/raid1/www/Hosts/bankrupt/TCRLA_Public/231222.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, December 22, 2023, Vol. 24, No. 256
Headlines
A R G E N T I N A
ARGENTINA: IMF Staff Welcome Measures Disclosed by New Minister
ARGENTINA: Milei Needs to Deactivate $400 Billion 'Debt Bomb'
ARGENTINA: Price Hikes Soar With a Vengeance in Country
B R A Z I L
B3 SA BRASIL: Fitch Affirms 'BB+' LongTerm IDR, Outlook Stable
BRAZIL: S&P Ups LT Global Scale Ratings to 'BB', Outlook Stable
MINAS GERAIS: Moody's Confirms 'B2' Issuer Rating, Outlook Stable
OI SA: Telefonica Mulls Bid for Broadband Fiber Services Unit
UNIDAS LOCACOES: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable
D O M I N I C A N R E P U B L I C
DOMINICAN REPUBLIC: Commits Over COP1 Bil to Boost Poultry Sector
DOMINICAN REPUBLIC: Dajabon Border Market Reopens
DOMINICAN REPUBLIC: USAID Discloses $1.4M Donation to Boost Trade
J A M A I C A
PROVEN GROUP: Gives Up Securities License for Two Units
P U E R T O R I C O
ESJ TOWERS: Seeks Court Nod to Sell Assets by Auction
STONEMOR INC: Moody's Cuts CFR to Caa1 & Alters Outlook to Stable
- - - - -
=================
A R G E N T I N A
=================
ARGENTINA: IMF Staff Welcome Measures Disclosed by New Minister
---------------------------------------------------------------
Julie Kozack, Director of Communications at the International
Monetary Fund (IMF), issued the following statement:
"IMF staff welcome the measures announced earlier by Argentina's
new Economy Minister, Luis Caputo. These bold initial actions aim
to significantly improve public finances in a manner that protects
the most vulnerable in society and strengthen the foreign exchange
regime. Their decisive implementation will help stabilize the
economy and set the basis for more sustainable and private-sector
led growth.
IMF staff and the new Argentine authorities will work expeditiously
in the period ahead. Following serious policy setbacks over the
past few months, this new package provides a good foundation for
further discussions to bring the existing Fund-supported program
back on track."
About Argentina
Argentina is a country located mostly in the southern half of South
America. Its capital is Buenos Aires. Javier Milei is the current
president of Argentina after winning the November 19, 2023 general
election. He succeeded Alberto Angel Fernandez 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.
The IMF's executive board completed on August 23, 2023, the fifth
and six reviews of Argentina's 30-month Extended Fund Facility
(EFF), and approved a US$7.5-billion disbursement to Argentina as
part of the larger program, which refinances payments Argentina
owes the institution from a previous bailout that failed to
stabilize the economy in 2018. Argentina would receive another IMF
disbursement in November of about US$2.75 billion pending another
staff-level agreement and board approval.
S&P Global Ratings, on June 13, 2023, raised its local currency
sovereign credit ratings on Argentina to 'CCC-/C' from 'SD/SD' and
0its national scale rating to 'raCCC+' from 'SD'. S&P also affirmed
its 'CCC-/C' foreign currency sovereign credit ratings on
Argentina. The outlook on the long-term ratings is negative. S&P's
'CCC-' transfer and convertibility assessment is unchanged. None of
its rated bond issues are affected.
S&P said the negative outlook on the long-term ratings is based on
the risks surrounding pronounced economic imbalances and policy
uncertainties before and after the 2023 national elections.
Divisions within the government coalition, and infighting among the
opposition, constrain the sovereign's ability to implement timely
changes in economic policy.
Fitch Ratings also upgraded on June 13, 2023, Argentina's Long-Term
Foreign Currency (FC) Issuer Default Rating (IDR) to 'CC' from
'C'and affirmed the Long-Term Local Currency (LC) IDR at 'CCC-'.
Fitch typically does not assign Outlooks to sovereigns with a
rating of 'CCC+' or below.
The upgrade of the FC IDR reflects that Fitch no longer deems a
default-like process to have begun, as the authorities have not
signaled a clear intention to follow through with an intra-public
debt swap announced in March. The new 'CC' rating signals a default
event of some sort appears probable in the coming years, regardless
of the outcome of upcoming elections. The affirmation of the LC IDR
at 'CCC-' follows the peso debt swap in June that Fitch did not
deem to be a "distressed debt exchange" (DDE).
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.
ARGENTINA: Milei Needs to Deactivate $400 Billion 'Debt Bomb'
-------------------------------------------------------------
Reuters reports that Argentina's economy has many problems, and
dealing with a mountain of debt repayments over the next two years
could determine whether the new government's economic road map
succeeds.
The country's total sovereign debt exceeds $400 billion, some $110
billion of which is owed to the International Monetary Fund and to
holders of restructured, privately-held eurobonds, according to the
report.
With central bank reserves in the red by more than $10 billion and
little chance of tapping the market, the country has some $16
billion in debt payments coming due next year, the report notes.
Javier Milei, inaugurated with a mandate to straighten out the
economy, spoke of a "$100 billion debt bomb" while economy minister
Luis Caputo widened it to the $400 billion in total sovereign debt,
the report relays.
"Argentina is facing a formidable challenge in terms of FX debt
maturities," said Juan Ignacio Paolicchi, chief economist at Buenos
Aires-based consultancy firm Empiria, the report adds. "The need
for a debt rollover is imminent."
About Argentina
Argentina is a country located mostly in the southern half of South
America. Its capital is Buenos Aires. Javier Milei is the current
president of Argentina after winning the November 19, 2023 general
election. He succeeded Alberto Angel Fernandez 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.
The IMF's executive board completed on August 23, 2023, the fifth
and six reviews of Argentina's 30-month Extended Fund Facility
(EFF), and approved a US$7.5-billion disbursement to Argentina as
part of the larger program, which refinances payments Argentina
owes the institution from a previous bailout that failed to
stabilize the economy in 2018. Argentina would receive another IMF
disbursement in November of about US$2.75 billion pending another
staff-level agreement and board approval.
S&P Global Ratings, on June 13, 2023, raised its local currency
sovereign credit ratings on Argentina to 'CCC-/C' from 'SD/SD' and
0its national scale rating to 'raCCC+' from 'SD'. S&P also affirmed
its 'CCC-/C' foreign currency sovereign credit ratings on
Argentina. The outlook on the long-term ratings is negative. S&P's
'CCC-' transfer and convertibility assessment is unchanged. None of
its rated bond issues are affected.
S&P said the negative outlook on the long-term ratings is based on
the risks surrounding pronounced economic imbalances and policy
uncertainties before and after the 2023 national elections.
Divisions within the government coalition, and infighting among the
opposition, constrain the sovereign's ability to implement timely
changes in economic policy.
Fitch Ratings also upgraded on June 13, 2023, Argentina's Long-Term
Foreign Currency (FC) Issuer Default Rating (IDR) to 'CC' from
'C'and affirmed the Long-Term Local Currency (LC) IDR at 'CCC-'.
Fitch typically does not assign Outlooks to sovereigns with a
rating of 'CCC+' or below.
The upgrade of the FC IDR reflects that Fitch no longer deems a
default-like process to have begun, as the authorities have not
signaled a clear intention to follow through with an intra-public
debt swap announced in March. The new 'CC' rating signals a default
event of some sort appears probable in the coming years, regardless
of the outcome of upcoming elections. The affirmation of the LC IDR
at 'CCC-' follows the peso debt swap in June that Fitch did not
deem to be a "distressed debt exchange" (DDE).
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.
ARGENTINA: Price Hikes Soar With a Vengeance in Country
-------------------------------------------------------
Justin Martinez at Buenos Aires Times reports that citizens in
Argentina are gripped by "uncertainty and concern" as prices soar
in the wake of Javier Milei's emergency measures, but on the
streets many concede that drastic steps are required if the
libertarian leader is to right Argentina's economy.
The newly inaugurated Javier Milei administration announced an
emergency economic package that aims to reduce the fiscal deficit
and avoid hyperinflation, though experts say the measures will
massively increase inflation in the short term, according to Buenos
Aires Times.
The evidence was clear to see on the streets of Buenos Aires --
though prices had already jumped prior to Milei's inauguration,
local business chambers reported that some goods had doubled
following the end of the previous government's 'Precios Ciudados'
price-control scheme, the report notes.
For shoppers, the impact of the measures is being immediately felt,
the report relays. Among other increases, basic food products are
expected to increase up to 100 percent in the coming days, the
report notes. In supermarkets they believe that, without the
trust, oil will go from costing 800 to 2,000 pesos per litre, while
bakeries would register increases of around 80 percent, the report
discloses.
Former Agriculture secretary Juan Jose Bahillo forecast that "a
kilo of roast-beef [a cheap cut normally used for stews] will cost
at least 8,000 pesos" following the announcement of the economic
package, the report says.
For Buenos Aires resident Paula Di Marzo, the days since the
announcement have been filled with "uncertainty and concern," the
report relays.
"Today I have to fill up with petrol and I will see the increase
then. But petrol increases have been coming in recent weeks so I am
already expecting a big hike," she told the Times, the report
notes.
Di Marzo was right -- fuel prices were hiked by as much as 40
percent in response to the new rules and regulations, the report
discloses.
