risk remains high but most debt maturities come due only in 2020
TRANSCRIPT
CORPORATES
SECTOR IN-DEPTH2 May 2016
Contact
Veronica Amendola 54-11-5129-2610VP-Senior [email protected]
Barbara Mattos, CFA 55-11-3043-7357VP-Sr Credit [email protected]
Sandra Beltran [email protected]
Alonso Sanchez 52-55-1253-5706VP-Senior [email protected]
Marianna Waltz, CFA 55-11-3043-7309MD-Corporate [email protected]
Paloma San Valentin 212-553-4111Managing Director– US and AmericasCorporate [email protected]
Corporate Liquidity – Peru
Risk Remains High But Most DebtMaturities Come Due Only in 2020» Liquidity risk remains steady but high for Peruvian non-financial companies,
with high funding risk for 71% of the 14 companies we studied in this report—slightly above our last review in mid-2015. Only 29% of Peruvian companies havelow liquidity risk today, with enough cash and free cash flow to cover short-term debtand long-term maturities, operating expenses and regular capital spending throughmid-2017 (see Exhibit 1). Since our previous report, lower commodity prices haveincreased funding risk and liquidity pressure for a few players including Compania deMinas Buenaventura and Volcan Compania Minera S.A.A. y Subsidiarias.
» Ten of the 14 Peruvian companies we studied have high liquidity risk today, buttheir cash and equivalents together covered total short-term debt by 1.4x—amoderate improvement from a year earlier. Mining companies such as SouthernCopper, Minsur and Hochschild Mining all have at least adequate liquidity todayand we expect no significant policy changes in Peru's mining sector after presidentialelection that could impact them. Liquidity will be tighter for Ferreycorp, a distributorof construction and mining equipment, and cement producer Unacem, as well asfood producers Alicorp and Gloria Foods JORB S.A (Gloria Foods), and Home retailerMaestro Peru.
» The ten Peruvian companies we found with high liquidity risk at the end of 2015all had manageable maturity profiles with no significant refinancing peaks until2020. Peruvian companies have refinanced short-term debt and made investment plansusing financing from the bond market—both domestic and foreign—and from bankloans. Peruvian corporate debt issuance reached $2 billion in 2015—only a slight increasefrom $1.8 billion in 2014.
» The depreciation of Peru’s nuevo sol hurts the credit quality of the companies westudied, since 85% of their unhedged total debt is denominated in US dollars,while they generate most of their income in the local currency. A weaker localcurrency increases companies’ cost of servicing debt, as well as leverage. Expansionsabroad, dollarized commodity prices and export-heavy business models all ease thisrisk, particularly for mining companies, but retail and food companies such as Alicorp,InRetail Consumer and Maestro focus mainly on the domestic market. The weaknuevo sol benefits the miners, which generate export revenues in dollars, but have farless costs and debt denominated in dollars.
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2 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
About this report
This report summarizes the liquidity risk of the 14 Peruvian non-financial and non-utility companies we rated as of 30 April 2016. We define thedegree of liquidity risk by looking at a company’s cash needs over a 24-month period, from 1 January 2016 until 31 December 2017, against itsavailable cash sources.
Cash needs include estimates of operating uses and short-term debt maturities. Maturities of interest-bearing debt are those reported as of 31December 2015. We estimate available funds based on assumptions of each company’s revenue growth, margins and cash flow generation afterplanned capital spending and dividend, in addition to committed bank facilities.
In our liquidity analysis we also take into consideration financial covenants and exposure to foreign-currency risk. The 2014 statistics reflect thehistorical data for the same pool of companies along with methodological refinements, so could differ from those cited in previous liquidity studies.Other reports in this series discuss corporate liquidity in Argentina, Brazil, Chile and Mexico.
Peruvian Companies Face Slower Growth at Home and Tougher External Environment
Liquidity risk remains steady but high for Peruvian non-financial companies, with high funding risk for 71% of the 14 companies westudied in this report—slightly above our last review in mid-2015. Only 29% of Peruvian companies have low liquidity risk today, withenough cash and free cash flow to cover short-term debt and long-term maturities, operating expenses and regular capital spendingthrough mid-2017 (see Exhibit 1). Since our previous report, lower commodity prices have increased funding risk and liquidity pressurefor a few players, including Buenaventura (Ba2 review for downgrade) and Volcan (B2 stable).
