Top 20

Transcripción

Top 20

Top 20
Peruvian Companies
Standard&&Poor’s
Poor’s
Standard
Av.
L.N.
Alem
855
3er
Piso
Av. L.N. Alem 855 3er Piso
BuenosAires
AiresC1001AAD
C1001AAD
Buenos
Argentina
Argentina
Tel:
+54
11
4891
2100
Tel: +54 11 4891 2100
[email protected]
[email protected]
www.standardandpoors.com.ar
www.standardandpoors.com.pe
October 2011
Introduction
Dear reader,
Standard & Poor’s Ratings Services is pleased to present “TOP 20 Peruvian Companies” a report focusing
on a selected group of Peruvian entities which we consider to be among those with the best credit quality in
the country. Within the next pages, there is a detailed section on the methodology applied to determine the
selected list of companies.
Over the last five years, Peru’s creditworthiness has steadily improved with rising terms of trade and stable
macroeconomic policies and higher levels of investment that supported growth. Low fiscal deficits or surpluses, proactive debt management, an autonomous central bank with an inflation-targeting regime, a floating exchange rate, strengthening bank supervision, and numerous free trade agreements are some of the key
macroeconomic factors that underpinned the country’s economic performance over the last decade.
Peru’s economic performance has shaped the country’s corporate sector during the last decade. As the
country’s economy, the fate of many of the major corporations is tied to the swings of the global economy,
especially the evolution of commodities in general and metals and minerals in particular. However, prudent
financial policies and cash management have allowed most players to grow and withstand external shocks
improving their creditworthiness through the cycle.
These characteristics will emerge from the individual analyses included in this publication. We have also
included commentaries on the sovereign rating of Peru, the financial system, as well as information on Latin
America and criteria and methodology to provide a broader analytical framework.
We trust that the investor community, both in Peru and overseas, will find this report an important reference
tool that will facilitate investment decisions.
Pablo F. Lutereau
Senior Director
Analytical Manager, Corporate Ratings
Standard & Poor’s
October 2011
Top 20: Peruvian Companies
1
The analyses in this publication are Standard & Poor’s opinions based on limited publicly available information, do not constitute Standard & Poor’s ratings or definitive indications of what
ratings Standard & Poor’s would assign, and are not recommendations to purchase, hold or sell any securities or make any investment decision. Standard & Poor’s will not update, modify
or surveil these analyses.
Table of Contents
Introduction
Selection Criteria and Methodology
Commentaries
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Republic of Peru 8
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Latin America’s Resilience, Recovery, And Consolidation18
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How Vulnerable Are Latin American Corporates To Commodity Prices? A Sensitivity
Analysis25
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Latin America Is Seeing a Rise in Privately Financed Infrastructure Projects32
•
South American Banks’ Should Support Rapid Credit Growth35
•
Will Future Flow Securitizations Help Fund Peru’s Growing Mining Export Industry?40
Selected Financial Data and Credit Statistics
Peer comparison 46
Credit Reports
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Alicorp S.A.A.50
Compañía de Minas Buenaventura S.A.A.52
Corporación Lindley S.A.54
Edegel S.A.A.56
Empresa de Distribución Eléctrica de Lima Norte S.A.A. - EDELNOR58
EnerSur S.A.60
Gloria S.A.62
Luz del Sur S.A.A.64
Minera Barrick Misquichilca S.A.66
Minera Yanacocha S.R.L.68
Minsur S.A.70
Petróleos del Perú – Petroperú S.A.72
Saga Falabella S.A.74
Shoughang Hierro Perú S.A.A.76
Sociedad Minera Cerro Verde S.A.A.78
Supermercados Peruanos S.A.80
Telefónica del Perú S.A.A. 82
Telefónica Móviles S.A.84
Unión de Cervecerías Peruanas Backus y Johnston S.A.A.86
Volcán Compañía Minera S.A.A.88
Understanding Ratings and Definitions
Guide To Credit Rating Essentials92
Glossary Of Financial Ratio Definitions95
Incorporating Adjustments Into The Analytical Process96
Standard & Poor’s Rating Definitions98
Contact List
October 2011
3
Copyright © 2011 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
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Selection Criteria and Methodology
Our selection process encompassed different stages aimed at building a short list of 20 Peruvian companies
with superior credit quality. For that, we scrutinized the key sectors of the Peruvian economy, identifying
those elements that help companies achieve strong business risk profiles, such as size, cost efficiency,
management experience, degree of business integration, geographic and product diversity, etc.
