/raid1/www/Hosts/bankrupt/TCRLA_Public/240621.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, June 21, 2024, Vol. 25, No. 125
Headlines
A R G E N T I N A
AEROLINEAS ARGENTINAS: Milei Still Intends to Privatize Firm
ARGENTINA: IMF Allows Immediate Drawing of Approximately US$800MM
ARGENTINA: Milei to Meet IMF Chief During Push for New Program
ARGENTINA: Monthly Inflation Slows to Lowest Level Since 2022
B R A Z I L
SAO PAULO: Fitch Affirms 'BB' LongTerm IDRs, Outlook Stable
C A Y M A N I S L A N D S
ARADA SUKUK 2: Fitch Assigns 'BB-' Final Rating on Unsec. Notes
DEER INVESTMENT: Fitch Alters Outlook on 'B-' IDR to Negative
C O S T A R I C A
COSTA RICA: 3-Year Extended Deal Under EFF was OK on March 1
D O M I N I C A N R E P U B L I C
[*] DOMINICAN REPUBLIC: CNZFE OKs 15 New Companies in Free Zones
J A M A I C A
NCB FINANCIAL: Sells Stake in Bermuda Bank
T R I N I D A D A N D T O B A G O
HERITAGE PETROLEUM: Moody's Alters Outlook on 'Ba3' CFR to Stable
- - - - -
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A R G E N T I N A
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AEROLINEAS ARGENTINAS: Milei Still Intends to Privatize Firm
------------------------------------------------------------
Buenos Aires Times reports that President Javier Milei still
intends to privatise Argentina's flagship carrier Aerolíneas
Argentinas and a host of other state-run firms, despite the
government giving ground during talks to pass its sweeping 'Ley de
Bases' reform bill.
Speaking after the so-called 'omnibus' bill and its accompanying
fiscal package were approved by the Senate, Presidential
Spokesperson Manuel Adorni said that Milei still intends to push
ahead with privatization of a dozen state firms, according to
Buenos Aires Times.
He will do so, Adorni said, beyond the framework of Congress, the
report notes.
"All state-run companies may be privatized. Whether it will be at
this legislative juncture or further on will be up to the Chamber
of Deputies," said Milei's top spokesman at his daily press
conference, the report relays.
During negotiations to pass its 200-plus-article 'Ley de Bases'
bill, ruling party lawmakers were forced to accept amendments from
senators, the report discloses. These included the removal of
Aerolíneas Argentinas from the list of state-run companies to be
privatized, the report relays.
The Correo Argentino post office and the state media outlets of
Radio y Televisión Argentina (RTA) were also taken off the table,
the report notes.
Adorni, who was highly critical of state firms, argued that the
companies "cannot continue running as they are" – a reference to
debts held by many public firms, the report relays.
The spokesperson, who is on the same ideological page as President
Milei, then defended the idea of privatizing them by claiming that
the goal of the libertarian administration is "not to close" the
firms but to "save them," the report relays.
"The entry of private capital into state-run companies is a way of
saving them," he insisted, the report notes.
In another section of the press conference, the spokesman held "the
left and Kirchnerism" responsible for the damage to the area around
Congress that came in the wake of demonstrations against the bill,
the report says.
He described the violent incidents as a "21st-century coup."
"There were terrorists outside Congress who wanted to trample over
democracy, who claimed the people's representation, but who were
never voted by anyone," he specified, the report notes.
He stressed that Security Minister Patricia Bullrich, "managed to
forcefully and decisively contain what was happening in the
street", and he said that the City Police was working on
identifying the demonstrators who burned cars and caused damage,
the report discloses.
Lastly, he promised that the Government "would pursue this to the
very end," and even though he specified that "the charges are being
assessed", he underlined that the decision is that "the maximum
penalty should be imposed on everyone," the report adds.
ARGENTINA: IMF Allows Immediate Drawing of Approximately US$800MM
-----------------------------------------------------------------
The Executive Board of the International Monetary Fund (IMF)
completed the eighth review of the extended arrangement under the
Extended Fund Facility (EFF) for Argentina. The Board's decision
allows for an immediate drawing of approximately US$800 million (or
SDR600 million), bringing the total disbursements under the
arrangement to about US$41.4 billion[1].This will support the
authorities' efforts to restore stability and strengthen
Argentina's external viability.
In completing the review, the Executive Board assessed the program
to be firmly on track, with all quantitative performance criteria
through end-March 2024 met with margins. In addition, the Board
also approved waivers of non-observance for a new exchange
restriction and multiple currency practices in the context of some
easing of dividend payment restrictions. The Board emphasized that
sustaining the strong progress requires improving the quality of
fiscal adjustment, initiating steps towards an enhanced monetary
and FX policy framework, and implementing the structural agenda.
Continued efforts to support the vulnerable, broaden political
support and ensure agile policymaking will also be necessary.
At the conclusion of the Executive Board's discussion, Ms. Gita
Gopinath, First Deputy Managing Director and Acting Chair made the
following statement:
"Since the last review, continued resolute actions to restore
macroeconomic stability have put the program firmly on track. The
stabilization plan—centered on a strong fiscal anchor with no new
monetary financing—has delivered fiscal and external surpluses, a
marked turnaround in reserves, a strengthening of the central
bank's balance sheet, and faster-than-expected disinflation, while
upscaling social expenditures. All quantitative performance
criteria through end-March were met with margins, with good
progress on the structural agenda.
"Nevertheless, some macroeconomic imbalances and barriers to growth
remain, and a difficult adjustment path still lies ahead. Policies
now need to be enhanced to build on the progress made so far.
Efforts should continue to broaden political and societal support
for reforms, as well as to protect the most vulnerable.
"Impressive progress has been made to achieve overall fiscal
balance and priority should now be placed in further improving the
quality of the adjustment. Efforts should continue to reform the
personal income tax, rationalize subsidies and tax expenditures,
and strengthen expenditure controls. Beyond this year, deeper
reforms of the tax, pension, and revenue-sharing systems, including
to unwind distortive taxes, will be critical.
"Monetary and FX policies need to evolve to continue to entrench
the disinflation process and further improve reserve coverage. To
support the transition towards a new monetary regime, where price
and financial stability remain prime objectives of the central bank
and individuals are free to use currencies of their choice, the
real policy rate should turn positive to support peso demand and
disinflation. The exchange rate policy should also become more
flexible to reflect fundamentals, and safeguard disinflation as
well as reserve accumulation, particularly as capital flow
management measures (CFMs) are gradually eased as conditions
permit. Further steps are also needed to define the new monetary
regime's key underpinnings as well as to develop and begin to
implement the framework for a conditions-based easing of FX
controls and CFMs.
"Greater focus on micro-level reforms will help support the
recovery and boost potential growth. The proposed reforms aimed at
improving competitiveness, increasing labor market flexibility, and
improving the predictability of the regulatory framework for
investment, are steps in the right direction, and their approval
and careful implementation should be a priority. This should be
complemented by reforms to enhance transparency and governance,
including the AML/CFT framework.
"Risks, although moderated, are still elevated, requiring agile
policy making. Contingency planning will remain critical, and
policies will need to continue to adapt to evolving outcomes to
safeguard stability and ensure all program objectives continue to
be met."