'Shock Therapy' to 'Inflation Shock'
The new presidential administration is pursuing a policy of
economic "shock therapy" which banks on citizens accepting economic
pain initially through austerity measures and a massive devaluation
of the currency, the report relays.
Economy Minister Luis Caputo announced that the new government
would be devaluing the peso by more than 50 percent, shifting the
official exchange rate from around 366 pesos to over 800 overnight,
the report discloses. The currency reset was harsher than analysts
had anticipated and includes a monthly two-percent crawling peg,
the report discloses.
Economist Fausto Spotorno says the devaluation, "does not serve to
lower inflation, the report relays. In fact it makes it worse" but
the government is attempting to "order the exchange market to
finally unify it into a single market," the report discloses.
"The fiscal austerity measures are the ones that will finally stop
inflation because they will eliminate the financing of the fiscal
deficit through monetary issuance and will help to cool demand,"
Spotorno told the Times, the report relays.
But before this can happen there will be an "inflationary flash" as
"the economy will have to put in order the relative prices that are
currently distorted by the regulations and price freezes
implemented by the previous government to contain inflation in the
short term without solving the underlying problems," explained the
analyst, the report notes.
Additional measures are also being taken to cut down on the size of
the federal government, including halving the number of ministries
from 19 to nine, an immediate halt to new public works tenders as
well as a suspension of works who have been tendered but have not
yet been started, among others, the report notes.
Presidential Spokesperson Manuel Adorni has also confirmed planned
cuts to transport and public utility subsidies beginning on January
1, 2024, the report says. These cuts will affect the costs of
electricity, gas and water, the report discloses.
Price to Pay?
Political analyst and sociologist Carlos de Angelis forecast that
Milei will pay a price amongst voters for the soaring hikes,
observing that he ran on a platform of punishing the "political
caste" who were entrenched in power for decades and living
comfortably while the general public suffered from inflation and
stagnation, the report relays.
The administration, he says "is already receiving the political
cost, precisely because of this difference in imagining that this
price was going to be paid by the political caste" when in
actuality the increases will have their strongest impact on the
general population, the report notes.
Another resident, Lydia Caceres, said while shopping for broccoli
at a local shopping market that she had also seen the hikes coming.
Rather than complain, however, she said it was about time, the
report discloses.
"Nobody likes things to increase [in price], but in this case I
think it is absolutely necessary," she told the Times.
Lydia points the finger firmly at those who governed before him.
"We couldn't continue living like this," she said, the report
adds.
About Argentina
Argentina is a country located mostly in the southern half of South
America. Its capital is Buenos Aires. Javier Milei is the current
president of Argentina after winning the November 19, 2023 general
election. He succeeded Alberto Angel Fernandez 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.
The IMF's executive board completed on August 23, 2023, the fifth
and six reviews of Argentina's 30-month Extended Fund Facility
(EFF), and approved a US$7.5-billion disbursement to Argentina as
part of the larger program, which refinances payments Argentina
owes the institution from a previous bailout that failed to
stabilize the economy in 2018. Argentina would receive another IMF
disbursement in November of about US$2.75 billion pending another
staff-level agreement and board approval.
S&P Global Ratings, on June 13, 2023, raised its local currency
sovereign credit ratings on Argentina to 'CCC-/C' from 'SD/SD' and
0its national scale rating to 'raCCC+' from 'SD'. S&P also affirmed
its 'CCC-/C' foreign currency sovereign credit ratings on
Argentina. The outlook on the long-term ratings is negative. S&P's
'CCC-' transfer and convertibility assessment is unchanged. None of
its rated bond issues are affected.
S&P said the negative outlook on the long-term ratings is based on
the risks surrounding pronounced economic imbalances and policy
uncertainties before and after the 2023 national elections.
Divisions within the government coalition, and infighting among the
opposition, constrain the sovereign's ability to implement timely
changes in economic policy.
Fitch Ratings also upgraded on June 13, 2023, Argentina's Long-Term
Foreign Currency (FC) Issuer Default Rating (IDR) to 'CC' from
'C'and affirmed the Long-Term Local Currency (LC) IDR at 'CCC-'.
Fitch typically does not assign Outlooks to sovereigns with a
rating of 'CCC+' or below.
The upgrade of the FC IDR reflects that Fitch no longer deems a
default-like process to have begun, as the authorities have not
signaled a clear intention to follow through with an intra-public
debt swap announced in March. The new 'CC' rating signals a default
event of some sort appears probable in the coming years, regardless
of the outcome of upcoming elections. The affirmation of the LC IDR
at 'CCC-' follows the peso debt swap in June that Fitch did not
deem to be a "distressed debt exchange" (DDE).
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.
===========
B R A Z I L
===========
B3 SA BRASIL: Fitch Affirms 'BB+' LongTerm IDR, Outlook Stable
--------------------------------------------------------------
Fitch Ratings has affirmed B3 S.A. Brasil, Bolsa, Balcao's (B3)
Long-term Foreign Currency and Local Currency Issuer Default
Ratings (IDRs) at 'BB+' and its Short-term IDRS at 'B'. Fitch has
also affirmed at 'AAA(bra)'/'F1+(bra)' B3's National Long- and
Short-Term Ratings. The Rating Outlook for the Long-Term IDRs and
Long-Term National Rating is Stable.
KEY RATING DRIVERS
IDRs and Senior Debt
B3's IDRs are based on its standalone credit profile (SCP), which
is one notch above the assigned Sector Risk Operating Environment
(SROE) of 'bb' and Brazil's sovereign rating (BB/Stable),
reflecting the company's robust business profile. Fitch does not
expect the differential to widen in the foreseeable future.
Dominant Franchise, Resilient Business Model: B3 benefits from its
dominant domestic franchise in trading and clearing services across
multiple asset classes in Brazil. The entity reported a total net
operating income (TOI) of USD1.8 billion on average in the last
four years, which is commensurate with the mid-range of Fitch's
'bbb' category for business profile benchmark for FMIs. Trading,
post-trading and clearing activities continue to comprise most of
B3's revenues at 55.6% as of September 2023. However, its services
business units (mainly data and technology) have gradually
increased, which helped offset the drop in trading volumes (19.3%
of revenues).
Sound Operational Risk Management: Fitch considers B3's margining
process framework and its safeguard structures robust and
well-articulated, which reduces credit and counterparty risks
stemming from its central counterparty clearing (CCPs) activities.
(Both CCPs are compliant with IOSCO principles.) This assessment
considers the collection of guaranty funds and default waterfall
procedures, which Fitch views as effective. There were no past
cases of default. From B3's CCPs' total margin collateral, 83% are
related to government securities, which increases B3 exposure to
the sovereign debt and could pose a risk in the event of sovereign
deterioration.
While operational risks have been adequately managed as reflected
in good system availability ratios, legal risks remain from tax and
civil proceedings. Together these totaled BRL58 billion or a high
2.9x B3's total equity position as of September 2023. The
proceedings are currently classified as "possible" according to
B3's financial statements. In Fitch's assessment, no loss was
assumed under the rating horizon of up to 24 months.
Strong Profitability: Despite the challenges in the local capital
market in 2023, B3 continued to report strong and above industry
and regional peer profitability metrics. Although results as of
9M23 were impacted by lower trading activities, these were
partially offset by the growth of service business lines and a
strict cost control. B3's reported an EBITDA margin of 66.2% as of
September 2023 is stable when compared to the 66% as of YE22, but
lower when compared to the entity's four-year average of 67.8%.
Fitch expects B3's profitability in 2024 to remain linked with the
improvements in the local capital markets, which could also be
positively impacted by the expected reduction on domestic interest
rates.
Increased Leverage but Still Adequate: After B3's last local debt
issuance in October 2023, its leverage ratio increased to 2.1x,
which is higher than regional peers but still commensurate with its
rating level. At 3Q23, from B3's total debt, only 15% matures by
end-2024, which demonstrates good debt structure and
diversification between local and international markets.
Stable Funding and Liquidity: In Fitch's view, B3 has a good
funding and liquidity profile. Fitch's core metric for this factor,
EBITDA/interest expenses, stood at 4.5x at September 2023, a
decrease compared to 10.7x reported at end-2021. The company has a
long-term funding profile and strong access to local and foreign
capital markets. Fitch believes issuing new debts, if necessary,
would not be an issue. B3 maintains a strong cash position, with
liquid assets around BRL17.2 billion, from which almost 80% are
related to government securities. B3's liquidity and credit
facilities, which are designed specifically for its CCPs and are
unutilized so far, are indicative of a strong liquidity profile.
National Scale Ratings
B3's national scale ratings are relative to the entity's
creditworthiness compared to other issuers within Brazil's
jurisdiction. The assignment of the long-term National Ratings at
'AAA(bra)' reflects the company's superior credit profile relative
to other Brazilian entities.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
IDRs and Senior Debt
- B3's ratings could be downgraded in the event of negative rating
actions on the Brazilian sovereign rating and/or from a downgrade
of Fitch's assessment of the sector risk operating environment
factor score;
- The ratings could be negatively affected if counterparty risks at
B3's CCPs increase to a level beyond accompanying margin and
guaranty fund growth, such that it increases the risk of
compromising B3's liquidity/equity position or from prolonged and
repetitive system outages that result in reputational damage;
- Unfavorable decisions/expectations related to existing tax and
civil proceedings that weaken B3's financial profile could result
in a downgrade of one or more notches;
- A material and sustained deterioration in B3's financial
performance, significant reduction of profitability metrics, gross
leverage above 4x and/or interest expense coverage below 4x, could
also put downward pressure on ratings.
