(Editor's Note: Our "Risky Credits" series focuses on corporate issuers rated 'CCC+' and lower in emerging markets. Because many defaults are of companies in these categories, ratings with negative outlooks or on CreditWatch negative are even more important to monitor.)
Key Takeaways
- The pace of defaults in emerging markets remained slower than in the U.S. and Europe. The number of issuers rated 'CCC+' and lower stabilized and remained at 15 as of June 2024, compared with March 2024. Risky credits now represent 10.5% of the speculative-grade universe.
- Downward transition risk--consisting of issuers rated 'CCC+' and lower, with a negative outlook or on CreditWatch negative--reduced further to 27% in the second quarter, from 33% in the first quarter.
- Financing conditions continued to improve in the second quarter as secondary market yields for 'CCC' rated bonds decreased by 200 basis points (bps). However, corporate spreads will be sensitive to geopolitical risk and political uncertainty in the second half of 2024.
- The maturity wall for rated debt will peak in 2027 and is mainly concentrated in Latin America.
The number of emerging market issuers rated 'CCC+' and lower remained at 15 in the second quarter of 2024 (see chart 1). Issuers rated 'CCC+' and lower accounted for 10.5% of the speculative-grade universe as of June 2024, in line with March 2024 numbers.
- Chilean telecommunications company Wom S.A. filed for Chapter 11 bankruptcy in April 2024 and was therefore downgraded to 'D' from 'CCC', following delays in securing the refinancing of its $348 million senior unsecured notes that were due in November 2024. Management worked on different refinancing options for about a year but high borrowing costs, combined with limited investor appetite, prevented the company from obtaining favorable refinancing conditions, while its liquidity continued to deteriorate.
- Brazilian telecommunications company Oi S.A. rejoined the risky credits cohort after we raised the rating to 'CCC-' from 'D' and placed it on CreditWatch positive. The upgrade followed the court approval of Oi's judicial reorganization policy. The debt exchanges should be completed by the end of July 2024.
Chart 1
Three of the five companies that defaulted year to date had defaulted before. Since 2008, Brazilian airline Gol Linhas Aéreas Inteligentes S.A. has defaulted three times (in 2016, 2023, and 2024), Chilean casino operator Enjoy S.A. twice (in 2020 and 2024), and Argentine infrastructure management and development company CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. also twice (in 2021 and 2024). The main features of emerging market re-defaulters include low economic value added, low EBITDA interest coverages--which signal business underperformance--and liquidity strains (see "Emerging Market Re-Defaulters' Business Overhaul Plans May Be Falling Short," published July 18, 2024). These factors typically lead to price discounts on bonds. Even though re-defaulters often perform debt exchanges to gain time to turn around their operations, conditions do not tend to improve sufficiently or fast enough.
Emerging markets currently display a lower default rate than developed regions. As of May 2024, the 12-month trailing speculative-grade default rate for emerging markets was 2.0%, compared with 4.9% in Europe and 4.6% in the U.S. (12-month trailing speculative-grade default rates for the U.S. and Europe are through June 30, 2024, and they are preliminary and subject to change).
Negative bias decreased slightly to 27% in the second quarter, from 33% in the first quarter (see chart 2). The change in negative bias resulted from the default of Wom (previously negative outlook) and the addition of Oi (positive outlook) to the risky credits cohort. Three of the four companies with a negative outlook are based in Latin America.
Chart 2
Aggregate debt from issuers rated 'CCC+' and lower slightly increased to $8.5 billion in the second quarter, from $7.2 billion in the first quarter. With $6 billion, Argentina is the emerging market with the highest debt concentration. Most Argentine issuers' debt has a stable outlook (see chart 3). From a sector perspective, oil and gas companies top the list, with a combined $3.2 billion from Argentina-based YPF S.A. and Compania General de Combustibles S.A., both of which have stable outlooks (see chart 4).
Chart 3
Chart 4
Speculative-Grade Issuance Continued To Increase
Speculative-grade issuance reached $5.9 billion in the second quarter. This was 32% higher than in the first quarter and represented the highest amount since the third quarter of 2021 (see chart 5). Issuance benefited from historically low corporate spreads, with the Federal Reserve's E.M. High Yield Index Option-Adjusted Spread decreasing by 30 bps to 392 bps quarter over quarter, markedly below its 10-year average of 609 bps. The decline primarily resulted from tightening corporate yields, with the iBoxx iShares $ High Yield Corporate Bond Index reaching 15.9% as of June 2024, down from 17.9% as of March 2024.
Chart 5
'BB' rated and, to a lesser extent, 'B' rated issuers continue to dominate speculative-grade issuance. We note, however, that the most recent issuance of bonds rated 'CCC+' and lower dates back to November 2021, when speculative-grade yields were tight. We expect financing conditions in emerging markets will be sensitive to geopolitical risk and political uncertainty in the second half of 2024.
The rated debt maturity wall will peak in 2027. 'B-' and lower rated issuers, namely Chinese real estate company Xinhu (BVI) 2018 Holding Co. Ltd. and Brazilian airline Azul S.A., must refinance $900 million by the end of 2024--43% less than at the beginning of this year--and $2.5 billion by the end of 2025 (see chart 6). 90% of the latter debt are located in Latin America. The rated debt maturity wall will peak in 2027 at less than $3 billion. With $1.3 billion, oil and gas companies account for most of the debt maturing over the next 24 months, followed by transportation companies with $1.0 billion (see chart 7).