Exhibit 1
Peruvian Corporates’ Exposure to Funding Risk
Source: Moody's Investors Service
We typically define exposure to funding risk as low for Latin American companies with sufficient cash, free cash flow and committedcredit facilities to cover more than 150% of debt maturities over the next 24 months; medium if liquidity sources are sufficient to covermore than 150% of maturing debt over the next 12 months, but not the next 24 months; and high if liquidity sources will cover lessthan 150% of debt maturities over the next 12 months. A few companies in this analysis have significant amounts of debt due in theshort term, negative free cash flow generation, or limited cash to address upcoming maturities.
Peru’s real GDP growth bottomed at 2.4% in 2014, but reached an inflection point early in 2015 and recovered to 3.3% last year. Thegrowth has weakened in relation to previous years due to lower commodity prices worldwide, economic deceleration in China and
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3 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
persistent financial market volatility. However, we expect Peru to grow around 4.0% in 2016 and 4.5% in 2017 propelled by mining andinfrastructure investments.
Mining is Peru’s economy engine and represents an important share of GDP and 60% of Peru’s exports. According to the Energy andMining Peruvian Ministry, the mining projects in portfolio amount for approximately USD 58 million. After June 2016 presidentialelections, the elected candidate will continue to be challenged by social conflicts that have halted these large-scale projects and willneed to improve business sentiment through some structural changes in order to drive investments in Peru again.
Peru's credit profile has remained resilient to the economic slowdown and external headwinds due to its strong fundamentals and byusing the fiscal space created during the commodity boom. Nevertheless, maintaining creditworthiness will depend on fiscal disciplineand reinvigorating the reform agenda.
Low Commodity Prices and Weaker Growth Keep Corporate Liquidity Under StrainTen of the 14 Peruvian companies we studied have high liquidity risk today, with either insufficient cash to cover short-term debtmaturities, negative free cash flow or a lack of committed credit facilities to face their maturities through mid-2018. Yet their cash andequivalents together covered total short-term debt by 1.4x—a moderate improvement compared to 1.0x coverage a year earlier (seeExhibit 2). Most of these companies have good market access, support from parent entities or strong operations. Overall, agriculturaland fishing companies have the weakest cushions, and liquidity will also generally be tight through at least 2017 for mining companies.
Exhibit 2
Cash Position and Short-Term Debt Coverage for Peruvian Companies
Source: Moody's Investors Service
Food producer Alicorp (Baa3 stable) saw derivatives losses in 2015 from mark-to-market calls , with further losses unlikely in 2016, andthe acquisition of Latin American cereal producer Global Alimentos, working capital needs and margin compression in Argentina allfurther strained Alicorp's liquidity. Still, 36% of Alicorp's debt comes due in the short term. Gloria Foods (Baa3 stable) spent heavily oncapital investments in 2014, and its near-term liquidity will remain relatively tight, requiring external funding. However, Gloria has asignificant amount of approved, uncommitted bank lines, and the company will likely adjust its dividend payout within its strong creditprofile today.
Home retailer Maestro Peru's (Ba2 stable) weak liquidity profile, with just PEN43 million in cash at the end of December 2015, stemsfrom its high capital spending. But its new owner, Falabella Peru (unrated), will likely provide support for Maestro's existing debtobligations.
Plastics packaging company San Miguel Industrias PET (Ba2 negative) has an adequate debt profile, with most of its debt maturingonly after 2019. We expect that San Miguel will continue generating positive free cash flow, while capital spending will remain low.However, its very low cash balance of $12 million at the end of 2015 increases its liquidity risk, providing virtually no cushion in case ofneed.