National Ratings and Debenture
- The national ratings of B3 may be affected by a change in Fitch's
perception of the company's creditworthiness with respect to other
Brazilian entities rated on the national scale.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
IDRs and Senior Debt
- B3's IDRs could be upgraded as a result of an upgrade of Brazil's
sovereign rating but otherwise have limited upside potential in the
near future, as they are already one notch above Brazil's sovereign
ratings.
National Ratings and Debenture
- The national scale ratings of B3 are at the highest level on the
national scale; therefore, they cannot be upgraded.
ADJUSTMENTS
The Standalone Credit Profile has been assigned below the implied
Standalone Credit Profile due to the following adjustment
reason(s): Sovereign Rating (negative).
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
B3 S.A. Brasil,
Bolsa, Balcao LT IDR BB+ Affirmed BB+
ST IDR B Affirmed B
LC LT IDR BB+ Affirmed BB+
LC ST IDR B Affirmed B
Natl LT AAA(bra) Affirmed AAA(bra)
Natl ST F1+(bra) Affirmed F1+(bra)
senior
unsecured LT BB+ Affirmed BB+
senior
unsecured Natl LT AAA(bra) Affirmed AAA(bra)
BRAZIL: S&P Ups LT Global Scale Ratings to 'BB', Outlook Stable
---------------------------------------------------------------
On Dec. 19, 2023, S&P Global Ratings raised its long-term global
scale ratings on Brazil to 'BB' from 'BB-'. The outlook on the
long-term ratings is stable. S&P affirmed Brazil's global scale
short-term ratings at 'B' and its national scale long-term rating
at 'brAAA'. S&P also raised the transfer and convertibility
assessment on the country to 'BBB-' from 'BB+'.
Outlook
S&P said, "The stable outlook reflects our expectation that Brazil
will maintain a strong external position, thanks to strong
commodity output and limited external financing needs. We also
believe Brazil's institutional framework can sustain stable and
pragmatic policymaking based on extensive checks and balances
across the executive, legislative, and judicial branches of
government. We expect a very gradual fiscal correction but
anticipate fiscal deficits will remain large."
Downside scenario
S&P said, "We could lower our ratings within the next two years if
poor policy implementation leads to further fiscal deterioration
and a higher-than-expected debt burden. A deterioration in policy
signaling could also lower foreign direct investment inflows and,
thereby, weaken Brazil's external position."
Upside scenario
S&P could raise its ratings over the next two years if benefits
from the now extensive set of structural and microeconomic reforms
improve Brazil's long-term growth trajectory. Faster than expected
progress at addressing fiscal imbalances that stabilizes debt
levels could also lead us to raise the ratings.
Rationale
S&P raised the long-term global scale ratings on Brazil following
the recent approval of a tax reform. While it will be implemented
gradually, the reform is a significant overhaul of the tax system
and will likely translate into productivity gains over the long
term.
The reform adds to a now extensive track record of structural and
microeconomic reforms since 2016, which in our opinion reflects an
increasingly pragmatic institutional framework that helps to anchor
macroeconomic stability. S&P expects Brazilian institutions to
continue to slowly address the economic inefficiencies that slow
the country's growth, as well as the country's rigid budgetary
structure, which contributes to large fiscal deficits and a high
debt burden.
Brazil's strong external position, flexible exchange rate, and
monetary policy regime based on an inflation-targeting framework
conducted by an autonomous central bank support the ratings.
Moreover, deepening domestic capital and debt markets mitigate the
sovereign's rollover risk and allow the government to maintain a
favorable debt composition, mostly denominated in local currency.
Institutional and economic profile: Tax reform extends a track
record of policy pragmatism
-- The tax reform will help to partially tackle the complexities
of Brazil's fiscal code.
-- The institutional framework, characterized by fragmented
political and economic interest, will remain slow to address fiscal
rigidities.
-- Brazil's growth trajectory has improved in recent years but
remains weaker than those of emerging market peers.
On Dec. 15, 2023, the Brazilian Congress approved a revenue-neutral
tax reform that consolidates five indirect taxes into a dual
value-added tax (VAT) system plus a selective tax. S&P believes
this reform will clarify Brazil's indirect tax burden and
significantly reduce the cost of tax compliance.
The reform also significantly reduces the number of consumption tax
codes and strengthens the noncumulative characteristics of the tax
system. In addition, it will tax items at destination rather than
the origin, although this change will happen over 50 years. The
reform also mandates an automatic VAT reimbursement mechanism for
vulnerable families.
The reform is structural, and a simpler tax code will translate
into productivity gains, but most likely in the long term. For the
next two years, Brazil's authorities will regulate the new
framework. The Federal VAT tax will become fully effective in 2027.
The subnational governments' VAT tax will be fully effective only
in 2033. The reform maintains several tax benefits to different
economic sectors from the current system, which would raise the VAT
rate on other sectors, and two transition funds for the states will
add to central government fiscal pressures.
Regardless, the tax reform adds to a reformist track record since
2016, which includes reforms to improve labor conditions, soften
the pension burden, strengthen the management of government-related
entities, grant the official autonomy of the Brazilian Central
Bank, create a market-determined funding cost for Brazil's
Development Bank (BNDES), and two fiscal rules. It also includes a
series of microeconomic reforms across sectors.
The missing component has been the lack of progress to address the
large, rigid, and inefficient spending of the Brazilian general
government. Over time, this has resulted in consistent fiscal
deficits, squeezing resources from the financial sector and
partially explaining Brazil's weak growth. The large size of the
government apparatus is partially due to a very detailed
constitution, deriving from fragmented political and economic
interests and requiring large sums of political capital to fix.
S&P said, "We expect the Brazilian economy to grow at almost 3% in
2023. This is because of strong agricultural performance and its
significant spillovers over the first half of the year, coupled
with robust employment and a recovery in real salaries that kept
domestic consumption resilient.
"That said, the Brazilian economy has slowed over the second half
of 2023. Moreover, given our expectation of slowing global economic
growth--and, with it, external demand--we expect Brazil's GDP to
slow toward 1.5% in 2024. Looser monetary conditions should sustain
growth at around 2% in 2025-2026. We believe real per-capita GDP
growth will average 1.5% over 2023-2026, remaining lower than that
of peers with a similar level of economic development. We estimate
GDP per capita will reach US$9,800 in 2023 and trend toward
US$10,800 by 2026."
Flexibility and performance profile: Strong external position and
monetary policy credibility mitigate Brazil's still weak fiscal
performance
-- S&P expects fiscal deficits and the debt burden to remain high
in 2023-2026.
-- Restrictive monetary policy and benign weather conditions are
curbing inflation.
-- Brazil's external position is strong, supported by growing
current account receipts and low external debt.
S&P expects general government deficits to average 6.2% of GDP over
2023-2026, reflecting the challenges of fulfilling campaign
promises, high interest cost, a low level of discretionary
spending, and only gradual success on tax measures.
The government moved quickly to fulfill part of its campaign
promises and expanded President Luiz Inacio Lula da Silva's
flagship "Bolsa Familia" program and created rules to allow the
minimum salary to grow in real terms. With the reversal of the
constitutional amendment that created the spending ceiling, the
budgetary minimums for health and education are again linked to
primary revenue growth. Another reversal, on a cap on legal claims
payment, aims to tackle a growing expenditure burden by 2027 but
adds immediate pressure to the nominal fiscal result. The cost of
central government debt has stabilized but is almost 200 basis
points higher than the 2019-2022 average.
Moreover, the recently approved fiscal rule maintained some degree
of fiscal policy directing, but the government has sent mixed
signals about its commitment to the rule. Central Government
discretionary space accounted only for 1.6% of GDP in average over
2019-2022, and under the Brazilian fiscal rule is about the space
the government has to pursue fiscal policy. Government has
repeatedly stated that spending cuts should be avoided as much as
possible. As a result, the government relies mostly on tax revenue
measures to meet its fiscal targets.
That said, the short-term outcomes of measures like a tiebreaker
vote at the tax council are difficult to forecast, because tax
payers can continue to explore legal alternatives. Tax measures on
offshore and closed-end funds will likely provoke an economic
response and translate into one-off revenue. Given its economic
impact, Congress and the courts are likely to move cautiously on
matters such as the effect of state subsidies on the tax for
commerce and services on the federal income tax base.
Accounting for the inflation effect on Brazil's debt dynamics, S&P
expects the change in net general government debt to average 7% of
GDP over 2023-2026. This will bring Brazil's net general government
debt, at 52.3% of GDP in 2022, close to 67% by 2026. With Brazil's
reference rates declining and government interest cost stabilizing,
S&P expects Brazil's interest cost to remain below 15% of general
government revenue over 2023-2026.
The composition of Brazil's debt mitigates the risks embedded in
the high debt burden. The debt is mostly denominated in local
currency, and the central government's strong liquidity position
mitigates rollover risk. The government has an adequate number of
debt instruments to satisfy investor demand while fulfilling its
debt strategy in terms of maturity and cost, as demonstrated by the
recent creation of a sustainable bond framework.
