Brazil slowdown: 'Fallen Angels’

Finantial Times
may 6, 2015

Companies face junk credit rating downgrade amid corruption scandal

A darkening gloom hangs over Brazil’s economy. Analysts are steadily downgrading their growth projections for the economy this year, while inflation expectations creep ever upwards. 

As evidence that the strain is being felt by businesses, a report from Moody’s Investors Service shows Brazil overtaking Russia as home to the emerging world’s largest number of potential “fallen angels” — companies at risk of losing their investment grade credit rating and falling into speculative grade, or junk.

The central bank’s latest weekly survey of market economists shows Brazil’s gross domestic product shrinking 1.18 per cent this year and consumer prices rising 8.26 per cent. 

Consumer and business confidence is lower than even at the depths of the global financial crisis of 2008-09. 

A multibillion dollar corruption scandal at Petrobrás, the government-controlled oil company, threatens to contaminate business life and the government faces an increasingly unhelpful Congress as it struggles to balance its books using recessionary measures in mid recession.

Hanging over the economy is the threat of electricity rationing, an issue that all but brought down a previous government in 2002. 

The threat has been averted for now by renewed rainfall after a drought — most of Brazil’s generation comes from hydroelectric plants — but it will resurface if, as expected, the economy picks up in the fourth quarter of 2015, just as water levels in the country’s reservoirs are likely to be at renewed lows.

Rationing of an indirect sort is already in place: electricity prices for many consumers have risen more than 40 per cent this year as the government cut subsidies and turned on more expensive thermal plants to make up for lost hydro power. Consumers are cutting back.

So it is unsurprising that the biggest group of new potential fallen angels in Moody’s latest quarterly review of its “Crossover Zone” consists of Brazilian electricity utilities. 

Moody’s classifies as potential fallen angels any companies rated Baa3, its lowest investment grade, with a negative outlook or on review for downgrade. 

Its Crossover Zone also includes potential rising stars: those rated Ba1, its highest speculative grade, with a positive outlook or on review for upgrade.

Brazil’s five new potential fallen angels, see chart above, join three other Brazilian companies already in the Crossover Zone at risk of downgrade: Eletrobrás, the country’s biggest power generator and transmitter; Braskem, a petrochemicals company; and Sabesp, the São Paulo state water utility.

In its report, Moody’s singles out Brazil for broader concern. “We downgraded 10 Brazilian corporates in the first quarter of 2015,” it notes, “as compared to no upgrades. Corruption allegations and the consequent tighter liquidity . . . were directly and indirectly responsible for five downgrades. 

The balance were related to lower commodity prices and company specific operating challenges amid a worsening economy, rising inflation, corruption scandals, growing unrest, and even the threats of water and energy rationing. There are nine issuers with negative outlooks, which could result in further downgrades over the next 12-18 months.”

There is consolation of a sort for Brazil: it only outranks Russia in the Moody’s Crossover Zone because 18 Russian companies fell out of it during the quarter and went deeper into junk, all related to the downgrade of Russia’s sovereign rating.

But that will be cold comfort. As Moody’s notes, the outlook for many Brazilian companies in 2015 is increasingly uncertain.

fonte: FT