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 March 15, 2024, raised its local currency
sovereign credit ratings on Argentina to 'CCC/C' from 'SD/SD' and
its national scale rating to 'raB+' from 'SD'. S&P also raised its
long-term foreign currency sovereign credit rating to 'CCC' from
'CCC-' and affirmed its 'C' short-term foreign currency rating. The
outlook on the long-term ratings is stable. In addition, S&P
revised its transfer and convertibility assessment to 'CCC' from
'CCC-'.
S&P said the stable outlook on the long-term ratings balances the
risks posed by pronounced economic imbalances and policy
uncertainties with the favorable change in near-term debt service
obligations. S&P also expect no further debt exchanges that it
would likely consider to be distressed.
Fitch Ratings 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 to Meet IMF Chief During Push for New Program
--------------------------------------------------------------
globalinsolvency.com, citing Bloomberg News, reports that President
Javier Milei will meet face-to-face with the head of the
International Monetary Fund in Italy, with Argentina claiming it
has cleared a key hurdle as it seeks fresh funds to eventually lift
capital controls.
The libertarian leader's talks with Managing Director Kristalina
Georgieva on the sidelines of the Group of Seven summit will take
place a day after the Fund's executive board votes on its latest
review of the crisis-prone South American nation's $43 billion
program, according to globalinsolvency.com.
Milei's government said it was ending its policy of negative real
interest rates on Treasury auctions, a strategy implemented during
the administration's first six months of trying to tame
triple-digit annual inflation, the report notes.
Positive real rates from the central bank are a key demand of the
Washington, D.C.-based lender, the report relays.
Economy Minister Luis Caputo trumpeted a sovereign debt auction
that featured a 4.25% interest rate on 90-day Treasury notes, the
report discloses.
With monthly inflation for May expected to come in under 5% in data
due soon, Caputo declared victory, the report relays. "The era of
the negative real rates ended for us," he said at an event in
Buenos Aires.
The Argentine central bank's benchmark lending rate, however,
stands at 40% - down from 133% when Milei took office in December,
with another cut expected as soon as possible, the report relays.
Annual inflation is running at nearly 300%, so it remains to be
seen if the Fund will agree with the government's argument that
real rates are now positive, 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 March 15, 2024, raised its local currency
sovereign credit ratings on Argentina to 'CCC/C' from 'SD/SD' and
its national scale rating to 'raB+' from 'SD'. S&P also raised its
long-term foreign currency sovereign credit rating to 'CCC' from
'CCC-' and affirmed its 'C' short-term foreign currency rating. The
outlook on the long-term ratings is stable. In addition, S&P
revised its transfer and convertibility assessment to 'CCC' from
'CCC-'.
S&P said the stable outlook on the long-term ratings balances the
risks posed by pronounced economic imbalances and policy
uncertainties with the favorable change in near-term debt service
obligations. S&P also expect no further debt exchanges that it
would likely consider to be distressed.
Fitch Ratings 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: Monthly Inflation Slows to Lowest Level Since 2022
-------------------------------------------------------------
globalinsolvency.com, citing Bloomberg News, reports that monthly
inflation in Argentina slowed to its lowest level in May since
early 2022, capping the fifth straight cooler print under President
Javier Milei as market doubts linger that the trend can be
sustained.
Consumer prices rose 4.2% last month, less than economists
estimates for 5% and the lowest level since January 2022, according
to globalinsolvency.com.
From a year ago, inflation slowed to 276.4%, according to
government data published, the report relays.
Communication costs and education led monthly price gains in May by
categories, the report discloses. While far from a definitive
victory, a slower pace of price increases marks another positive
development for Milei after the majority of his economic reforms
passed through the Senate early in a pivotal vote, the report
relays.
His government also renewed a portion of its currency swap line
with China, while the International Monetary Fund's executive board
is expected to approve the latest review of the country's program
sometime, the report discloses. Milei will participates in the
Group of Seven summit in Italy, too, the report relays.
While the Milei's administration is expected to trumpet the
positive results of its economic shock therapy program, private
economists see the current pace of monthly inflation as somewhat of
a floor in the short term, the report notes. Although inflation
expectations have declined significantly this year, analysts
surveyed by Argentina's central bank in May don't expect monthly
price rises below 5% through September, the report relays. Even by
November, monthly inflation is seen at 4.5%, 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 March 15, 2024, raised its local currency
sovereign credit ratings on Argentina to 'CCC/C' from 'SD/SD' and
its national scale rating to 'raB+' from 'SD'. S&P also raised its
long-term foreign currency sovereign credit rating to 'CCC' from
'CCC-' and affirmed its 'C' short-term foreign currency rating. The
outlook on the long-term ratings is stable. In addition, S&P
revised its transfer and convertibility assessment to 'CCC' from
'CCC-'.
S&P said the stable outlook on the long-term ratings balances the
risks posed by pronounced economic imbalances and policy
uncertainties with the favorable change in near-term debt service
obligations. S&P also expect no further debt exchanges that it
would likely consider to be distressed.
Fitch Ratings 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
===========
SAO PAULO: Fitch Affirms 'BB' LongTerm IDRs, Outlook Stable
-----------------------------------------------------------
Fitch Ratings has affirmed the Brazilian State of Sao Paulo's (Sao
Paulo) Long-Term Foreign and Local Currency Issuer Default Ratings
(IDRs) at 'BB' with a Stable Rating Outlook and its Short-Term
Foreign and Local Currency IDRs at 'B'. Fitch has also affirmed Sao
Paulo's National Long-Term Rating at 'AAA(bra)' with a Stable
Outlook and its National Short-Term Rating at 'F1+(bra)'. Fitch
assess Sao Paulo's Standalone Credit Profile (SCP) at 'bb-'.
The State of Sao Paulo's ratings are supported by Brazil's
(BB/Stable) ratings because the federal government is its most
significant creditor. Debt owed to the federal government
corresponds to approximately 86% of the state's direct debt. Fitch
views intergovernmental debt as more favorable, as it can be used
as an instrument of support by the sovereign in periods of
distress, leading to a one-notch uplift from the state's SCP of
'bb-'.
KEY RATING DRIVERS
Risk Profile: 'Low Midrange'
The assessment reflects Fitch's view that there is a moderately
high risk of the issuer's ability to cover debt service with the
operating balance weakening unexpectedly over the scenario horizon
(2024-2028), due to lower revenue, higher expenditures or an
unexpected rise in liabilities or debt service requirements.
Revenue Robustness: 'Midrange'
Fitch evaluates this factor as 'Midrange' due to the state's high
fiscal autonomy with very low dependency on federal transfers.
The Brazilian tax collection framework transfers a large share of
responsibility to collect taxes to states and municipalities.
Constitutional transfers exist as a way to compensate poorer
entities. Fitch considers a high dependence on transfers a weak
feature for Brazilian LRGs. The primary metric for revenue
robustness is the transfers ratio (transfers to operating
revenues). Fitch classifies LRGs reporting a ratio above or equal
to 40% as 'Weaker', while others with a ratio below 40% are
'Midrange'.