In addition, foreign currency and domestic debt held by
nonresidents are only around 10% of central government debt,
limiting the risk of potential adverse external shocks on debt
rollover. The share of domestic lenders, including the banking
sector, is high. On the other hand, the banking sector's already
high exposure to the government (which accounts for over 20% of its
assets) will constrain the availability of credit to other sectors
of the economy.
Contingent liabilities from the financial system are low,
considering the size of the financial sector, at around 135% of
GDP. In addition, S&P's Banking Industry Country Risk Assessment on
Brazil is '6'. (BICRA scores are on a scale from '1' to '10', with
group '1' representing the lowest-risk banking systems and group
'10' the highest-risk ones.) Debt issued by public-sector companies
is less than 10% of GDP and poses limited risk to the government.
That said, potential legal claims against the government amount to
over 20% of GDP, which we consider a significant contingent
liability.
After its operational independence was approved in 2021, the
Brazilian Central Bank has been able to withstand political
pressure and keep monetary policy restrictive. Coupled with lower
international oil prices and favorable weather conditions that
smoothed food and electricity prices, this has led nominal and core
inflation to trend down in 2023.
Annual inflation and market expectations are now within the central
bank's target range, which has allowed the central bank to cut its
reference interest rate by a total of 200 basis points across four
consecutive board decisions, to 11.75%. S&P expects the central
bank to continue to cut rates to 9% in 2024.
Brazil is benefiting from rising commodity output over recent
years, mostly from grains and oil, which continues to offset lower
commodity prices. Current account receipts, as a result, increased
to 22% of GDP in 2022, from 11.5% in 2010. S&P believes they'll
remain at a similar level for the foreseeable future.
The current account deficit should remain around 2% of GDP over
2023-2026, fully financed by foreign direct investment inflows. S&P
expects the domestic market to provide most of the government's
financing needs, which should help shift Brazil back to a narrow
net external debt creditor by 2024.
S&P classifies the Brazilian real as an actively traded currency,
based on the Bank for International Settlements' 2022 Triennial
Survey. The survey showed that the real contributes at least 1% of
global foreign exchange market turnover.
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
UPGRADED; CREDITWATCH/OUTLOOK ACTION; RATINGS AFFIRMED
TO FROM
BRAZIL
Sovereign Credit Rating BB/Stable/B BB-/Positive/B
UPGRADED
TO FROM
BRAZIL
Transfer & Convertibility Assessment BBB- BB+
BRAZIL
Senior Unsecured BB BB-
RATINGS AFFIRMED
BRAZIL
Sovereign Credit Rating
Brazil National Scale brAAA/Stable/--
BRAZIL
Senior Unsecured brAAA
MINAS GERAIS: Moody's Confirms 'B2' Issuer Rating, Outlook Stable
-----------------------------------------------------------------
Moody's Investors Service has confirmed the State of Minas Gerais
long-term Issuer Ratings at B2. At the same time, the state's
Baseline Credit Assessment (BCA) was downgraded to caa2 from caa1.
The outlook on the ratings is now stable. Previously, the ratings
were on review for upgrade. This concludes the review initiated on
June 6, 2023.
RATINGS RATIONALE
The downgrade of the BCA to caa2 reflects Moody's view that Minas
Gerais' ability to support its debt, absent federal support,
continues to pose a significant credit risk notwithstanding recent
improvements in fiscal outcomes. The state has received debt
service support from Government of Brazil (Brazil, Ba2 stable) in
various degrees since 2018 and the federal government has assumed
the entirety of the state's debt service since 2020. Minas Gerais'
high debt burden will remain a key credit challenge for the
foreseeable future and the fiscal turnover to meet any renegotiated
debt amortization schedule adds execution risks to the state's
strategy. As a result, the ratings base case still embeds an
elevated probability of future missed payments from Minas Gerais
absent federal support. The caa2 BCA also reflects Moody's view of
that increased political risk heightened governance risks, given
the lack of consensus among the State Deputies that has prevented
the state from reaching a successful adhesion to the fiscal
recovery regime ("RRF"), as defined in the Brazilian complementary
laws 159 and 178 which could lead to a long-term plan for Minas
Gerais to restructure its debt and better align it to its fiscal
capabilities.
The confirmation of the B2 issuer ratings reflects the combination
of the caa2 BCA along with an assumption of a high level of
extraordinary support from the Government of Brazil. Moody's
revised its support assumption to high from strong based on the
ongoing support from the sovereign government, which has been
present even absent adhesion to the RRF since 2018.
As of August 2023, Minas Gerais' net direct and indirect debt
reached BRL172 billion, representing 179% of its trailing twelve
months operating revenue. Minas Gerais reported large cash
financing deficits between 2013 and 2019 and subsequently became
insolvent, forcing the federal government to start servicing its
debt in 2018. The state's government has been exploring two
alternatives to restructure Minas Gerais' debt to its fiscal
capacity, but both encompass uncertainties on effectiveness and
fiscal challenges.
Until recently, the main option explored was the adhesion to the
RRF which is a mechanism that supports states' efforts to extend
the debt maturities and restore fiscal alignment. Within this
process, Minas Gerais and the federal government would agree on
specific fiscal consolidation measures and restructure the state's
debt with the involvement of the federal government. If
implemented, the state would still have to increase its cash
financing surpluses, which measured BRL10.1 billion in 2022, to
around BRL15.4 billion in 2033. Minas Gerais announced its
intention to adhere to the RRF in 2019, but only formally submitted
the request in July 2022. In June 2023, Brazil's supreme court
authorized the State of Minas Gerais to adhere to the RRF, but the
approval of the Minas Gerais State Assembly is still pending
because some unpopular austerity measures lacks political
consensus. Moody's considers that the delays hurt governability and
policy effectiveness.
Absent progress on adhering to the RRF, Minas Gerais began to
explore another refinancing option involving transferring certain
state's assets and receivables to the federal government for a debt
rebate. Under this proposal, the state would deduct from its
outstanding debt balance with the federal government the amounts
arising from: i) the federalization of three state companies; ii)
the cession of the credit rights following the lawsuits against
mining companies; and iii) the expected compensations from the
Kandir Law. In addition, the federal government would grant a
discount on the state's remaining debt under the REFIS tax recovery
program. If approved, Moody's estimates that these measures
combined could reduce Minas Gerais debt by up to BRL66 billion by
2024 from BRL172 billion in 2023, a credit positive. However, the
remaining debt amount would be paid within twelve years, which
could result in cash pressures given the state's modest primary
surplus. The proposal is under review by the Brazilian ministry of
finance and entails financial uncertainties, political weariness
and a lengthy approval process.
The caa2 BCA also reflects Minas Gerais' large personnel expense
structure, high debt and pension burden, and very weak liquidity
which has led to a history of difficulties to address debt service
without support from the federal government. However, Moody's notes
that the state's fiscal profile has improved over the last three
years, in part due to the lack of debt service provided by the
state, but also reflecting its efforts to increase its own-source
revenues while limiting operating expenses. Its revenue base is
somewhat resilient and benefits from the state's large and
diversified economy.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view of continued support from
the Government of Brazil to Minas Gerais' debt service, mitigating
the state's fiscal tightness deriving from large personnel
expenses, high debt and pension burden, weak liquidity and
significant challenges to improve its cash financing surpluses that
will continue to weigh on its standalone credit profile over the
next twelve to eighteen months.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Minas Gerais is exposed to environmental, social and governance
risks. These risks are partially offset by the federal government's
strong support for Regional and Local Governments ("RLGs"). As a
result, Moody's assessment of Minas Gerais' credit impact score
(CIS) is CIS-4.
Minas Gerais' environmental issuer profile score (IPS) is E-4. The
state is exposed to the mining industry that results in an
assessment of highly negative natural capital risk. The state's
infrastructure and economic base could be subject to pressure
stemming from environmental concerns due to safety risks in
tailings dams structure with dam collapse accidents experienced in
the past.
The social IPS is S-4, mainly reflecting risks related to health
and safety as well as access to basic services that could be a
potential source of social unrest. Minas Gerais faces moderate
challenges in the provision and quality of education and housing.
Minas Gerais' governance IPS is G-4. Over the past few years, the
state has accumulated fiscal deficits, with high debt and pension
liabilities combined with weak liquidity. Moody's views a high
likelihood of further missed payments on the state's debt and
financial obligations. Nonetheless, these risks are partly offset
by the strong support given by the federal government. Minas Gerais
delivers documents in a timely manner; accuracy and detail of
information is overall adequate, and the level of data transparency
is satisfactory.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A debt refinancing solution combined with a sustained improvement
in key financial metrics that results in the state's ability to
service its debt without external support could lead to an upgrade
in Minas Gerais' creditworthiness. An upgrade of Brazil's sovereign
rating could also result in upward pressure on the ratings.
Conversely, a downgrade of the sovereign rating or a further
deterioration in Minas Gerais' solvency profile that result in
sustained cash financing deficits, combined with diminished
assumptions of support from the federal government, could lead to a
rating downgrade.
LIST OF AFFECTED RATINGS
Issuer: Minas Gerais, State of
Downgrades:
Baseline Credit Assessment, Downgraded to caa2 from caa1
Confirmations:
LT Issuer Rating (Local Currency), Confirmed at B2
LT Issuer Rating (Foreign Currency), Confirmed at B2
Outlook Actions:
Outlook, Changed To Stable From Rating Under Review
The principal methodology used in these ratings was Regional and
Local Governments published in January 2018.