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4 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
Mining Companies Face Continued challenging industry environment and Cash Flow Stress
We expect no significant changes in Peru's economic policy as Veronika Mendoza, presidential candidate who advocated a strong shiftin the policy framework to change Peru's mining-based economic model, came in third place and was left out of the run-off which willbe held on June 2016. Upcoming presidential election, in which Keiko Fujimori, a congresswoman and daughter of ex-president AlbertoFujimori, will face economist Pedro Pablo Kuczynski ensures policy continuity as both are perceived as market friendly. We also expectno significant policy changes in the country's mining sector, an important engine of growth, as it is likely that the new president willbe committed to supporting the industry's continued development. Still, we can expect social conflicts to continue, which in the pastyears have delayed various mining projects.
With low commodity prices, liquidity has strained for the mining industry in Peru as companies faced weaker cash flow from operationsduring the year, and some of them were carrying out large projects to expand production capacity. The market downturn has notaffected all companies equally, though.
Some companies in the industry have adequate liquidity profiles. Southern Copper's (SCC, Baa2 negative) liquidity is supported by cashand short-term investments of $879 million as of 31 December 2015, and $1.3 billion of cash from operations for the full year 2015.Higher capital spending—about $1.5 billion in 2016 and $1.6 billion in 2017—along with dividend payments will likely result in negativefree cash flow in the next few years, but we expect that SCC will manage its dividend payments in line with cash generation levels andcapital spending needs in order to maintain appropriate liquidity without committed bank facilities.
Minsur (Ba3 negative) has strong liquidity, and we expect that Minsur's high cash balance—roughly $590 million in cash as of 31December 2015—and its cash from operations (although weaker than previous years) will cover its financial obligations, as well asoperational and capital spending through mid-to-late 2017. A $450 million issuance of bonds due 2024 represents more than 80% ofMinsur's outstanding debt.
Historically, Buenaventura has reported strong liquidity based on the maintenance of large cash balances relative to short-termdebt. However, with a large capital spending program and metal prices declining, Buenaventura's cash generation capacity has comeunder strain. The company has relied increasingly on short-term debt, of which its $79 million cash balance as of 31 December 2015would cover about 25% of the debt due in 2016. We recognize though, that dividends received from Yanacocha early in 2016 havealready brought a relief to the company's liquidity, and further liability management should help extend debt maturities and improvethe company's liquidity profile. Although Buenaventura will see the benefit of higher production volumes already in 2016 and 2017,operational performance and recovery in earnings may take longer given the challenging market environment.
Hochschild Mining (B2 stable) reported an acceptable cash balance of $84 million as of December 2015, and about $435 million intotal debt—22% short-term and 78% long-term, most of it bonds. In the fourth quarter of 2015, Hochschild issued $100 million inequity rights, using the proceeds to reduce total debt by $105 million. As a consequence, Hochschild's leverage will improve for 2016overall, with an additional benefit from the Inmaculada's project to Hoschild's EBITDA since the commencement of production in theend of second quarter of 2015. The company's adequate debt maturity profile supports its liquidity, with its 2021 bonds representingabout 67% of its $435 million total debt, and assumes improvements in cash generation from Inmaculada.
Volcan's liquidity was tight as of 31 December 2015, with $192 million of cash and equivalents, covering about 97% of its $199 millionin short-term debt. Otherwise Volcan's debt profile is quite comfortable, with bonds due in 2022 representing 71% of total debt.Volcan's cash generation should remain acceptable amid its reduced capital spending needs, its careful management of dividendpayments, and new lower-cost projects contributing further to earnings. But liquidity risk will increase if base metals and preciousmetals prices further deteriorate. We expect that the company will maintain at least $100 million cash on hands for operatingpurposes.
Fishing and Agriculture Sectors Grapple With Seasonal ChangesPeru's fishing and agriculture companies contend with climate conditions, seasonal cash flow and volatile commodity prices. Fishingcompanies typically fund their working capital needs with uncommitted, inventory-based short-term bank facilities, but their cash flowalso depends on the size of the anchovy catch, which Peru's ministry of production can limit.