The State of Sao Paulo reports high fiscal autonomy, with a low
transfer ratio, which drives this factor to 'Midrange'. Transfers
represented 8.3% of operating revenues, on average, in 2019-2023,
and 14.6% in 2023. The higher ratio for 2023 reflects the
reclassification of Fundeb transfers.
Fundeb is a fund dedicated to finance education. All government
levels contribute to it, and all states and municipalities receive
Fundeb transfers. When one accounts for Fundeb deductions and
Fundeb transfers, states are net losers. The National Treasury is
pushing for harmonization on Fundeb reporting, what led to a change
in Sao Paulos's reporting in 2023.
Previously, the state would report taxes net of the Fundeb loses
(transfers minus deductions) and no Fundeb transfers. Since 2023,
Sao Paulo started reporting Fundeb revenue as a transfer, while
discounting for the full Fundeb contribution when reporting taxes
(taxes net of Fundeb deductions). The effect over the operating
balance is null.
Between 2018-2023, operating revenues dropped on average 0.6%
annually in real terms, compared to 1.5% average GDP growth. The
weaker performance of tax revenues reflects limitations to the ICMS
tariff over fuels, electricity and telecommunications imposed by
the Brazilian National Congress in July 2022. Going forward, Fitch
expects operating revenues to be aligned with GDP growth.
Revenue Adjustability: 'Weaker'
Fitch evaluates this factor as 'Weaker' due to the state's reliance
on a small number of tax payers and their limited ability to adjust
tariffs.
Fitch considers Brazilian states and municipalities to have low
capacity to increase revenue in response to a downturn. There is
low affordability of additional taxation given that tax tariffs are
close to the constitutional national ceiling and a small number of
taxpayers represent a large share of tax collection, driving this
factor to weaker.
The most relevant tax, the ICMS, has a concentrated taxpayer base,
like for other Brazilian states. The 10 largest tax payers
corresponded to 28.1% of total ICMS tax collection in Sao Paulo in
2023.The measure reflects the 10 largest tax payers within each
segment such as retail, utilities, etc. This creates a challenging
environment for LRGs to expand their own revenue collection during
a downturn, leading this factor to 'Weaker'.
Brazil has a history of federal intervention to matters of
subnational taxation, such as when the National Congress set a
ceiling to the ICMS tariff over fuels and electricity in July 2022,
which led to revenue losses across states and municipalities. The
losses were only partially reversed later.
Sao Paulo's per capita GDP was 1.38x the national per capita GDP in
2021. The state reported poverty rates below the national average,
with 17.5% of the population living below the poverty line in 2021
(USD5.5 PPP 2011) and 4.2% living under the extreme poverty line
(USD1.9 PPP 2011).The state has a stronger socioeconomic profile
relative to the national average.
Expenditure Sustainability: 'Midrange'
Fitch evaluates this factor as 'Midrange' due to robust and stable
operating margins in the last years.
Responsibilities for states are moderately countercyclical since
they are engaged in healthcare, education and law enforcement.
Expenditure tends to grow with revenues as a result of earmarked
revenues. States and municipalities are required to allocate a
share of revenues in health and education. This results in a
procyclical behavior in good times, as periods of high revenue
growth result in a similar behavior for expenditures. However, due
to the big weight of personal expenditures and salary rigidity,
downturns that result in lower revenues are not followed by similar
drops in expenditures.
Sao Paulo reports moderate control over expenditure growth, with
sound margins. Operating margins averaged 11.9% in the 2019-2023
period. The state is current on its payroll bill and has no
significant delays for the payment of suppliers. Operating
expenditure CAGR registered a negative 1% in real terms between
2018-2023, which was within the state's operating revenues
performance with a CAGR of negative 0.6% in the same period.
As per the local fiscal framework, Sao Paulo pursues a current
savings ratio of at least 10%. In May 2024, the state issued a
decree with fiscal adjustment measures that will affect the 2025
budget law called "São Paulo na Direção Certa". The decree
mandates an assessment of tax exemptions and includes an
expenditure review.
Expenditure Adjustability: 'Weaker'
Fitch evaluates this factor as 'Weaker' due to budget rigidity and
the limited ability to lower expenditures.
Brazilian local governments suffer from a fairly rigid cost
structure, driving this factor to 'Weaker'. As per the Brazilian
Constitution, there is low affordability of expenditure reduction,
especially for the payroll bill and pensions. As a result, whenever
there is an unpredictable reduction in revenues, operating
expenditure does not follow automatically.
For the State of Sao Paulo, personal expenditures corresponded to
44.6% of total expenditure in 2023. This item has very limited
flexibility for adjustments given salary rigidity and the limited
ability to manage human resources or pensions. Transfers to
municipalities amounted to 20.9% of total expenditures and are
mandated by the constitution.
Other operating expenditures amounted to 23.6% of total
expenditures in 2023 and has some flexibility for adjustments, but
is still limited by constitutional mandates on health and
education. Lastly, capex represented 6.3% of total expenditures in
2023 and 5.5% on average, between 2019 and 2023. Historically,
Brazilian LRGs have often relied on cutting investments when facing
a more challenging economic scenario.
Liabilities & Liquidity Robustness: 'Midrange'
Fitch evaluates this factor as 'Midrange' due to the state's
relative easier access to new lending and the robust subnational
framework for debt.
The Brazilian credit market for subnational governments is rather
limited and highly controlled by the federal government. LRGs often
opt for new loans with federal guarantees, which are only granted
to subnationals rated 'A' or 'B' under the National Treasury's
ability to pay assessment, or capacidade de pagamento (CAPAG), a
criteria assessing three indicators: indebtedness, current savings
and liquidity. Within this limited market, the State of Sao Paulo
has relatively easier access to new loans given the strength of its
economy.
There is a moderate national framework for debt and liquidity
management since there are prudent borrowing limits and
restrictions on loan types. Sao Paulo does not present maturity
concentration. External debt corresponded to 8.2% of direct debt as
of YE 2023, with no relevant maturity concentration. Debt directly
owed to the federal government represented 86% of total debt in
December 2023 or BRL272.5 billion.
Under the Fiscal Responsibility Law of 2000, Brazilian LRGs must
comply with indebtedness limits. Consolidated net debt for states
cannot exceed 2x (200%) of net current revenue. The State of Sao
Paulo reported a debt ratio of 127.9% as of YE 2023, according to
the National Treasury's calculations. The law sets limits for
guarantees at 32% of net current revenue. Sao Paulo reported
guarantees to state-owned companies of 2.15% of net current revenue
in 2023.
There is moderate off-balance-sheet risk stemming from the pension
system, which is a burden for most Brazilian LRGs, especially for
states given a mandate over education and public security. Another
relevant contingent liability refers to the payment of judicial
claims, or "precatorios". The National Congress determined
subnational governments must fully amortize such liabilities until
2029.
Liabilities & Liquidity Flexibility: 'Midrange'
Fitch evaluates this factor as 'Midrange' due to adequate cash in
the last three-years.
A framework exists for providing emergency liquidity support from
the federal government via the granting of extended maturity over
the prevalent federal debt portion. Fitch assesses the entity's
available liquidity to differentiate between 'Weaker' and
'Midrange' for liabilities and liquidity flexibility.
