The 0-for-27 Tally on Debt Ratings Seen Worsening: Brazil Credit

The 0-for-27 Tally on Debt Ratings Seen Worsening: Brazil Credit 

by Filipe Pacheco Ney Hayashi Cruz

1:43 AM BRT  February 25, 2015


(Bloomberg) — To appreciate just how bad things are in Brazil, consider this: its companies have suffered 27 rating downgrades in the first two months of the year.

The number of upgrades? Zero.

The tally illustrates how Brazil’s tottering economy and the widening bribery probe that pushed Petroleo Brasileiro SA into junk has eroded companies’ creditworthiness. From commodity producers to construction companies, virtually no industry has been spared. The last time Brazil had such a rash of downgrades was in 1999, when the nation was on the brink of default.

“This is a truly unique moment in terms of debilitation and weak finances,” Joe Bormann, a managing director for Latin America corporate finance at Fitch Ratings, said from Chicago. “We expect downgrades to outpace upgrades in what could be a record this year. Prospects are not good at all.”

Moody’s Investors Service cut Petrobras to junk Tuesday by two steps to Ba2, or two levels below investment grade, according to a statement. The state-controlled oil producer has yet to determine how much it overpaid suppliers that allegedly paid bribes in return for contracts.

Fitch Ratings and Standard & Poor’s rate the company at their lowest investment grades.

‘Increasing Concern’

The rating action “reflects increasing concern about corruption investigations and liquidity pressures,” Moody’s analyst Nymia de Almeida said in the statement.

More pain is also potentially in store for Petrobras as Moody’s said the company’s ratings remain on review for downgrade.

Of the 82 Brazilian companies rated by Fitch, 21 have a negative outlook on their grades, Bormann said.

The string of rating cuts has helped trigger a surge in borrowing costs for Brazilian companies, with yields on dollar-denominated bonds climbing 0.5 percentage point this year to 7.6 percent, according to JPMorgan Chase & Co.

That compares with an average drop of 0.04 percentage point for corporate debt across developing nations.

In a sign that the prospects for Brazil’s economy are getting worse, analysts in a central bank survey now predict gross domestic product will decrease 0.5 percent this year.

That would be the deepest contraction since the economy shrank 4.2 percent in 1990, according to data compiled by the International Monetary Fund.

Construction companies from OAS SA to Andrade Gutierrez SA have had their ratings chopped after being implicated in the Petrobras corruption investigation.

Sugar producers including Grupo Virgolino de Oliveira SA and Vale SA, the world’s biggest iron-ore producer, have also suffered downgrades.

‘Bad Scenario’

The rating cuts this year compare with 46 over the same period in 1999, when Brazil’s sovereign rating was cut to four levels below junk by Standard & Poor’s as Russia’s financial crisis prompted investors to pull money from emerging markets.

The real sank 32.8 percent that year, helping stoke inflation of 8.9 percent.

“Now Brazil is a completely different country, much more integrated in international markets,” Marcelo Lima, a fixed-income trading manager at INTL FCStone Securities Inc., said from Miami. “We recognize the reasons for such a bad scenario as being much more internal than external.”

Brazil itself is in danger of having its debt ratings lowered. Moody’s put Brazil’s on negative outlook in September, six months after Standard & Poor’s cut the nation to the lowest investment grade. A downgrade would lead to reductions in the grades of state-controlled companies from banks to utilities.

“I don’t think the trend for downgrades is close to being over,” FCStone’s Lima said. “The scenario is bad and shouldn’t get any better any time soon.”

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