Fitch: Macroeconomic Challenges to Threaten Brazilian Infrastructure Corporates

OREANDA-NEWS. Fitch Ratings believes the credit quality of several Brazilian infrastructure corporates is threatened due to the higher cost of long-term financing within the country. The infrastructure sector has faced challenges financing large capex projects forecasted for the next three years. This scenario has pressured infrastructure companies' debt service coverage and their ability to pay down these lines, which ultimately increases refinancing risks. Current and future projects could potentially require additional equity from sponsors, which would deteriorate the liquidity position of the holding companies of these infrastructure groups. Companies most likely to be at risk are groups that are in an expansionary phase versus more mature groups.

The country's annual basic interest rate (Selic) has rapidly increased to the current 14.25%, which is 325 b.p. higher than September 2014 and 525 b.p. higher than September 2013. Additionally, the NTN treasure note (Nota do Tesouro Nacional), risk free reference rate for inflation-linked bonds, increased by about 300 p.p. during the last 12 months, given the economic and political uncertainties within the country. These factors have impacted the financing costs of sponsors and infrastructure projects. Infrastructure debentures issued under Law 12.431, created to finance infrastructure projects, are not allowed to be prepaid or refinanced. The high interest rate environment has resulted in companies opting to issue short-term debt to finance its projects, in order to avoid the higher financing costs associated with long-term financing. However, these shorter term credit lines are expected to challenge the industry's cash flow as projects mature and the credit lines come due.

Fitch believes the ratings of the holdings of more incipient groups such as Invepar ('A(bra)'/'BB'/Stable Outlook) are more vulnerable to negative rating actions if alternative sources of funds are not raised. The cash flow of their ramp-up projects is dependent on increased volumes and should be pressured by debt service outflows, while they mature. More mature groups such as CCR ('AA+(bra)'/Stable Outlook) and Triunfo ('A+(bra)'/Stable Outlook), are better protected against increasing debt service outflows as operating cash flows and, consequently, dividends to the holdings are more robust. Furthermore, additional capex requirements for the projects of more mature infrastructure groups will likely be immaterial. Alternative capital sources at the holding level, such as asset sales or equity injections from shareholders, aiming to support projects' additional needs and to reduce the holding debt level, are key for the holding`s liquidity and reducing refinancing risks, and is expected to be positive from ratings perspective.