The Brazilian National Treasury analyzes the liquidity rate for
LRGs to assess which entities qualify for federal government
guarantees (Capacidade de Pagamento or CAPAG), which is measured by
the LRGs' short-term financial obligation to net cash.
The federal government's threshold to rate this ratio 'A' is 100%.
Fitch has set a threshold of 100% for the average of the last three
years (2021-2023 year-end) and for the last year-end results
available (December 2023), which would result in a 'Midrange'
assessment for this factor.
Sao Paulo reported a three-year average liquidity ratio of 64.5%.
As of December 2023, the metric reached 42.3%, corroborating with
the 'Midrange' assessment.
Debt Sustainability: 'a category'
Debt Sustainability is assessed at 'a'. Fitch's rating case
forward-looking scenario indicates that the payback ratio (net
adjusted debt to operating balance), the primary metric of the debt
sustainability assessment, will reach an average of 8.8x for the
2026-2028 period, which is aligned with a 'aa' assessment.
The actual debt service coverage ratio (ADSCR), the secondary
metric, is projected at an average of 1.1x for 2026-2028, aligned
with a 'bb' assessment. Fiscal debt burden is projected at 80% for
the same period. Fitch applies an override to overall debt
sustainability considering that the secondary metric is
significantly weaker than the primary metric.
Debt metrics improved slightly from the previous annual review on
the back of stronger operating margins in 2023, better prospects
for tax collection in 2024 and the state's commitment to fiscal
adjustment measures. The payback ratio improved to 8.8x from 9.3x,
which is borderline between a 'aa' and 'a' category. Nonetheless,
despite the improvement in the primary metric, the overall debt
sustainability assessment was stable at 'a' considering an override
between the primary and secondary metrics.
DERIVATION SUMMARY
The State of Sao Paulo's ratings reflect the combination of a 'Low
Midrange' risk profile and an 'a' debt sustainability assessment
under Fitch's rating case scenario. The SCP, positioned at 'bb-',
also reflects the comparison with national and international peers.
The state's IDRs benefit from a one-notch uplift from its SCP
through intergovernmental finance support. Sao Paulo's national
scale rating is mapped at AAA(bra) following a national peer
comparison.
KEY ASSUMPTIONS
Risk Profile: 'Low Midrange'
Revenue Robustness: 'Midrange'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Midrange'
Expenditure Adjustability: 'Weaker'
Liabilities and Liquidity Robustness: 'Midrange'
Liabilities and Liquidity Flexibility: 'Midrange'
Debt sustainability: 'a'
Support (Budget Loans): '1'
Support (Ad Hoc): 'N/A'
Asymmetric Risk: 'N/A'
Rating Cap (LT IDR): 'N/A'
Rating Cap (LT LC IDR) 'N/A'
Rating Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a "through-the-cycle" scenario, which
incorporates a combination of revenue, cost and financial risk
stresses. It is based on 2019-2023 figures and 2024-2028 projected
ratios. The key assumptions for the scenario include:
- Yoy 4.5% increase in operating revenue on average in 2024-2028;
- Yoy 5.2% increase in tax revenue on average in 2024-2028;
- Yoy 4.9% increase in operating expenditure on average in
2024-2028;
- Net capital balance of - BRL 15,326 million on average in
2024-2028;
- Cost of debt: 5.2% on average in 2024-2028
Quantitative assumptions - Sovereign Related
Figures as per Fitch's sovereign actual for [2023] and forecast for
[2024-2028], respectively (no weights and changes since the last
review are included as none of these assumptions was material to
the rating action).
Liquidity and Debt Structure
Net adjusted debt totaled BRL286.5 billion as of YE 2023 and
considers unrestricted cash availabilities of BRL40.5 billion.
Foreign currency debt corresponds to 8.2% of direct debt, while 86%
consists of intergovernmental debt related to the legacy of the
debt restructuring program of the 1990s.
As of 2023, Sao Paulo reported a significant increase in
intergovernmental debt, which was related to the monetary
adjustment factor of 8.97% applied by the National Treasury.
Monetary adjustments were larger than principal payments, leading
to a BRL16.1 billion increase in intergovernmental debt. The state
had benefited from ICMS compensation through a debt service
discount. Part of the compensation must be paid back and will
reflect in the stock of intergovernmental debt in 2024.
Issuer Profile
The State of Sao Paulo, Brazil, is classified by Fitch as a Type B
local and regional government, which is required to cover debt
service from cash flow on an annual basis. Sao Paulo is the most
populous Brazilian state, with approximately 44.4 million people.
It is also the strongest state economy, accounting for
approximately 30% of national GDP.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A negative rating action on Brazil's IDR would lead to a
corresponding rating action on the State of Sao Paulo given that
its ratings are uplifted to the sovereign level through
intergovernmental finance support.
The State of Sao Paulo's IDRs would be downgraded if its enhanced
payback ratio is projected above 9x and its enhanced actual debt
service coverage ratio is projected below 1.5x, which Fitch views
as unlikely.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A positive rating action on Brazil's IDR could lead to a
corresponding rating action on the State of Sao Paulo given that
its ratings are uplifted to the sovereign level through
intergovernmental finance support.
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The ratings of the State of Sao Paulo are uplifted to the sovereign
level through intergovernmental finance support.
Entity/Debt Rating Prior
----------- ------ -----
Sao Paulo,
State of 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)
===========================
C A Y M A N I S L A N D S
===========================
ARADA SUKUK 2: Fitch Assigns 'BB-' Final Rating on Unsec. Notes
---------------------------------------------------------------
Fitch Ratings has assigned Arada Developments LLC's (Arada,
B+/Stable) trust certificate issuance programme a final rating of
'BB-'. The programme is issued through the trustee, Arada Sukuk 2
Limited (ASL2). The final rating is in line with Arada's senior
unsecured rating of 'BB-'. The Recovery Rating is 'RR3'. Fitch also
assigned a rating of 'BB-' to the recent drawdown of USD400 million
8.00% maturing in June 2029.
In its capacity as trustee, ASL2 is incorporated in the Cayman
Islands as a limited liability company for the sole purpose of
issuing the sukuk notes. The Law Debenture Trust Corporation p.l.c.
is acting as the delegate of the trustee, while Aljada Developments
LLC and Masaar Developments LLC (wholly-owned subsidiaries of
Arada) are the sellers and Arada is the obligor, lessee, buyer and
service agent. Arada is the obligor, lessee, and servicing agent.
According to the programme documentation, proceeds will be used for
general corporate purposes and repaying Arada's existing debt.
KEY RATING DRIVERS
The sukuk's programme's rating is derived from Arada's Long-Term
IDR. This reflects Fitch's view that a default of the senior
unsecured obligations would reflect a default of Arada, in
accordance with Fitch's rating definitions. Fitch has given no
consideration to any underlying assets or collateral provided, as
the agency believes that the trustee's ability to satisfy payments
due on the trust certificates will ultimately depend on Arada
satisfying its unsecured payment obligations to the trustee under
the transaction documents.