Having identified those companies with good business risk profiles, we centered our analysis on those that
make public disclosure of its financial statements. Among those, we searched for the ones with healthy
financial risk profiles, evidenced by cash flow stability, conservative debt leverage, prudent financial policies,
adequate liquidity and financial flexibility and good access to debt markets.
October 2011
5
Commentaries
October 2011
7
Republic of Peru
Richard Francis, New York (1) 212-438-7348; [email protected];
Sebastián Briozzo, Buenos Aires (54) 11-4891-2125; [email protected]
Current Rating
Sovereign Credit Rating
Foreign Currency
BBB/Stable/A-3
Local Currency
BBB+/Stable/A-2
Major Rating Factors
Strengths:
• High real GDP growth, supported by a significant
rise in investment.
• A low and declining general government debt
burden.
Weaknesses:
• Still-evolving political institutions in the context
of significant economic, social, and ethnic
fragmentation as well as high poverty levels.
• A significant (albeit declining) level of financial
dollarization, with 45% of bank claims on
residents in U.S. dollars as of June 2011.
Rationale
The ratings on the Republic of Peru reflect our
expectation that broad fiscal and monetary policy
continuity under Ollanta Humala’s new government
will support stronger economic policy flexibility
and growth. In July 2011, Mr. Humala—PresidentElect at the time—signaled macroeconomic policy
continuity by reappointing the respected president
of the central bank, Julio Velarde, and appointing
another respected technocrat, Luis Miguel Castilla,
to head the finance ministry.
Since taking office on July 28, the government has
emphasized its goal to promote social inclusion
and has laid out plans to increase social and
infrastructure spending as well as boost public-sector
wages. However, the government has also signaled
its intent to implement these priorities gradually
and within the limits of a prudent fiscal approach
by tying expenditures to increased revenues, partly
from the mining sector. Therefore, assuming a fairly
steady currency, net general government debt to
GDP likely will continue to decline gradually over
the next three years. Although raising taxes on
mining will be a policy priority, Mr. Humala has
stated that keeping the sector reasonably attractive
to investors is critical to economic growth and tax
collection.
The government’s commitment to economic stability
and a positive investment climate support the
ratings on Peru. We believe that these factors likely
will underpin solid growth through 2013 despite
global uncertainties. Peru’s still-evolving political
institutions in the context of significant economic,
social, and ethnic fragmentation—as well as high
poverty levels—continue to constrain the ratings.
The country’s monetary vulnerability is also a
constraint. Peru has a significant (albeit declining)
level of financial dollarization, with 45% of bank
claims on residents in U.S. dollars as of June 2011.
Peru’s diversifying economic structure and high
levels of investment, including foreign direct
investment (FDI), should support the country’s
robust growth prospects over the next three to five
years. Although the country’s net external liability
position was 86% of current account receipts at
year-end 2010, close to 40% of the gross liability
is FDI. Standard & Poor’s Ratings Services expects
that Peru’s net inward FDI will continue to exceed
the current deficit, which we estimate to be 2%-3%
of GDP from 2011-2013.
Our local-currency rating on Peru is one notch
higher than the foreign-currency rating because in
our opinion, the combination of monetary flexibility
and the growing local-currency debt market
provide slightly better capacity to service nuevos
soles-denominated debt issued in the domestic
market. Our ‘A-’ transfer and convertibility (T&C)
assessment reflects our opinion that the likelihood of
the sovereign restricting access to foreign exchange
that Peru-based nonsovereign issuers need for debt
service is moderately lower than the likelihood of
the sovereign defaulting on its foreign-currency
obligations. Although the government has some
foreign-exchange restrictions, they are on the capital
account, and the economy is open to trade.