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5 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
According to Peru's central bank, the fishing sector grew 9.1% in the first three quarters of 2015, compared to a 9.5% contractionduring the same period in 2014. The central bank anticipates a 1.2% contraction in the fishing sector in 2016, based on a moderate-to-strong El Niño event that would affect climate conditions off the coast, reducing the anchovy population during the first of 2016's twofishing seasons. But by 2017, the sector should return to nearly 28% growth from the reduced levels of 2016.
Pesquera Exalmar (B3 negative) typically funds its working capital needs with USD190 million in uncommitted credit facilities fromlocal and international banks, 82% of it unused today. Although Exalmar's $2 million cash balance at the end of 2015 covered onlyabout 6% of total debt maturing in 2016, most of the short-term debt is secured by inventory and receivables. Exalmar signed a $20million, two-year committed credit facility that strengthens its liquidity profile, and Exalmar has no major debt amortizations due until2020.
Camposol's (Caa1 stable) weak liquidity reflects the agricultural producer's low cash balance of just $ 27 million at the end ofDecember 2015, with about $46 million in short-term debt maturing in 2016 and stressed free cash flow generation likely to benegative during 2016 and 2017. But most of Camposol's short-term debt is for working capital, and in the past Camposol hasrefinanced with any of several banks. Camposol's working capital needs usually peak during the third quarter.
Liquidity Tight for Ferreycorp and UnacemFerreycorp (Ba1 stable), a distributor of construction and mining equipment, had just PEN233 million in cash at the end of December2015, with PEN762 million debt maturing in 2016, but improved its liquidity when it sold its rental fleet to Caterpillar (A2 stable) inlate 2014. Ferreycorp's liquidity will stay tight through 2016 but the company has historically reduced inventory and met short-termdebt obligations during market downturns. Ferreycorp also has very strong support from Caterpillar, based on their strong longtimecommercial and financial relationship.
Liquidity remains tight for cement producer Union Andina de Cementos (Unacem, Ba2 stable), with just PEN 269 million in cash atthe end of 2015 and PEN603 million in debt maturing in 2016, followed by around PEN 1,454 million maturing in 2017-2018. Unacemplans to pay most of the maturities with internal cash generation, once it fully consolidates cash generated from its Ecuador assets on alast-12-month basis. Unacem's relationships with banks make it easier to refinance its debt when necessary.
Most of Peru’s corporate debt obligations are well in the future
The ten Peruvian companies we found with high liquidity risk at the end of 2015 all had manageable maturity profiles with nosignificant refinancing peaks until 2020 (see Exhibit 3). Peruvian companies have refinanced short-term debt and made investmentplans using financing from the bond market—both domestic and foreign—and from bank loans. Peruvian corporate debt issuancereached $2 billion in 2015—only a slight increase from $1.8 billion in 2014.
Exhibit 3
Debt Maturities for Rated Peruvian Non-Financial Companies
Source: Moody's Investors Service; companies' financial statements
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6 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
In 2015, Alicorp, Copeinca (unrated), InRetail Consumer (Ba1 stable) and Maestro repurchased a total of $1.02 billion of their bondsissued in foreign markets, financing these buybacks through the issuance of new securities in the local and international markets.Alicorp issued PEN500 million in bonds in the local market. Although investment-grade companies have more conservative maturityprofiles, even Peru’s speculative-grade companies today face most of their debt maturities starting only in 2020 (see Exhibit 4).
Exhibit 4
Most Maturities for Speculative-Grade Peruvian Companies Due Only Starting in 2020
Source: Moody's Investors Service; companies' financial statements
Bonds and notes represent about two-thirds of total debt for the 14 companies in this study, with the rest comprised of bank debt andobligations with other financial institutions (see Exhibit 5). Bonds and notes represent the bulk of the debt for both investment-gradeand speculative-grade companies, and their long maturity profiles give them comfortable longer-term liquidity cushion.
Exhibit 5
Debt Structure for Rated Peruvian Non-Financial Companies by Instrument
Source: Moody's Investors Service; companies' financial statements
Foreign Exchange Intensifies for Retail and Related IndustriesThe depreciation of Peru’s nuevo sol hurts Peruvian companies’ credit rating overall, since 75% of their total debt—88% of which isunhedged against currency fluctuations—is denominated in US dollars, while they generate most of their income in the local currency.A weaker local currency increases companies’ cost of servicing debt, as well as leverage.