In addition to Arada ensuring repayments by ASL2, the company would
be required to ensure full and timely repayment of ASL2's
obligations, encompassing Arada's various roles and obligations
especially, but not limited to, the below features:
- Under the lease agreement, murabaha agreement and the service
agency agreement, the rental due and the murabaha instalment
payments will fund periodic amounts payable by the trustee for the
relevant trust certificates
- On any dissolution or Arada event (which includes a default on
obligations), the aggregate amounts of deferred sale price then
outstanding will become immediately due and payable; and the
trustee will have the right under the purchase undertaking to
require Arada, as the obligor, to purchase all of its rights,
title, interests, benefits and entitlements, present and future,
in, to and under the relevant lease assets as payment of its
relevant exercise price.
- Both the exercise price payable by Arada under the purchase
undertaking and its outstanding deferred sale price payable under
the murabaha agreement are intended to fund the dissolution amount
payable by the trustee under the relevant trust certificates, which
should equal the outstanding face amount of the trust certificates
and unpaid periodic distributions amounts.
- In a total loss event or partial loss event (unless the relevant
lease assets have been replaced by Arada), or if there is a
shortfall from the insurance proceeds, Arada undertakes to pay the
total loss or the partial loss shortfall amount. As the servicing
agent, Arada will irrevocably undertake to ensure that the insured
amount relating to each loss event will at all times be at least
equal to the full reinstatement value. If the servicing agent is
not in compliance with the obligation to insure the assets against
total and partial loss event, it will immediately deliver a written
notice to the trustee and the delegate of the non-compliance and
this will constitute an Arada event.
If a total loss event occurs with respect to the lease assets,
where the relevant lease assets are replaced in accordance with the
servicing agency agreement, then the certificate holders could only
receive part of the periodic distribution amount, within a maximum
of 60 days, that will be paid in the next periodical distribution
date.
Arada's payment obligations under the service agency agreement,
purchase undertaking and the murabaha agreement will constitute its
present and future direct, unconditional, unsubordinated and
unsecured obligations and at all times rank at least equally with
its other outstanding present and future unsecured and
unsubordinated obligations.
- The programe documents have a tangible asset ratio (defined as
each series' lease assets/aggregate of their value and the deferred
sale price outstanding) of more than 50%. If the ratio falls to or
below 50%, but above 33%, the servicing agent will take steps (in
consultation with the Shari'a advisor) required to restore it to
more than 50%. If the ratio falls below 33% (a tangibility event),
the trust certificates will be delisted and each holder will have
the right to require the redemption of all or any of its trust
certificates.
Fitch expects Arada to maintain the tangible asset ratio above 50%
through the life of any trust certificates issued under the
programme. The obligor has a material base of unencumbered tangible
assets, mainly comprising land plots in Sharjah, that will be
initially earmarked for the programme, but other assets may also be
deemed eligible later on, if necessary. Arada's asset base is
sufficient to support the trust certificate programme.
The programme documentation includes a negative pledge,
cross-default provisions and restrictive covenants including debt
limitations and interest coverage. Some of the transaction
documents will be governed by English law and others by the laws of
the Emirate of Sharjah and to the extent applicable in the Emirate
of Sharjah, the federal laws of the UAE.
Fitch does not express an opinion on whether the relevant
transaction documents are enforceable under any applicable law.
However, Fitch's rating on the trust certificates reflects the
agency's belief that Arada would stand behind its obligations.
Fitch does not express an opinion on the trust certificates'
compliance with sharia principles when assigning ratings to the
certificates to be issued.
Good Recovery Estimate: Fitch applies a one-notch uplift to the
senior unsecured rating from the IDR. The recovery estimate uses a
liquidation approach, mainly supported by the attributable value of
work in progress and investment properties, to which Fitch applies
a 50% discount. As Arada's IDR is 'B+', the Recovery Rating is
capped at 'RR3', resulting in a senior unsecured rating of
'BB-'/RR3.
DERIVATION SUMMARY
The issuance ratings are derived from Arada's Long-Term IDR and are
in line with its senior unsecured rating.
RATING SENSITIVITIES
ASL2's Rating
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- The senior unsecured rating would not be upgraded if Arada's IDR
was upgraded to 'BB-'
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- The rating could be downgraded if Arada's Long-Term IDR was
downgraded
- Adverse changes to the roles and obligations of Arada under the
sukuk's structure and documents
Arada's IDR
Factors That Could, Individually or Collectively, Lead To Positive
Rating Action/Upgrade
- Positive free cash flow (FCF) generation on a sustained basis
- Sustained improvement in financial metrics leading to gross
debt/EBITDA below 3.5x
- Improved corporate governance structure
- Reduced execution risk
- Improved liquidity position
Factors That Could, Individually Or Collectively, Lead To Negative
Rating Action/Downgrade
- Change in government support, weakening Arada's business and
financial profiles
- Gross debt/EBITDA above 4.5x
- Liquidity score sustained below 1x
- Negative FCF on a sustained basis
- Overall softening of Sharjah's real estate market resulting in
low pre-sales levels and delayed project launches
LIQUIDITY AND DEBT STRUCTURE
Liquidity Remains Tight: At 31 December 2023, Arada had AED1.1
billion of unrestricted cash on the balance sheet. Fitch expects
the company to meet upcoming maturities of AED775 million in 2024.
Fitch maintains a negative FCF forecast, reflecting working capital
outflows as well as capex deployment and dividends distributions,
keeping liquidity ratio below 1.0x. However, Fitch expects the
company to issue additional equity and new unsecured debt, which
will significantly improve liquidity.
ISSUER PROFILE
Arada is a master-plan community developer currently focusing on
the Emirate of Sharjah in the UAE.
DATE OF RELEVANT COMMITTEE
04 June 2024
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Fitch's latest quarterly Global Corporates Macro and Sector
Forecasts data file which aggregates key data points used in its
credit analysis. Fitch's macroeconomic forecasts, commodity price
assumptions, default rate forecasts, sector key performance
indicators and sector-level forecasts are among the data items
included.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Arada Sukuk 2
Limited
senior unsecured LT BB- New Rating RR3
senior unsecured LT BB- New Rating RR3 BB-(EXP)
DEER INVESTMENT: Fitch Alters Outlook on 'B-' IDR to Negative
-------------------------------------------------------------
Fitch Ratings has revised the Outlook on Deer Investment Holdings
Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) to
Negative from Stable, and affirmed the Long-Term IDR at 'B-'.
The Outlook revision to Negative is due to uncertainty about the
company's pace of deleveraging and narrowing liquidity buffer.
Fitch continues to expect Deer to start deleveraging in 2024,
albeit at a slower pace than previously thought, but this will
hinge on Deer successfully executing its strategy to meaningfully
improve EBITDA generation and reduce the rate of cash burn. Fitch
currently estimates liquidity is sufficient to cover a decreasing
shortfall in Fitch-adjusted free cash flow (FCF), which includes
net interest expense. However, Fitch could consider taking negative
rating action if FCF does not trend towards positive by 2025.
KEY RATING DRIVERS
Slow Deleveraging Pace: Fitch expects deleveraging will start in
2024, but at a slower pace than previously expected. Deer could
remain over-levered for a longer period after weaker operating
performance and rising net debt caused EBITDA leverage to remain
high at above 10x in 2023, lowering its rating headroom. Leverage
is above that of many peers in the 'B' rating category, and while
Fitch forecasts leverage to trend below 7x by around 2026, any
further delay in deleveraging could result in a downgrade.