Chart 6
Chart 7
Risky credits' financials were relatively stable in the second quarter, compared with the first quarter (see charts 8-10). The main drivers of the most significant forecast changes include:
- Hungarian chemical company Nitrogenmuvek Zrt.'s EBITDA will slightly increase in 2024 due to higher sales volumes after negative free operating cash flow (FOCF) in 2023. FOCF turned negative after Hungary's emission trading system (ETS) came into force in October 2023 and the Hungarian government introduced a tax on free allowances for carbon dioxide emissions. Nitrogenmuvek has issued legal challenges against the ETS decree, whose outcome is highly uncertain. We downgraded the company to 'CCC' from 'CCC+' in May 2024, given the heightened refinancing risk associated with Nitrogenmuvek's €200 million senior unsecured notes that mature within a year and represent most of the company's debt. We expect Nitrogenmuvek's leverage will remain very high at about 10x in 2024 and increase further in 2025.
- The telecommunications sector's average debt to EBITDA is highly influenced by Oi. Despite the completion of its asset sales plan, Oi displays negative EBITDA over 2022-2025, given its weak operating performance.
- We expect Argentine utility CAPEX S.A. will consistently reduce its interest burden by 2026, on the basis of a lower overall debt amount. Average EBITDA interest coverage will therefore increase to about 17x in 2026, from below 8x in 2025.
Chart 8
Chart 9
Chart 10
Table 1
| Emerging market issuers rated 'CCC+' and lower | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Industry | Issuer | Rating | Outlook/CreditWatch | Outlook/CreditWatch | Country | Region | ||||||||
| Bank |
Banco De Galicia Y Buenos Aires S.A.U. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Financial institutions |
Operadora de Servicios Mega, S.A. de C.V. SOFOM, E.R. |
CCC- | Negative | Outlook | Mexico | Latin America | ||||||||
| Capital goods |
CLISA-Compania Latinoamericana de Infraestructura & Servicios S.A. |
CCC- | Negative | Outlook | Argentina | Latin America | ||||||||
| Chemicals, packaging, and environmental services |
Nitrogenmuvek Zrt. |
CCC | Negative | Outlook | Hungary | Europe | ||||||||
| Homebuilders/real estate companies |
Kawasan Industri Jababeka Tbk. PT |
CCC+ | Stable | Outlook | Indonesia | Asia-Pacific | ||||||||
| Homebuilders/real estate companies |
Grupo Gicsa S.A.B. de C.V. |
CCC+ | Stable | Outlook | Mexico | Latin America | ||||||||
| Oil and gas exploration and production |
YPF S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Oil and gas exploration and production |
Compania General de Combustibles S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Telecommunications |
Telecom Argentina S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Telecommunications |
Oi S.A. |
CCC- | Positive | CreditWatch | Brazil | Latin America | ||||||||
| Transportation |
Aeropuertos Argentina 2000 S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Transportation |
Investimentos e Participacoes em Infraestrutura S.A. - Invepar |
CCC+ | Negative | Outlook | Brazil | Latin America | ||||||||
| Utility |
Empresa Distribuidora Y Comercializadora Norte S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Utility |
CAPEX S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Utility |
Pampa Energia S.A. |
CCC | Stable | Outlook | Argentina | Latin America | ||||||||
| Data as of June 30, 2024. Emerging markets consist of Latin America: Argentina, Brazil, Chile, Colombia, Peru, and Mexico; Emerging Asia: India, Indonesia, Malaysia, Thailand, Philippines, and Vietnam; Europe, the Middle East, and Africa: Hungary, Poland, Saudi Arabia, South Africa, and Turkiye; and Greater China: China, Hong Kong, Macau, Taiwan, and red chip companies (issuers headquartered in Greater China but incorporated elsewhere). Source: S&P Global Ratings. | ||||||||||||||
Glossary
Negative bias--Percentage of issuers with a negative outlook or ratings on CreditWatch negative.
Related Research
- Emerging Market Re-Defaulters' Business Overhaul Plans May Be Falling Short, July 18, 2024
- Default, Transition, and Recovery: Defaults Drop In June, July 17, 2024
- Emerging Markets Monthly Highlights: Blurring Long-Term Outlook, July 17, 2024
- Risky Credits: External Risks Overshadow Positive Developments In Emerging Markets, May 2, 2024
- Credit FAQ: The Rise of Repeat Defaulters, April 11, 2024
Related Rating Actions
- Oi S.A. Issuer Credit Rating Raised To 'CCC-' From 'D' And Placed On CreditWatch Positive, May 29, 2024
- Nitrogenmuvek Ratings Lowered To 'CCC' On Increasing Refinancing Risk; Outlook Negative, May 28, 2024
- Operadora de Servicios Mega Downgraded To 'CCC-' On Rising Liquidity Pressures; Outlook Negative, May 7, 2024
- Wom S.A. Downgraded To 'D' On Chapter 11 Bankruptcy Filing, April 1, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Luca Rossi, Paris +33 6 2518 9258; luca.rossi@spglobal.com |
| Secondary Contact: | Jose M Perez-Gorozpe, Madrid +34 914233212; jose.perez-gorozpe@spglobal.com |
| Research Contributor: | Nivedita Daiya, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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