OI SA: Telefonica Mulls Bid for Broadband Fiber Services Unit
-------------------------------------------------------------
Pablo Mayo Cerqueiro, Andres Gonzalez, and Amy-Jo Crowley at
Reuters report that Telefonica (TEF.MC) is exploring a possible
offer for a unit of Brazil's Oi (OIBR4.SA) that provides broadband
fiber services to retail and business customers, four people with
knowledge of the situation said, in a bid to expand in its
second-largest market.
The board of Oi, which filed for bankruptcy protection earlier this
year, hired advisers in October to study strategic options for its
fiber broadband client base, called UPI ClientCo, according to
Reuters.
The Spanish telecoms group, which operates in the country through
its listed subsidiary Telefonica Brasil (VIVT3.SA), has been
discussing its potential move with financial advisers, said three
sources, who spoke on condition of anonymity, the report notes.
Deliberations are still preliminary, and Telefonica has not yet
approached Oi, they cautioned, the report relays.
Telefonica Brasil CEO Christian Mauad Gebara said the company
participates "in everything related to any opportunity in the fibre
business" when asked about the sale of Oi's assets during the third
quarter results presentation in November, the report discloses.
Other competitors in the Brazilian market, such as America Movil's
Claro and TIM, may also consider offers, two of the sources said,
the report notes.
Telefonica and America Movil and declined to comment. Telecom
Italia was not immediately available to comment. A spokesperson
for its Brazilian subsidiary declined to comment
Oi originally hoped to sell 40% of ClientCo in 2025 for 4.8 billion
Brazilian reais ($976.50 million) under a restructuring plan
presented in May, implying a valuation of more than $2.4 billion
for the business, the report says.
However, the unit -- which is now understood to be entirely for
sale -- is likely to be valued by bidders at a fraction of that
targeted valuation, given Oi's difficult financial position and the
challenges any new owner would face in moving clients to its own
networks, two of the people said, the report says.
A spokesperson for Oi declined to comment on the bidders, but said
the company agrees with the valuation outlined in the May plan and
has not made a decision on what percentage of UPI ClientCo to sell
as negotiations with creditors are ongoing, the report notes.
Oi entered bankruptcy protection again in March this year after
having emerged from a similar proceeding last December, more than
six years after filing for what was then Brazil's biggest ever
judicial recovery process, the report relays. It had 60 days to
present a recovery plan, according to a securities filing, the
report says.
In September it secured $300 million in debtor in possession
financing from BTG Pactual, which is advising on the sale of UPI
ClientCo, the report notes.
In 2020 Telefonica Brasil agreed to acquire Oi's mobile operations
in a joint bid with TIM SA and Claro, the report says. Brasil is
one of Telefonica's core markets, with expected revenues of 9.7
billion euros in 2023, according to a recent research by JPMorgan,
the report adds.
As reported in the Troubled Company Reporter-Latin America on Nov.
7, 2023, Fitch Ratings has affirmed Oi S.A.'s Long-Term Foreign
Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs)
at 'D' and its Long-Term National Scale Rating at 'D(bra)'. Fitch
has also affirmed Oi's senior unsecured notes due 2025 and senior
secured 2026 notes at 'C'/'RR4'.
UNIDAS LOCACOES: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable
-----------------------------------------------------------------
Fitch Ratings has affirmed Unidas Locacoes e Servicos S.A. (Unidas)
Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs)
at 'BB-', and upgraded its Long-Term National Scale Rating,
together with its local senior unsecured issuances, to 'AA(bra)'
from 'AA-(bra)'. The Rating Outlook for the corporate ratings is
Stable.
Unidas' IDRs reflect its moderate scale in the competitive car,
fleet and heavy machinery and equipment rental sector in Brazil.
The company benefits from high revenue predictability for some of
its businesses and should be able to continue delivering its growth
strategy with moderate leverage and robust operating margins. The
analysis also incorporates the positive tracking record of support
from its controlling shareholder.
The National Scale Rating upgrade reflects the strengthening of the
company's credit profile within the 'BB-' IDR, due to its
strengthened scale, business position and client base as a result
of the business combination of Unidas and Unidas Locadora S.A.
(Unidas RaC).
KEY RATING DRIVERS
Improved Business Profile: Unidas' improved scale and business
profile should lead to a stronger bargaining power with original
equipment manufacturers and allow the company to better capture
economies of scale. As of September 2023, Unidas total fleet was
around 114 thousand vehicles, 63 thousand in rent-a-car (RaC) and
51 thousand in fleet rental. Fitch projects that the compound
annual grow rate for total fleet and net rental revenue will be
around 4% and 10%, respectively, during the 2023-2026 period. For
2023, Fitch forecasts pro-forma net rental revenue at BRL3.2
billion and a total fleet of 114 thousand vehicles at YE, reaching
BRL3.8 billion and 116 thousand in 2024.
Business Predictability: Unidas' strong and reasonably predictable
operating cash generation, based on long-term contracts for fleet
rental of light vehicles and heavy machinery and equipment, is
positive for the ratings. The diversification among these segments
and the RaC is important to the company's credit profile. Fitch
expects Unidas to rightly price the sale of its light vehicles at
the end of the contracts, as this is crucial for this rental
companies.
Growing EBITDA; Pressured FCF: Rating case scenario presents
strengthening EBITDA based on organic growth and healthy margins. A
still underpenetrated and very fragmented market for fleet and
heavy machinery and equipment rental should continue to experience
further growth and rental rates increase - considering still high
asset prices and cost of capital, which favor renting over asset
ownership.
Fitch forecasts pro forma rental EBITDA of BRL2.1 billion (65%
rental margin) in 2023 and BRL2.5 billion (67% rental margin) in
2024. The rating scenario considers that cash flow from operations
(CFFO) should increase along with the rental EBITDA, being pro
forma BRL865 million in 2023 and BRL1.2 billion in 2024.
Nevertheless, FCF should remain negative on the range of BRL4.0
billion-4.5 billion due to average annual total capex of BRL5.3
billion from 2023 to 2025, partially funded by the sale of used
vehicles of BRL3 billion, on average, in the same period.
Adequate Leverage: Balanced demand and supply dynamics, resulting
in adequate rental rates and a return on invested capital spread in
line with historic industry levels, should enable the company to
conciliate its growth and fleet renew with an adequate financial
leverage. Fleet growth should be primarily debt funded in the
rating scenario. Consolidated net leverage (IFRS-16 adjusted),
measured by net debt/rental EBITDA, should average 4.0x on the
rating horizon, comparing with an average of 4.6x from 2020 to
2022.
Capital Intensive Industry: The capital-intensive nature of the
rental industry, which demands sizable and regular investments to
grow and renew the fleet, pressures the financial profile of the
companies in the sector during strong expansion periods. Therefore,
lower funding costs and strong access to credit markets are key
competitive advantages. On the other hand, the business model
allows the companies to postpone fleet renewal and adjust its size,
if needed.
DERIVATION SUMMARY
Compared to Simpar S.A. (Simpar; Local Currency and Foreign
Currency IDRs BB/Long-term National Scale Rating AAA(bra)/Stable),
Unidas has a smaller scale, less diversified service portfolio, and
an overall weaker business profile. While Unidas has higher
profitability (operating margins), both companies have similar
leverage levels and strong liquidity position, while Simpar has
stronger access to credit markets, both locally and abroad.
Compared to Unidas, Localiza Rent a Car S.A. (Localiza; Local
Currency and Foreign Currency IDRs BB+/ Long-term National Scale
Rating AAA(bra)/Stable) has significant greater scale, stronger
negotiating power with suppliers, and an overall more robust
business profile. Localiza also has a stronger financial profile,
based on lower leverage, lower cost of capital and more proved
access to credit markets.
KEY ASSUMPTIONS
- Average annual capex of BRL5.3 billion in the 2023-2026 period;
- Total Fleet of 114 thousand vehicles at YE 2023, and 116 thousand
vehicles at YE 2024;
- Fleet rental rates higher, on average, 9% in the 2023-2026
period;
- RaC rental rates higher, on average, 3% in the 2023-2026 period;
- Dividends payout around 25% throughout the rating horizon.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
- Improved scale and business position;
- Net debt/rental EBITDA consistently below 4.0x;
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
- Net debt/rental EBITDA consistently above 5.0x;
- Deterioration of the company's business position;
- Declining EBITDA and profitability levels;
- Worsening liquidity profile;
- A perception of lower financial flexibility.
LIQUIDITY AND DEBT STRUCTURE
Adequate Financial Flexibility: Unidas's adequate liquidity
position and proven access to local funding are key credit
considerations, with cash covering its short-term debt by an
average over 3.0x during the last three years. The group's expected
negative FCF, a result of organic growth and fleet renew, should be
financed by a combination of cash, sale of used assets and
additional debt in the rating scenario.
As of September 2023, Unidas had BRL1.4 billion of cash and
equivalents and BRL8 billion of total debt, with BRL1.1 billion due
in the short term -- mainly bank loans -- and an additional BRL6.7
billion up to 2025. The group's consolidated debt is mainly
comprised of local capital market debt (49%) and bank loans (51%).
Unidas's financial flexibility is also supported by the group's
ability to postpone growth capex to adjust to the economic cycle
and the groups considerable number of unencumbered assets, with the
market value of the fleet over net debt at around 1.5x.