Lower Liquidity Buffer: Deer's liquidity buffer narrowed in 2023
due to negative FCF, but Fitch thinks liquidity should be adequate
to cover near-term obligations. The company added Chinese
yuan-denominated bank debt in 2023 to supplement liquidity, but
Deer has a committed USD75 million revolving credit facility (RCF)
that remains unutilised. The RCF is sufficient to cover Fitch's
expectation of narrowing cash outflow and any short-term debt that
is not rolled over. There is no immediate refinancing risk as the
term loan B (TLB) represents the majority of debt and is due
starting 2029.
Narrowing Negative FCF: Fitch assumes negative FCF will narrow in
2024, but there is uncertainty on when FCF would trend towards
positive. Hedging has reduced volatility in the TLB benchmark rate,
but interest costs remain persistently high and Deer does not yet
have sufficient financial flexibility to cover other costs like
capex. Positive FCF would reduce the reliance on additional debt to
close liquidity gaps and prevent further deterioration in the
liquidity buffer.
Rebound in Revenue: Fitch expects revenue growth to resume in 2024
on more stable performance of customers. Revenue at Deer's main
operating subsidiary, HCP Global Limited, was hurt by weak
sell-through in makeup and skin care by its top customer, Estee
Lauder, but the company was able to expand its product coverage and
wallet share at other key customers like L'Oreal. The pipeline of
new award wins has been growing and this tends to indicate strong
future revenue, although there could still be variation in order
timing and the extent of replenishment orders.
Profitability to Improve: Fitch thinks profitability may improve
more meaningfully in 2024. EBITDA margin only widened marginally in
2023, but Fitch expects higher capacity utilisation, completion of
overseas production ramp-up, and cheaper raw material costs can
support gross margin expansion. In addition, a lack of one-off
costs incurred in 2023 should also support better margin. Fitch
expects EBITDA margin to trend towards 20%-21% in 2024-2025.
Niche Market Leader: HCP is the largest APAC manufacturer of rigid
packaging for beauty and skincare products and the second-largest
globally. It has a share of around 5% in the fragmented market,
with the top-five manufacturers making up less than 20% of market
share. Fitch expects HCP's market position to be supported by high
entry barriers and long-term relationships with key customers. New
entrants must set up production facilities and pass a rigorous
qualification process before becoming global suppliers for beauty
brands.
DERIVATION SUMMARY
In comparison with peers in the 'B' rating category, Deer has a
smaller scale and a more limited and cyclical product range than
Titan Holdings II B.V. (B+/Stable), a European metal food can
producer. Deer's financial profile is also weaker, with higher
leverage and weaker FCF generation.
Deer's credit profile is similar to Ardagh Metal Packaging S.A.
(AMP; B-/Negative, SCP: b), where weaker recent operating
performance has resulted in delayed deleveraging and sustained
negative FCF. However, AMP's business profile justifies its SCP, as
it is one of the leading metal beverage can producers globally.
Deer compares favourably to AMP's parent Ardagh Group S.A. (CCC),
which is constrained by excessive refinancing risk related to
material debt maturities in 2026 and an unsustainable debt
structure at over 10x in 2024-2025. Deer does not have immediate
debt maturity until 2029 and is expected to deleverage, albeit at a
slow pace.
KEY ASSUMPTIONS
- Revenue to grow by 8% in 2024, moderating to mid single-digit
growth by 2026
- EBITDA margin of 20%-21% in 2024-2027
- Capex intensity of 4%-5% in 2024-2027
- No dividends paid
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Upgrade:
- Sustained negative free cash flow through to 2025
- EBITDA interest coverage sustained below 1.5x
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- The Outlook could be revised to Stable if the negative
sensitivities are not met
LIQUIDITY AND DEBT STRUCTURE
Lower Liquidity: Fitch assesses the liquidity buffer reduced in
2023, with the net debt balance increasing. The undrawn committed
USD75 million RCF is still available as of May 2024 and should be
sufficient to cover the short-term debt balance of USD26 million
and narrowing FCF deficits. However, the liquidity buffer may not
be adequate if FCF does not trend towards neutral within the next
two years.
ISSUER PROFILE
Deer is an investment vehicle set up by Carlyle to acquire HCP. The
acquisition was completed in August 2022.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Fitch's latest quarterly Global Corporates Macro and Sector
Forecasts data file which aggregates key data points used in its
credit analysis. Fitch's macroeconomic forecasts, commodity price
assumptions, default rate forecasts, sector key performance
indicators and sector-level forecasts are among the data items
included.
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
----------- ------ -----
Deer Investment
Holdings Limited LT IDR B- Affirmed B-
===================
C O S T A R I C A
===================
COSTA RICA: 3-Year Extended Deal Under EFF was OK on March 1
------------------------------------------------------------
The Executive Board of the International Monetary Fund (IMF)
completed the sixth review of Costa Rica's economic reform program
supported by the IMF's extended arrangement under the Extended Fund
Facility (EFF). Completion of this review makes available SDR
206.23 million (about US$ 272 million), bringing total
disbursements under the arrangement to SDR 1237.49 million (about
US$ 1.6 billion).
The Executive Board also concluded the third review under Costa
Rica's Resilience and Sustainability Facility (RSF) arrangement.
Completion of this assessment makes available SDR 184.7 million
(about US$ 243 million), bringing total disbursements under the
arrangement to SDR 554.10 million (about US$ 730 million).
Costa Rica's three-year extended arrangement under the EFF was
approved on March 1, 2021, in the amount of SDR 1.23749 billion
(US$1.778 billion or 335 percent of quota in the IMF at the time of
approval of the arrangement, see Press Release No. 21/53) and was
extended by five months on March 25, 2022 (see Press Release No.
22/91).
Costa Rica's RSF arrangement was approved on November 14, 2022, in
the amount of SDR 554.1 million (about US$ 725 million or 150
percent of quota in the IMF at the time of approval of the
arrangement, see Press Release No. 22/382). Its duration coincides
with the period remaining under the EFF, disbursements under the
RSF being contingent on the conclusion of relevant reviews under
the EFF and implementation of scheduled reform measures. The sixth
EFF and third RSF reviews mark the final reviews of both
arrangements. Costa Rica is the first country to complete an RSF
arrangement, doing so having implemented all twelve targeted reform
measures.
Following the Executive Board's discussion on Costa Rica, Mr. Kenji
Okamura, Deputy Managing Director and Acting Chair of the Board,
issued the following statement:
"The completion of the reviews marks the successful conclusion of
an ambitious, multi-year, multi-dimensional reform program, under
which the authorities demonstrated strong commitment to a
broad-based homegrown reform program that is helping reshape Costa
Rica's economy and advance the climate agenda. Growth has remained
strong and inflation is rising to the lower end of the central
bank's tolerance range. Formal employment, private-sector wages and
poverty are all moving in the right direction.
"The central bank has appropriately lowered the policy rate and its
data-dependent, forward-looking approach should continue to help
inflation rise back to target. It is critical to institutionalize
the central bank's autonomy as well as clarify its mandate and
decision-making processes through comprehensive legal reforms as
soon as circumstances are propitious.
