Brazilian corporates face strong challenges from COVID-19

Brazilian corporates face strong challenges from COVID-19

Capital Markets Economy & Policy Fixed Income Brazil Coronavirus

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More than a quarter of Brazilian companies rated by Fitch Ratings are highly sensitive to the financial impact of the coronavirus outbreak, due to low liquidity, currency risk and limited ability to take on debt to ride out the pandemic, the firm said in a new report.

Fitch said 35 out of 125 issuers in Brazil have “higher relative rating vulnerability” due to their  liquidity position, sector risk, foreign currency exposure and/or leverage vulnerability compared with the downgrade trigger.

“Refinancing risk should increase for many companies in this report,” Fitch said, adding it “expects material revenue loss for the most affected sectors, greater selectivity in the credit supply in general, and for a smaller group, higher risk due to high exposure to the strong devaluation of the Brazilian real.”

“Brazil had low GDP growth and high unemployment before the coronavirus outbreak, which will further pressure major macroeconomic indicators and economic activity,” the report said.

Goldman Sachs puts real GDP down 3.4% in 2020.

SECTOR BREAKDOWN
Fitch classified around
6% of Brazilian corporates as operating in a high risk industry, such as airlines, lodging and oil & gas, and 18% as industries having above-average exposure to the impact of coronavirus, such as auto parts, fleet and car rental, and metals and mining.

Among the impacts of the global pandemic mentioned in the report are falling oil prices, declining tourism and business travel, closed stores, severe demand contraction, slower industrial activity and disrupted supply chains.

Fitch also broke down the companies in its portfolio by liquidity, FX risk, and the companies’ rating headroom, which is the
percentage reduction each companys EBITDA could bear before it hit its leverage downgrade trigger, as measured by net debt/EBITDA.

“Twenty-three percent of issuers…have low liquidity, while 6% are exposed to high-risk sectors, 8% are exposed to high FX risk and 16% have no rating headroom to reduce EBITDA, as leverage ratios are already above the downgrade trigger,” the report said.

The ratings agency assigned risk categories of A, B or C to all 125 issuers. Of these, three issuers equivalent to 2% of Fitch’s credit portfolio - retailer Restoque and airlines Gol and Azul - were in the highest risk category.

The authors stated that all three have already been downgraded: Restoque to BBB-(bra) with a negative outlook from A-(bra) and Gol and Azul to B with a negative outlook from B+ and BB-, respectively.

Top-rated issuers with AAA(bra) and AA(bra) rating represented 37% of companies within Risk Categories A and B, while issuers rated in the A(bra) category and below represented 29% and 34%, respectively, the report stated.

Separately, S&P Global Ratings revised down its outlook for Brazil's economy to stable from positive, due to the negative impact of COVID-19.

"We expect Brazil's GDP growth and fiscal performance to suffer in 2020 due to the pandemic and extraordinary government spending, before gradual economic recovery and fiscal consolidation resumes. We also assume slower-than-expected progress on the reform agenda to address structural fiscal vulnerabilities and to improve low medium-term GDP growth prospects," the rating agency said in a statement.