Peru’s retailers have focused in recent years mainly on the domestic market issuing foreign-denominated debt in recent years tointernational lenders who favored Peru’s investment-grade sovereign rating, solid economic environment, and an economy dependenton dollar-denominated commodities.
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7 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
To reduce their exposure to dollar-denominated debt, some Peruvian companies have recently tried to increase their stakes oflocal debt, but have found only limited funding availability in local currency. Food producer Alicorp has refinanced part of its dollar-denominated debt to reduce its foreign-currency exposure, but retailers such as InRetail and Maestro still have high exposures, withmost debt denominated in dollars even while they still generate revenues entirely in nuevo soles.
On the other hand, the weak nuevo sol benefits the mining companies, whose export revenues are linked to the US dollar, and about60% of their costs are dollar-denominated. Peruvian mining companies also benefit from higher volumes and efficiencies coming fromrecently completed investments—even if this benefit may not be enough to compensate for the low commodity prices, particularly forbase metals.
Gloria and San Miguel benefit from Peru’s strong economy, but face dollar-denominated costs, and lack the natural currency hedges ofcommodity-exporting companies. Gloria has only 6% of its debt denominated in dollars, about 18% of its total costs denominated indollars. Resin represents around 80% of total raw material needs for San Miguel, but the company typically passes any higher costs toits customers, thereby protecting its operating margins.
Unacem’s pricing mechanisms reduce its exposure to local currency depreciation. About 68% of Unacem’s debt and 24% of its EBITDAare dollar-denominated, but Unacem will likely maintain enough cash to service its dollar-denominated debt and comply with itscovenants. We consider companies at low risk of a covenant breach if their most recent metrics gave them more than 100% cushionfor their covenant tests, medium risk if they have a cushion of 50%-100%, and high risk with less than 50% leeway.
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8 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
Appendix: Rating Universe of Peruvian Companies, as of April 2016
Exhibit 6
Source: Moody's Investors Service
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9 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
Moody's Related Research
Sector In-Depth Reports:
» Corporate Liquidity – Argentina: Funding Risk Remains High But New Government Improves Credit Prospects, 2 May 2016
» Corporate Liquidity – Brazil: Funding Becomes More Challenging and Liquidity Risk Increases, 2 May 2016
» Corporate Liquidity – Chile: Strong Credit Quality Overall Offsets Liquidity Risk, 2 May 2016
» Corporate Liquidity – Mexico: Liquidity Proves Resilient Even as Economic Environment Grows Tougher, 2 May 2016
» Latin America: Global Headwinds Pressure Credit Conditions in Region, 2 September 2015
» Corporate Liquidity in Peru: Liquidity Risk Increasing, but Most Maturities are Still Far in the Future, 13 May 2015
Outlooks:
» Moody's Latin America 2016 Outlook (Presentation), 6 April 2016
» Non-Financial Corporates – Latin America: 2016 Outlook - Global and Regional Stresses Strain Credit Quality (Presentation), 3 December 2015
» Oil & Gas, Steel & Base Metals, and Pulp & Paper – Latin America: 2016 Outlook - Commodity Price Weakness Prolongs Pain for Oil, Steel, Metals
(Presentation), 3 December 2015
» Construction and Homebuilding – Latin America: 2016 Outlook – Homebuilding Improves in Mexico; Brazil Construction Stays Weak (Presentation), 3
December 2015
» Protein and Sugar-Ethanol - Latin America: 2016 Outlook – Exports Benefit Protein; Ethanol Prices Up and Sugar Deficit Looms, 3 December 2015
» Consumer, Retail and Telecom – Latin America: 2016 Outlook – Stable Conditions Overall Despite Economic Stress in Brazil, 3 December 2015
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.
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10 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
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11 2 May 2016 Corporate Liquidity – Peru: Risk Remains High But Most Debt Maturities Come Due Only in 2020
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Veronica Amendola 54-11-5129-2610VP-Senior [email protected]
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