"The supervisory authorities should continue to enhance their
toolkits to strengthen financial sector resilience. A recently
submitted bill to amend the bank resolution and deposit insurance
law would help strengthen the crisis management framework and the
financial safety net and should be approved quickly.
"Following another strong fiscal performance, the authorities' firm
commitment to further spending-driven consolidation will reduce
debt and interest burdens and create space for capital and social
investment. To simultaneously achieve these objectives, legislative
changes that erode revenue should be avoided and the coverage of
the fiscal rule should be maintained.
"Keeping the momentum of structural reforms is critical to
achieving greener and more inclusive growth. The new social
assistance single window is increasing the quality of social
spending. It is critical for the public employment bill to be fully
implemented by all affected institutions. Reforms supported by the
RSF arrangement are helping to reduce risks to prospective balance
of payments stability and aiding ongoing efforts to attract
private-sector finance."
===================================
D O M I N I C A N R E P U B L I C
===================================
[*] DOMINICAN REPUBLIC: CNZFE OKs 15 New Companies in Free Zones
----------------------------------------------------------------
Dominican Today reports that the National Council of Free Export
Zones (CNZFE) has approved installation permits for 15 new
companies in free zones, with a projected investment exceeding
RD$496 million.
Daniel Liranzo, the executive director of the CNZFE, announced that
these new companies are expected to create 1,512 direct jobs and
generate over US$13.9 million in foreign currency, according to
Dominican Today. The companies' activities will span call center
services, tobacco processing and cigarette manufacturing, dental
floss assembly, and technical and computer support for software,
the report notes.
The new companies will be established in various provinces across
the country, including Santiago, Santo Domingo, Peravia, San
Cristóbal, San Pedro de Macorís, and Valverde, the report
relays.
During the CNZFE's ordinary session, the contract to commence
operations at the La Cuaba Industrial Free Trade Zone park was
signed, the report discloses.
The session was led by the Minister of Industry, Commerce, and
MSMEs, Víctor-Ito Bisonó, and attended by Vice Minister of Free
Zones of the MICM, Johannes Kelner; Vice Minister of Finance,
Martín Zapata; Claudia Pellerano, vice president of Adozona;
Yarisol López, deputy director of the CNZFE, and other public and
private sector representatives, 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
=============
NCB FINANCIAL: Sells Stake in Bermuda Bank
------------------------------------------
David Rose at Jamaica Observer reports that NCB Financial Group
Limited (NCBFG) has entered into a share purchase agreement to sell
30.20 per cent of its ownership in Bermuda-based Clarien Group
Limited to Cornerstone Financial Holdings Limited (CFHL), its
second divestment announcement this year.
The sale is set to reduce NCBFG's stake from 50.10 per cent to
19.90 per cent in Clarien Group, which is the parent company of
Clarien Bank Limited, a Bermudan bank involved in community
banking, investment management and trust administration, according
to Jamaica Observer. The deal would represent CFHL's first
international acquisition following its 75 per cent acquisition of
Barita Investments Limited for $3.08 billion in August 2018, the
report notes.
"NCB Financial Group Limited's decision to sell its controlling
interest in Clarien Group is a strategic move aligned with our
ongoing efforts to reallocate capital effectively. We are pleased
to remain a shareholder with a 19.90 per cent stake in Clarien
Group Limited, and we look forward to continuing our collaboration
with existing shareholder Edmund Gibbons Limited (EGL), while
anticipating new majority shareholder, Cornerstone who will hold
approximately 70.10 per cent," shared Robert Almeida, CEO of NCBFG,
from the press release, the report relays.
NCBFG's 2023 audited financials revealed that Clarien Group grew
revenue by 23 per cent to $13.79 billion and effectively doubled
net profit from $867.60 million to $1.72 billion, the report
discloses. This meant that Clarien would have contributed $1.72
billion out of $15.34 billion in consolidated net profit for the
NCB Financial Group, the report relays.
Clarien's net assets also improved 14 per cent to $16.97 billion
with cash and cash equivalents at $20.01 billion, the report notes.
NCBFG's carrying value for Clarien at the end of September 2023
was $9.98 billion. The subsidiary is yet to pay a dividend since
being acquired, the report relays. Clarien Bank's board is chaired
by Almeida with NCB Jamaica directors Bruce Bowen and Sandra
Glasgow also on the 10-member board, the report notes. Ian Truran
is the CEO of Clarien Bank.
"We presented 2024 to 2026 to the board of directors of Clarien and
the financial forecast for that same period was presented and was
approved, and it does incorporate a dividend payout ratio of an
approved level to maintain its growth aspirations, demonstrate
financial resilience, and provide a return on investment to
shareholders," said Clarien Bank CEO Ian Truran at NCBFG's February
9 AGM, the report discloses.
NCBFG acquired its original stake in December 2017 for $4.15
billion which resulted in it recording a gain of $4.39 billion from
the transaction, the report relays. NCBFG's 2018 audited
financials stated, "An offer was made to discount to book value
after taking into account the Bermudan economy, the company's loan
portfolio, real estate market and additional capital requirements
imposed by the Bermudan Monetary Authority."
The NCBFG acquisition also coincided with Portland Private Equity
Limited acquiring 17.92 per cent in Clarien Group, the report
discloses. Portland's website states that the Clarien Group stake
was acquired for US$10 million under Portland Caribbean Fund II.
Edmund Gibbons Limited retained a 31.98 per cent stake in Clarien
Group, the report relays.
According to the disclosure, NCBFG would provide transition support
after the sale to Cornerstone through its subsidiaries, the report
notes. It was also stated that the reduced interest wouldn't have
a material impact to future earnings or the asset base of NCBFG
after the sale, the report relays. If NCBFG maintains significant
influence on Clarien's board after the sale, it could still be
considered an associate company rather than just a regular
investment, the report relays.
The announcement of the Clarien sale comes a week after NCBFG
closed its additional public offering, which brought in $2.5
billion compared to the $5.097 billion it had set for its initial
target, the report says. NCBFG, the standalone holding company,
has $36.84 billion in current debt that matures between October
2023 to September 2024, the report discloses.
Although the sale price nor additional details were added in the
release, NCBFG's subsidiary NCB Global Holdings had sold 451,612
shares (0.195 per cent) of Guardian Holdings Limited (GHL) in June
2021 for $746.96, the report says. This left its interest in GHL
at 61.77 per cent, the report relays.
NCBFG had announced in February that it was selling NCB (Cayman)
Limited, a class A bank in the Cayman Islands, to Berkeley
Financial Holdings Limited, the report notes. NCB Cayman had
US$252.44 million (J$38.89 billion) in total assets and US$64.16
million (J$9.88 billion) in equity/capital as at September 30,
2023. Its net profit decreased 44 per cent from US$7.22 million to
US$4.07 million (J$627.18 million) according to its pillar 3
reports, the report relays. NCBFG extracted $5.41 billion from NCB
(Cayman) in its first quarter, the report discloses.
Cornerstone Financial Holding and Cornerstone United Holdings
Jamaica Limited are holding companies that own Barita Investments
and Cornerstone Trust & Merchant Bank Limited, the report relays.