ISSUER PROFILE
Unidas is one of the largest RaC, fleet rental and heavy equipment
and machinery rental company in Brazil. The company also operates
in the sale of used vehicles and equipments. Unidas is privately
held and has CEDAR Fundo de Investimento em Participações, an
investiment vehicle managed by Brookfield Brasil Asset Management
Investimentos, as its controlling shareholder.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Unidas Locacoes
E Servicos S/A LT IDR BB- Affirmed BB-
LC LT IDR BB- Affirmed BB-
Natl LT AA(bra) Upgrade AA-(bra)
senior
unsecured Natl LT AA(bra) Upgrade AA-(bra)
===================================
D O M I N I C A N R E P U B L I C
===================================
DOMINICAN REPUBLIC: Commits Over COP1 Bil to Boost Poultry Sector
-----------------------------------------------------------------
Dominican Today reports that in a significant move to bolster the
Dominican Republic's poultry industry, President Luis Abinader has
announced the allocation of over one billion pesos towards various
initiatives aimed at enhancing this vital sector. This commitment
was revealed during a meeting organized by the Dominican
Association of Poultry Farmers (ADA) in Moca, according to
Dominican Today.
The report notes that the president announced several key measures
to support the poultry sector:
1. Refrigeration Warehouse Project: An allocation of 220 million
pesos was made for the Dominican Association of Poultry Farmers
to set up a refrigeration warehouse. This facility, with an 8
million pound capacity for processed chicken, will be
established at Merca Santo Domingo. It aims to maintain a
strategic inventory, offering refrigerated storage for chicken
meat conservation.
2. Immediate Pledge Program Fund: A fund of 400 million pesos will
be created for an immediate pledge program, which involves the
distribution of 2 million units of chickens. This program will
be executed by the Ministry of Agriculture in collaboration
with the Agricultural Bank and ADA.
3. Support for Micro and Small Poultry Producers: The sum of 300
million pesos will be provided to assist micro and small
poultry producers. This fund, to be lent through cooperatives
and associations at a zero rate, is intended as compensation
for the capitalization of their businesses. Additionally, 100
million pesos will be paid immediately to settle INESPRE's debt
from the laying hen reduction program, which aims to stabilize
egg prices.
4. **Debt Restoration and International Alliances**: The president
also addressed the restoration of egg producers' debt with the
Agricultural Bank and proposed forming alliances with the
Guyana government for corn and soybean production.
President Abinader emphasized the importance of collaboration
between producers, businesses, workers, sector professionals, and
the government, the report relays. He expressed his desire for
continued partnership to ensure a productive sector that guarantees
profitability for producers and food security for the Dominican
people, the report says.
ADA directors expressed their gratitude to President Abinader for
his swift response to the challenges posed by the border closure,
the report notes. They assured that there would be an abundant
supply of chicken and pork for Dominican families during the
Christmas holidays, the report discloses.
Notable attendees at the event included President Luis Abinader;
Limbert Cruz, Minister of Agriculture; Jose Luis Polanco, president
of ADA; and other key figures in government and the poultry
industry, the report relays. The involvement of these leaders
underscores the government's commitment to supporting and advancing
the poultry sector in the Dominican Republic, the report adds.
About Dominican Republic
The Dominican Republic is a Caribbean nation that shares the island
of Hispaniola with Haiti to the west. Capital city Santo Domingo
has Spanish landmarks like the Gothic Catedral Primada de America
dating back 5 centuries in its Zona Colonial district. Luis Rodolfo
Abinader Corona is the current president of the nation.
TCR-LA reported in April 2019 that Juan Del Rosario of the UASD
Economic Faculty cited a current economic slowdown for the
Dominican Republic and cautioned that if the trend continues,
growth would reach only 4% by 2023. Mr. Del Rosario said that if
that happens, "we'll face difficulties in meeting international
commitments."
An ongoing concern in the Dominican Republic is the inability of
participants in the electricity sector to establish financial
viability for the system.
On December 4, 2023, the TCR-LA reported that Fitch Ratings has
affirmed Dominican Republic's Long-Term Foreign-Currency Issuer
Default Rating (IDR) at 'BB-' and revised the Outlook to Positive
from Stable. Fitch says the Positive Outlook reflects a trend
improvement in governance, and robust growth prospects that should
lead to continued gains in per capita income. According to Fitch,
growth has decelerated in 2023, but it expects Dominican Republic
to recover to high levels during 2024-2025. External liquidity
metrics have improved in recent years, and foreign currency share
of government debt is on a downward path.
In August 2023, Moody's Investors Service changed the outlook on
the Government of Dominican Republic's ratings to positive from
stable and affirmed the local and foreign-currency long-term issuer
and senior unsecured ratings at Ba3. Moody's said the key drivers
for the outlook change to positive are: (i) sustained high growth
rates have enhanced the scale and wealth levels of the economy; and
(ii) a material decline in the government debt burden coupled with
improved fiscal policy effectiveness will support medium-term debt
sustainability.
The affirmation of the Ba3 ratings balances the Dominican
Republic's strong economic growth dynamics and relatively contained
susceptibility to event risks, with a comparatively weaker fiscal
position, reflecting long-standing credit challenges which include:
(i) a shallow revenue base compared to peers, (ii) weak debt
affordability metrics, and (iii) high exposure to foreign currency
borrowing.
S&P Global Ratings, in December 2022, raised its long-term foreign
and local currency sovereign credit ratings on the Dominican
Republic to 'BB' from 'BB-'. The outlook on the long-term ratings
is stable. S&P affirmed its 'B' short-term sovereign credit
ratings. S&P also revised its transfer and convertibility (T&C)
assessment to 'BBB-' from 'BB+'. The stable outlook reflects S&P's
expectation of continued favorable GDP growth and policy continuity
over the next 12-18 months that will likely stabilize the
government's debt burden.
In February 2023, S&P said its BB ratings reflect the country's
fast-growing and resilient economy. It also incorporates the
country's historical political and social challenges in passing
structural reforms to contain fiscal deficits, despite recent
improvements in the electricity sector. The ratings are constrained
by relatively high debt, a hefty interest burden, and limited
monetary policy flexibility.
DOMINICAN REPUBLIC: Dajabon Border Market Reopens
-------------------------------------------------
Dominican Today reports that the Dajabon border market, a
significant trading hub between the Dominican Republic and Haiti,
has recommenced operations with noticeably reduced activity.
With less than 100 clients and the absence of 95% of Dominican
merchants, the market's reopening comes after the decision to
reactivate trade despite the ongoing closure of the border on the
Haitian side, according to Dominican Today.
The low turnout of Dajabon merchants is primarily because their
clientele consists almost exclusively of Haitians, who currently
cannot cross the border to make purchases. This has led to a
wait-and-see approach, with merchants hoping for the reopening of
the border by Juana Mendez authorities, the report notes.
Santiago Riveron, the municipal mayor, urged both Haitian and
Dominican merchants to participate in the market activities,
especially with the approaching Christmas season, to sell their
products, the report relays.
Merchant Jose Reyes emphasized the need for vendors to consolidate
efforts and move away from informal markets, the report says. He
believes that if Dominican vendors were to open their stores at the
market, Haitians would be encouraged to attend, considering their
need for the products, the report notes. The fair, however,
continues to experience minimal activity without Haitian buyers and
sellers, who are the primary trading partners, the report
discloses.
The border situation is complicated by the closure from the Haitian
side, a response to the Dominican government's restrictions linked
to the illegal diversion of water from the Masacre River by
civilians, the report relays. Meanwhile, the Dominican Army has
intensified surveillance in the Sierra de Babonuco area, a known
route for Haitian migration, and along the border to prevent
undocumented crossings, the report says.
The Specialized Land Border Security Corps (Cesfront) is also
maintaining strict controls in the market area to regulate the
movement of undocumented immigrants into the Dominican side, the
report discloses. These measures follow recent incidents where
groups of Haitians attempted to cross the border through the Sierra
de Bahoruco and were intercepted by military forces, the report
adds.
About Dominican Republic
The Dominican Republic is a Caribbean nation that shares the island
of Hispaniola with Haiti to the west. Capital city Santo Domingo
has Spanish landmarks like the Gothic Catedral Primada de America
dating back 5 centuries in its Zona Colonial district. Luis Rodolfo
Abinader Corona is the current president of the nation.
TCR-LA reported in April 2019 that Juan Del Rosario of the UASD
Economic Faculty cited a current economic slowdown for the
Dominican Republic and cautioned that if the trend continues,
growth would reach only 4% by 2023. Mr. Del Rosario said that if
that happens, "we'll face difficulties in meeting international
commitments."
An ongoing concern in the Dominican Republic is the inability of
participants in the electricity sector to establish financial
viability for the system.
On December 4, 2023, the TCR-LA reported that Fitch Ratings has
affirmed Dominican Republic's Long-Term Foreign-Currency Issuer
Default Rating (IDR) at 'BB-' and revised the Outlook to Positive
from Stable. Fitch says the Positive Outlook reflects a trend
improvement in governance, and robust growth prospects that should
lead to continued gains in per capita income. According to Fitch,
growth has decelerated in 2023, but it expects Dominican Republic
to recover to high levels during 2024-2025. External liquidity
metrics have improved in recent years, and foreign currency share
of government debt is on a downward path.
