A G O
=====================================
NATIONAL GAS: Moody's Alters Outlook on 'Ba2' Ratings to Positive
-----------------------------------------------------------------
Moody's Investors Service affirmed National Gas Company of Trinidad
and Tobago's (NGC) credit assessment (BCA) of ba2 and the company's
ratings of Ba2. The outlook changed to positive from stable.
This rating action follows Moody's ratings affirmation of the
Government of Trinidad & Tobago's (TT) rating of Ba2 and outlook
change to positive from stable. For more information on the
Government of Trinidad & Tobago please visit ratings.moodys.com.
Affirmations:
Issuer: National Gas Company of Trinidad and Tobago
Corporate Family Rating, Affirmed Ba2
Baseline Credit Assessment, Affirmed ba2
Senior Unsecured Regular Bond/Debenture, Affirmed Ba2
Outlook Actions:
Issuer: National Gas Company of Trinidad and Tobago
Outlook, Changed To Positive From Stable
RATINGS RATIONALE
The ratings affirmation and change in NGC's outlook were triggered
primarily by the rating action on Trinidad & Tobago, the ultimate
support provider the company, and also considered that NGC has
maintained relative strong credit metrics for its rating category.
NGC's Ba2 rating and ba2 BCA reflect the company's monopoly
position in the transmission and distribution of natural gas from
Trinidad & Tobago's offshore gas fields to the domestic
petrochemical, electrical power generation, steel, and light
industrial sectors. The BCA incorporates the company's economic
burden of serving as a conduit for the government for national
development, including the need to extend special credit terms to
the gas consuming electric utility company and potential growth
projects. The BCA also considers the highly cyclical nature of the
petrochemical sector and longer-term natural gas supply risk.
NGC has strong liquidity, with a cash balance and short-term
investments of close to $1.1 billion as of September 2022, which
compares with historical capital spending of around $500 million
for the 2019-2022 period. Additionally, the company does not have
any debt maturities until 2036, for $339.1 million. Annual interest
payments equal $20.55 million. The company does not have committed
banking credit facilities but has had minimal need for external
funding over the last several years.
In addition, in its joint default analysis, Moody's assumes a high
default correlation between NGC and the sovereign, its sole
shareholder, and a very high support probability from the
government to the company, in case of need. The high level of
dependence on credit factors, such as the oil and gas industry
dynamics, that could cause stress to both the government and the
company simultaneously, hinders the government's ability to provide
extraordinary support. In addition, Moody's expects that NGC and
the government will remain committed to avoiding NGC to increase
debt to transfer funds to the government.
The positive outlook coincides with the positive outlook on
Trinidad and Tobago's Ba2 rating given the importance of the
sovereign's credit strength to the company's ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if NGC's size and scale increase, in
combination with sustainable low leverage and satisfactory returns.
Additionally, an upgrade of the Government of Trinidad and Tobago's
ratings would provide an uplift to the company's ratings.
NGC's ratings could be downgraded because of materially weakened
margin or cash flow performance, greater government interference
via increased taxation or dividends that could jeopardize the
company's liquidity profile, or a diversion of the company away
from its core gas pipeline operations into public policy programs,
including the extension of special credit terms to less profitable
state entities. In addition, NGC's Ba2 rating could be downgraded
because of a decreased likelihood that the government of Trinidad &
Tobago would provide extraordinary support to NGC, or as a result
of a downgrade of the government's Ba2 rating.
NGC is a diversified natural gas transmission and distribution
company 100% owned by the Trinidad & Tobago's government. NGC is
Trinidad & Tobago's sole purchaser, transporter, and distributor of
natural gas to the domestic natural gas-based energy sector and is
also the designated agent of the Trinidad & Tobago's government to
promote and facilitate natural gas-based investment in the
country.
The methodologies used in these ratings were Midstream Energy
published in February 2022.
=================
V E N E Z U E L A
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VENEZUELA: Pursues Settlement with Crystallex, Conoco, Bondholders
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globalinsolvency.com, citing Reuters, reports that negotiators
representing Venezuela have held settlement talks with bondholders
and creditors owed billions of dollars from defaults and
expropriation claims, the head of a board supervising the country's
foreign oil assets.
The talks have gained urgency as a federal court judge is to decide
next month whether to kick off an auction of shares that could lead
to the break-up of Citgo Petroleum, Venezuela's most prominent
overseas asset, according to globalinsolvency.com.
The U.S. has for years shielded Citgo from seizure under a license
that will expire next month if not renewed, the report notes. Some
$2.6 billion in court-approved claims from Crystallex
International, ConocoPhillips, Siemens Energy and Red Tree
Investments could be applied to auction proceeds, the report adds.
About Venezuela
Venezuela, officially the Bolivarian Republic of Venezuela, is a
country on the northern coast of South America, consisting of a
continental landmass and a large number of small islands and islets
in the Caribbean sea. The capital is the city of Caracas.
Hugo Chavez was president to Venezuela from 1999 to 2013. The
Chavez presidency was plagued with challenges, which included a
2002 coup d'etat, a 2002 national strike and a 2004 recall
referendum. Nicolas Maduro was elected president in 2013 after
the
death of Chavez. Maduro won a second term at the May 2018
Venezuela elections, but this result has been challenged by
countries including Argentina, Chile, Colombia, Brazil, Canada,
Germany, France and the United States who deemed it fraudulent and
moved to recognize Juan Guaido as president.
The presidencies of Chavez and Maduro have challenged Venezuela
with a socioeconomic and political crisis. It is marked by
hyperinflation, climbing hunger, poverty, disease, crime and death
rates, social unrest, corruption and emigration from the country.
Moody's has withdrawn 'C' local currency and foreign currency
ceilings for Venezuela in September 2022. Standard & Poors has
also withdrawn its 'SD/D' foreign currency sovereign credit ratings
and 'CCC-/C' local currency ratings on Venezuela in September 2021
due to lack of sufficient information. Fitch withdrew its own
'RD/C' Issuer Default Ratings on Venezuela in June 2019 due to the
imposition of U.S. sanctions on the country's government.
*********
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