The Jamaican financial subsidiaries are set to be reorganized under
a financial holding company called Barita Financial Group Limited
at a later date, the report relays. Both firms are the brainchild
of founder and CEO Paul Simpson.
While both companies are private, Cornerstone Financial recently
received a Caricris rating of CariBBB+ and CariBBB recently with
the notes highlighting Productive Active Solutions Limited being
the largest shareholder with a 42.2 per cent, the report notes.
Cornerstone Financial was noted to have had a 56 per cent dip in
total income to US$41.30 million with net profit declining by 65
per cent to US$26.39 million in its September 2022 financial year,
the report relays.
However, Cornerstone Financial's total assets were up 12 per cent
to US$778.66 million with the tangible net worth improving six per
cent to US$480.31 million, the report discloses. Cornerstone's
debt pile jumped by 106 per cent from US$104.25 million to
US$215.68 million which also resulted in debt to total assets
moving to 27.7 per cent, the report says. Cornerstone Financial's
main asset is its Barita shares which are accounted for using the
share price rather than through the consolidation method on its
financial statements, the report notes. Cornerstone Financial held
919,404,592 ordinary shares or 75.3371 per cent of Barita
Investments up to March 31, the report relays.
Cornerstone Financial was seeking US$12 million (J$1.86 billion)
and $2 billion (US$12.74 million) in debt financing during February
to secure further investments which included acquisitions, the
report relays. Cornerstone Financial received a $1.50 billion
(US$9.69 billion) dividend from Barita on February 2. Cornerstone
Merchant Bank was recently searching for a supervisor for fintech
business operations, the report notes.
NCBFG chairman and majority shareholder Michael Lee-Chin is the
godfather of Simpson's daughter, the report relays. MJR Real
Estate Holdings Limited, a Barita managed asset, purchased the
250-acre Reggae Beach in St Mary from Lee-Chin in May 2022, the
report discloses. Lee-Chin's AIC Holdings Limited also sold 22.71
million NCBFG shares in June 2023 to 294 Inc, a company connected
to Simpson, and 16 million NCBFG shares to Barita Investments in
June 2023, the report notes.
NCBFG's stock price bounced up three per cent to $59.47 following a
dip where the stock traded at an intraday low of $56, the report
relays. NCBFG's JSE price is down 10 per cent in 2024, which
leaves it with a market capitalisation of $151.38 billion, the
report notes. The Trinidad & Tobago Stock Exchange price bounced
up 12 per cent to TT$3.10 (J$70.93) which leaves it down nine per
cent in 2023, the report adds.
About NCB Financial
NCB Financial Group Limited is a financial services conglomerate
operating in the Caribbean region and headquartered in Kingston,
Jamaica. NCB Financial Group Limited is the parent company of the
National Commercial Bank of Jamaica.
As recently reported in the Troubled Company Reporter-Latin
America, Jamaica Observer relayed that the NCB Financial Group is
yet to complete negotiations with its former president and CEO
Patrick Hylton and his deputy, Dennis Cohen, over the settlement in
relation to their separation from the company. At the centre of
the negotiations is the size of the separation package for the two
men who served the financial conglomerate for the last two decades,
including what value the company should compensate the men for
shares they were asked to surrender in July 2021, according to
Jamaica Observer. Both men were asked to surrender 95.1 million
shares valued at $13.8 billion at the time with the understanding
that, over time, they would recoup that value, the report noted.
Some were recouped in compensation for both men to the tune of $3.6
billion in the last financial year, the report relayed.
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T R I N I D A D A N D T O B A G O
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HERITAGE PETROLEUM: Moody's Alters Outlook on 'Ba3' CFR to Stable
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Moody's Ratings has affirmed the Ba3 Corporate Family Rating and
the Ba3 rating of the backed senior secured notes of Heritage
Petroleum Company Limited. At the same time, Moody's has affirmed
the b2 Baseline Credit Assessment (BCA), and changed the outlook to
stable from positive.
This rating action follows Moody's Ratings affirmation of the
Government of Trinidad & Tobago's ("TT" or "Trinidad & Tobago")
rating of Ba2 and outlook change to stable from positive.
RATINGS RATIONALE
The ratings affirmation and change in Heritage's outlook were
triggered primarily by the rating action on Trinidad & Tobago, the
ultimate support provider of the company, and also considers that
Heritage has maintained credit metrics in line with its rating
category.
Heritage's b2 BCA reflects the company's small oil and gas
production and asset base; adequate reserve life although
relatively small in scale compared to peers; and developing
corporate governance. The company's BCA is constrained by the fact
that in order to maintain an annual reserve replacement rate of
above 100% to protect cash generation, Heritage will have to manage
its operating costs prudently and work with Joint Venture partners
to grow efficiently. Additionally, Heritage's execution risk is
high because of the operating challenges inherent to underground
natural resources, besides the capital intensity and the commodity
nature of the oil and gas E&P business.
Heritage's Ba3 ratings take into consideration Moody's joint
default analysis, which includes the rating agency's assumptions of
high government support in case of need and high default
correlation between Heritage and the Government of Trinidad &
Tobago (Ba2 stable), resulting in two notches of uplift from the
company's b2 BCA.
Heritage is 100% owned by Trinidad Petroleum Holdings Limited
(TPHL), which in turn is 100% owned by the Government of Trinidad &
Tobago. TPHL and its main subsidiary, Heritage, are strategically
important to the energy sector in Trinidad & Tobago as demonstrated
by its relevant contribution to the government's fiscal budget and
dominant market share of the country's crude oil production. The
government directly appoints all board members. Given the strong
linkages among the Government and Heritage, governance risk is a
consideration in the rating action.
Heritage counts on adequate liquidity. Heritage had $191 million in
cash in December 2023, and Moody's expects it to generate enough
cash flow from operations through 2024 to cover interest payments
of about $92 million, debt amortization of $57 million and capital
spending of around $174 million in the period. Heritage has a
comfortable debt maturity profile, with sizable maturities starting
in 2029.
The stable outlook on Heritage ratings is based on Moody's view
that the company's operating and financial profile will remain
strong and protective of its credit metrics.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade Heritage's ratings if the company manages to
increase its production and reserve life efficiently, with a
minimal deterioration in its financial metrics. Specifically, if
Heritage's total debt/proved and developed reserves remains
consistently below $6 per barrel of oil (bbl), EBITDA/interest
expenses remains above 5x on a sustained basis. Additionally, an
upgrade of the Government of Trinidad & Tobago's rating would
provide an uplift to the company's ratings.
Heritage's ratings could be downgraded if the company's retained
cash flow (funds from operations less dividends)/total debt
declines to around 15%; its interest coverage, measured as
EBITDA/interest expense, falls below 2.5x, with limited prospects
of a quick turnaround or if its liquidity deteriorates, coupled
with a slow execution of its growth plans. In addition, Heritage's
ratings could be downgraded because of a decreased likelihood that
the Government of Trinidad & Tobago would provide extraordinary
support to the company, or as a result of a downgrade of the
government's Ba2 rating.
The methodologies used in these ratings were Independent
Exploration and Production published in December 2022.
*********
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