In August 2023, Moody's Investors Service changed the outlook on
the Government of Dominican Republic's ratings to positive from
stable and affirmed the local and foreign-currency long-term issuer
and senior unsecured ratings at Ba3. Moody's said the key drivers
for the outlook change to positive are: (i) sustained high growth
rates have enhanced the scale and wealth levels of the economy; and
(ii) a material decline in the government debt burden coupled with
improved fiscal policy effectiveness will support medium-term debt
sustainability.
The affirmation of the Ba3 ratings balances the Dominican
Republic's strong economic growth dynamics and relatively contained
susceptibility to event risks, with a comparatively weaker fiscal
position, reflecting long-standing credit challenges which include:
(i) a shallow revenue base compared to peers, (ii) weak debt
affordability metrics, and (iii) high exposure to foreign currency
borrowing.
S&P Global Ratings, in December 2022, raised its long-term foreign
and local currency sovereign credit ratings on the Dominican
Republic to 'BB' from 'BB-'. The outlook on the long-term ratings
is stable. S&P affirmed its 'B' short-term sovereign credit
ratings. S&P also revised its transfer and convertibility (T&C)
assessment to 'BBB-' from 'BB+'. The stable outlook reflects S&P's
expectation of continued favorable GDP growth and policy continuity
over the next 12-18 months that will likely stabilize the
government's debt burden.
In February 2023, S&P said its BB ratings reflect the country's
fast-growing and resilient economy. It also incorporates the
country's historical political and social challenges in passing
structural reforms to contain fiscal deficits, despite recent
improvements in the electricity sector. The ratings are constrained
by relatively high debt, a hefty interest burden, and limited
monetary policy flexibility.
DOMINICAN REPUBLIC: USAID Discloses $1.4M Donation to Boost Trade
-----------------------------------------------------------------
Dominican Today reports that during her recent visit to the
Dominican Republic, USAID Deputy Administrator Isobel Coleman
announced a significant $1.4 million donation from the United
States Government to support the Global Alliance for Trade
Facilitation (GATF) in the country. This initiative aims to
enhance trade and nearshoring opportunities through collaborative
efforts between public and private sectors, according to Dominican
Today.
The announcement came at an event hosted by the Ministry of
Industry, Commerce and MSMEs, attended by Minister Víctor Bisonó
and representatives from nine local entities spanning both sectors,
the report notes. The public sector's participation includes key
governmental bodies like the Ministry of Industry, Commerce and
MSMEs, the General Directorate of Customs, ProIndustria,
ProDominicana, and the National Council of Export Free Zones, the
report relays. Representing the private sector are the American
Chamber of Commerce of the Dominican Republic, ADOZONA, ADOEXPO,
and CODOPYME, the report discloses.
Minister Bisono highlighted the project's potential to foster
economic and social development in the Dominican Republic, made
possible by USAID's funding, the report says. Coleman expressed
enthusiasm about the new partnership, emphasizing its role in
improving business opportunities and driving sustainable economic
growth in the nation, the report notes.
This initiative particularly focuses on empowering micro, small,
and medium-sized enterprises (MSMEs), including women-led
businesses, to exploit nearshoring opportunities and enhance their
role in global trade, the report relays. It aims to forge
commercial ties between local SMEs and free zone companies,
offering support in achieving trade facilitation certification, the
report notes.
Coleman's visit included significant meetings with President Luis
Abinader, Foreign Affairs Minister Roberto Alvarez, and Presidency
Minister Joel Santos, discussing bilateral cooperation and
emergency preparedness, the report relays. The visit also involved
Scott Nathan, the executive director of the U.S. International
Development Finance Corporation, discussing investment
opportunities in the Dominican Republic, the report says.
The USAID Deputy Administrator also engaged with local civil
society organizations, addressing various societal issues, the
report discloses. This visit follows a prior announcement in April
2023 by Wendy Sherman, then Deputy Secretary of State, about a $6
million donation to promote economic development in the Dominican
Republic's northwest region through nearshoring industries, the
report adds.
About Dominican Republic
The Dominican Republic is a Caribbean nation that shares the island
of Hispaniola with Haiti to the west. Capital city Santo Domingo
has Spanish landmarks like the Gothic Catedral Primada de America
dating back 5 centuries in its Zona Colonial district. Luis Rodolfo
Abinader Corona is the current president of the nation.
TCR-LA reported in April 2019 that Juan Del Rosario of the UASD
Economic Faculty cited a current economic slowdown for the
Dominican Republic and cautioned that if the trend continues,
growth would reach only 4% by 2023. Mr. Del Rosario said that if
that happens, "we'll face difficulties in meeting international
commitments."
An ongoing concern in the Dominican Republic is the inability of
participants in the electricity sector to establish financial
viability for the system.
On December 4, 2023, the TCR-LA reported that Fitch Ratings has
affirmed Dominican Republic's Long-Term Foreign-Currency Issuer
Default Rating (IDR) at 'BB-' and revised the Outlook to Positive
from Stable. Fitch says the Positive Outlook reflects a trend
improvement in governance, and robust growth prospects that should
lead to continued gains in per capita income. According to Fitch,
growth has decelerated in 2023, but it expects Dominican Republic
to recover to high levels during 2024-2025. External liquidity
metrics have improved in recent years, and foreign currency share
of government debt is on a downward path.
In August 2023, Moody's Investors Service changed the outlook on
the Government of Dominican Republic's ratings to positive from
stable and affirmed the local and foreign-currency long-term issuer
and senior unsecured ratings at Ba3. Moody's said the key drivers
for the outlook change to positive are: (i) sustained high growth
rates have enhanced the scale and wealth levels of the economy; and
(ii) a material decline in the government debt burden coupled with
improved fiscal policy effectiveness will support medium-term debt
sustainability.
The affirmation of the Ba3 ratings balances the Dominican
Republic's strong economic growth dynamics and relatively contained
susceptibility to event risks, with a comparatively weaker fiscal
position, reflecting long-standing credit challenges which include:
(i) a shallow revenue base compared to peers, (ii) weak debt
affordability metrics, and (iii) high exposure to foreign currency
borrowing.
S&P Global Ratings, in December 2022, raised its long-term foreign
and local currency sovereign credit ratings on the Dominican
Republic to 'BB' from 'BB-'. The outlook on the long-term ratings
is stable. S&P affirmed its 'B' short-term sovereign credit
ratings. S&P also revised its transfer and convertibility (T&C)
assessment to 'BBB-' from 'BB+'. The stable outlook reflects S&P's
expectation of continued favorable GDP growth and policy continuity
over the next 12-18 months that will likely stabilize the
government's debt burden.
In February 2023, S&P said its BB ratings reflect the country's
fast-growing and resilient economy. It also incorporates the
country's historical political and social challenges in passing
structural reforms to contain fiscal deficits, despite recent
improvements in the electricity sector. The ratings are constrained
by relatively high debt, a hefty interest burden, and limited
monetary policy flexibility.
=============
J A M A I C A
=============
PROVEN GROUP: Gives Up Securities License for Two Units
-------------------------------------------------------
Jamaica Observer reports that Proven Group Limited has surrendered
securities licences for two of its subsidiaries, Proven Management
and International Financial Planning Jamaica (IFPJ), in a
cost-saving play that's also expected to create a leaner group of
companies.
Proven in a public advisory said it has voluntary surrendered the
IFPJ's securities dealers licences to Financial Services
Commission, as it is no longer engaged in the securities business,
and will transfer all IFPJ's clients to affiliated company Proven
Wealth Limited, according to Jamaica Observer.
IFPJ was formed following Proven's acquisition of First Global
Financial Services in 2014, the report notes. At the time, CEO of
Proven Chris Williams said the decision to acquire FGFS was a
strategic one and would build on the foundation that Proven had set
for itself, the report relays.
FGFS largely dealt in the business of securities trading, portfolio
management, stockbrokerage services, structured financing, pension
fund management, and economic and corporate analysis, but Williams
had a vision to widen the product range of the rebranded IFPJ
business to include international mutual and hedge funds, the
report says.
"IFPJ has really just been operating as a shell for years now and
Proven Management doesn't need a licence because that business
doesn't have clients.
"We did an audit and we realized that we had more licenses than we
needed and so we made the decision to surrender the two licenses.
We're just saving ourselves some money because we have to be paying
for these licenses," Williams told the Jamaica Observer.
Proven Wealth, a securities dealer, is regulated by FSC and engages
in the management of client portfolios, the report discloses.
"We didn't need a separate company to do that and so much of IFPJ's
business were shifted to Proven Wealth over time," Williams said,
the report relays.
He added that Proven will be winding up IFPJ's business soon but
will continue business for Proven Management.
"The process is still ongoing and we are looking for ways to become
more efficient, but those are the only two companies so far,"
Williams said, the report notes.
Proven, which describes itself as premier provider of financial
solutions in the Caribbean, lists Proven Wealth Limited, Proven
Bank (Cayman) Limited, Proven Bank (St Lucia), Proven Private
Capital and Proven Properties as its businesses on its website, the
report adds.
Proven Wealth Limited has operations in Cayman, Bermuda, the
British Virgin Islands, Barbados, Jamaica, and The Bahamas.
=====================
P U E R T O R I C O
=====================
ESJ TOWERS: Seeks Court Nod to Sell Assets by Auction
-----------------------------------------------------
ESJ Towers, Inc. asked the U.S. Bankruptcy Court for the District
of Puerto Rico to approve the sale of most of its assets to
Fortaleza Equity Partners 2, LLC or to another buyer with a better
offer.
Fortaleza made a cash offer of $13.5 million for the assets, which
include ESJ's real properties and other assets used to operate its
business, according to the sale agreement entered into by the
companies. The closing date is Jan. 31, 2024, the agreement says.
ESJ will use the proceeds from the sale to pay its creditors
pursuant to its proposed Chapter 11 plan of reorganization.
"The sale is aimed at enhancing the value of [ESJ's] estate and
provide feasibility to the plan," Charles Cuprill, Esq., the
company's attorney said, adding that the sale will also help the
company avoid the conversion of its bankruptcy case to a Chapter 7
case.
ESJ currently owns and operates 126 studio apartments, which are
classified either as vacation club or hotel units, and one
hospitality center.
The company will put the assets up for bidding to "maximize the
value" of its estate, according to Mr. Cuprill.
The proposed bid process, which is subject to court approval, gives
potential buyers at least 10 days after Dec. 20 to place their bids
on the assets. Each bidder must provide an executed copy of an
alternative sale agreement and an evidence of available funds,
among other things.
ESJ will conduct an auction if it receives more than one qualified
bid. The auction will take place at 10:00 a.m. (prevailing Eastern
Time) five days prior to the sale hearing, the date of which is yet
be determined.
Fortaleza will serve as the stalking horse bidder at the auction.
In the event it is not selected as the winning bidder, Fortaleza
will receive a break-up fee, which is 3% of its bid, and an expense
reimbursement of up to 100,000.
ESJ will announce the winning bidder within two business days after
the conclusion of the auction.
About ESJ Towers
ESJ Towers, Inc. owns the ESJ Towers in Carolina, P.R. The luxury
apartments and condo units at ESJ Towers have direct access to Isla
Verde Beach, widely considered one of the best in Puerto Rico.
ESJ sought protection under Chapter 11 of the U.S. Bankruptcy Code
(Bankr. D.P.R. Case No. 22-01676) on June 10, 2022, with as much as
50 million in both assets and liabilities. ESJ President Keith St.
Clair signed the petition.
Judge Enrique S. Lamoutte Inclan oversees the case.
The Debtor tapped Charles A. Cuprill, Esq., at Charles A. Cuprill,
PSC Law Offices as bankruptcy counsel; Ramon Luis Nieves, Esq., at
RL Legal Consulting Services, LLC and Luis Daniel Muniz, Esq., as
special counsels; Dage Consulting CPAS, PSC as financial advisor;
CPA Luis R. Carrasquillo & Co., P.S.C. as financial consultant; and
De Angel & Compania, PA, LLC as auditor.
The U.S. Trustee for Region 21 appointed an official committee of
unsecured creditors on Sept. 12, 2022. The committee tapped the Law
Office of Jonathan A. Backman as lead bankruptcy counsel; Julio
Cesar Alejandro Serrano, Esq., at JCAS Law as local counsel; and
Dage Consulting CPAS, PSC as financial advisor.
The Debtor filed its Chapter 11 plan of reorganization and
disclosure statement on June 1, 2023.
STONEMOR INC: Moody's Cuts CFR to Caa1 & Alters Outlook to Stable
-----------------------------------------------------------------
Moody's Investors Service downgraded the corporate family rating of
StoneMor Inc. ("StoneMor", dba Everstory Partners), a provider of
funeral and cemetery products and services in the US and Puerto
Rico, to Caa1 from B3. Moody's also downgraded the company's
probability of default rating to Caa1-PD from B3-PD and the
company's senior secured notes rating to Caa1 from B3. Moody's
changed the outlook to stable from negative.
The ratings downgrade reflects deteriorating credit metrics, high
debt to accrual EBITDA of 7.2x as of LTM September 30, 2023 and a
history of negative free cash flow that Moody's expects will
persist in 2024, albeit at reduced levels compared to the prior
year. The company is in the early stages of implementing a
three-year plan focused on improving operational performance and
customer and employee satisfaction. Part of the plan includes
revamping the sales force (which was previously revamped in 2019),
including changing the commission structure and discontinuing
heavily discounted sales periods. These changes have contributed to
elevated sales turnover and reduced sales production in the second
and third quarters of 2023, which Moody's believes could persist in
the first half of 2024. A successful sales force revamp is a
critical driver of solid sales production that will be pivotal for
growing revenue and reducing financial leverage.
RATINGS RATIONALE
The Caa1 CFR reflects Moody's expectation for 2024 that pre-need
cemetery sales production will rebound from declining 2023 levels
despite the ongoing sales force revamp. While Moody's expects
inflationary pressure to lessen, StoneMor should also realize
additional cost savings to offset some inflationary pressure. For
2024, Moody's anticipates debt to accrual EBITDA (reflecting
Moody's standard adjustments, as well as adding deferred revenues
and deducting deferred expenses) to decline and approach 6x and
accrual EBITDA less capital expenditures to interest expense of
about 1.7x. However, Moody's expects financial leverage and
interest coverage metrics without adjusting for deferrals to remain
very weak. StoneMor has not generated positive free cash flow on an
annual basis since 2018, and Moody's expects free cash flow to
remain negative in 2024 if organizational initiatives are not
successfully executed, especially ongoing sales force initiatives.
The company's unrestricted cash balances declined by $17 million
from the prior year's quarter-end to $26 million as of September
30, 2023. The rating is supported by a national portfolio of
cemetery properties and an approximately $1.2 billion backlog of
pre-need cemetery and funeral sales. StoneMor is owned by a private
financial sponsor affiliate, and as such Moody's anticipates
aggressive financial strategies, including the use of cash and debt
proceeds to fund acquisitions.
The Caa1 rating of the $365 million senior secured notes due 2029
reflect a PDR of Caa1-PD. The senior secured rating is in line with
the Caa1 CFR and reflects its position as the vast majority of debt
in the capital structure. The $45 million super-priority revolver
expiring in 2027 (not rated) is ranked ahead of the senior secured
notes.
The company's weak liquidity profile is driven by Moody's
expectation of currently very little covenant cushion on its fixed
charge financial covenant, modest availability under its revolver
and Moody's expectation of single-digit negative free cash flow in
2024. The company's liquidity is supported by $26 million of
unrestricted cash and around $9 million of availability under its
$45 million revolver expiring in 2027. StoneMor can increase
revolver commitments by an additional $15 million. As defined by
the loan agreement, the revolver contains a fixed charge coverage
tested quarterly that cannot go below 1.05x and a springing maximum
total net leverage ratio covenant that cannot exceed 6.5x, which is
tested when the revolver draw is 87.5% ($39.375 million) or
greater. As of September 30, 2023, Moody's believes there is
little-to-no cushion on the fixed charge ratio, and sufficient
cushion on the total net leverage ratio if it were to be tested.
Moody's expects cushion for both financial covenants to improve in
the fourth quarter of 2023 as one-time expenses associated with the
go-private transaction roll off. Moody's expects StoneMor to
maintain tight, but growing, covenant cushion under its fixed
charge coverage ratio over the next 12 months.
The stable outlook reflects Moody's expectation for
low-to-mid-single-digit percentage revenue growth and margin
improvements in 2024 contributing to debt to accrual EBITDA
declining towards 6x by year-end 2024.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Moody's anticipates: 1) debt to
accrual EBITDA below 5.5 times, 2) breakeven to modestly positive
free cash flow on a sustainable basis, 3) improved financial
flexibility from a longer debt maturity profile, and 4) balanced
financial strategies.
The ratings could be downgraded if Moody's expects: 1) revenue,
profitability rates or free cash flow to decline 2) a decline in
the value of StoneMor's assets, including its preneed cemetery
sales backlog, 3) liquidity to further deteriorate, including an
increased risk of a covenant breach, or 4) more aggressive
financial strategies.
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
StoneMor, Inc. (dba Everstory Partners), based in Altamonte
Springs, FL and majority-owned by affiliates of Axar Capital
Management L.P., is a provider of funeral and cemetery products and
services in the United States and Puerto Rico. StoneMor operates
304 cemeteries and 70 funeral homes. The company owns 275 of these
cemeteries and operates the remaining 29 under long-term management
agreements with non-profit cemetery corporations that own the
cemeteries. StoneMor booked GAAP revenues of $312 million as of LTM
September 30, 2023.
*********
S U B S C R I P T I O N I N F O R M A T I O N
Troubled Company Reporter-Latin America is a daily newsletter
co-published by Bankruptcy Creditors' Service, Inc., Fairless
Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C.,
USA, Marites O. Claro, Joy A. Agravante, Rousel Elaine T.
Fernandez, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A.
Chapman, Editors.
Copyright 2023. All rights reserved. ISSN 1529-2746.
This material is copyrighted and any commercial use, resale or
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re-mailing and photocopying) is strictly prohibited without prior
written permission of the publishers.
Information contained herein is obtained from sources believed to
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The TCR Latin America subscription rate is US$775 per half-year,
delivered via e-mail. Additional e-mail subscriptions for members
of the same firm for the term of the initial subscription or
balance thereof are US$25 each. For subscription information,
contact Peter A. Chapman at 215-945-7000.
.
* * * End of Transmission * * *