Outlook
The stable outlook balances Peru’s ongoing success
in attracting gas and mining investment with the
country’s political and external vulnerabilities.
We likely would upgrade Peru if economic growth
outside sectors related to energy and mining
accelerates, dollarization diminishes significantly,
and fiscal performance does not fall victim to
potential political rifts.
Conversely, we could lower the ratings if political
pressures arising fr om the large informal economy,
widespread poverty, and significant income
disparities make the country susceptible to populism.
In our opinion, the government’s ability to address
the underlying causes of its population’s discontent
will be key to the continued improvement of the
government’s creditworthiness.
Table 1 | Peru’s Summary Statistics
—Year ended Dec. 31—
2005 2006
2007
2008
2009 2010
2011e 2012f
2013f
2014f
GDP per capita (US$)
2,848
3,276
3,763
4,400
4,352
5,215
5,596
5,939
6,454
6,966
Real GDP per capita growth (%)
5.5
6.4
7.6
8.6
(0.3)
7.6
5.3
4.8
4.8
4.8
Narrow net external debt/current account receipts (%)
61.1
32.9
11.6
(0.1)
(9.0)
(15.5)
(27.7)
(31.1)
(34.4)
(39.2)
Gross external financing needs/current account receipts +
usable reserves
85.5
78.2
89.5
85.4
72.5
76.7
72.9
72.7
72.8
70.7
Change in general government debt/GDP (%)
(3.9)
(1.8)
(0.9)
2.2
3.6
(1.5)
(1.0)
(0.5)
(0.5)
(0.5)
Net general government debt/GDP (%)
32.4
25.5
19.8
17.9
20.4
15.5
13.1
11.6
10.3
9.0
General government interest paid/general government
revenues (%)
10.3
9.3
8.5
7.4
6.8
5.7
5.1
4.4
3.8
3.3
Domestic claims private nonfinancial public enterprises/
GDP (%)
19.4
17.8
21.0
25.5
25.0
25.1
27.4
27.4
27.4
27.4
CPI growth (%)
1.6
2.0
1.8
5.8
2.9
1.5
3.0
2.5
2.0
2.0
e—Estimate. f—Forecast.
Political Environment: Broad Consensus On
Macroeconomic Policy Amid A Still-Fragile
Political Environment
sector will be a policy priority, President Humala
would like to keep the sector reasonably attractive
to investors, as this is critical for future economic
growth and tax collection.
Maintaining and enhancing stability
In July 2011, Ollanta Humala, President-Elect at
the time, signaled macroeconomic continuity by
reappointing the respected president of the central
bank, Julio Velarde, to his post and appointing
another respected technocrat, Luis Miguel Castilla,
to head the finance ministry. On the fiscal front, the
government has emphasized its goal of promoting
social inclusion while reaffirming its commitment
to keep spending within the limits of a prudent
fiscal policy. The government has laid out plans to
increase social and infrastructure spending as well
as boost public-sector wages, but it has signaled
its intent to implement these initiatives gradually
and tie them to increased revenues, partly from the
mining sector. Although raising taxes on the mining
Growing consensus on the macroeconomic front, but a
lack of debate on reform
There is a stronger consensus on sound
macroeconomic policies across Peru’s political
class than ever before. Most of the political parties
in Congress, including Mr. Humala’s Nationalist
Party, approved a bill strengthening the old Fiscal
Responsibility Law. More than in the past, the
political class in Peru seems to accept the restrictions
that a sound macroeconomic framework imposes
on other areas of public policy. However, the debate
has yet to touch on more fundamental issues,
namely, how to improve the country’s still-weak
political and economic institutions. Social issues—
such as education, health, and justice—have only
October 2011
9
recently gained priority in the government’s political
agenda in the aftermath of the presidential victory
of President Humala. He will seek to balance his
keeping his campaign promises to increase social
spending with maintaining sound macroeconomic
policies and a good investment climate that supports
growth.
There are risks ahead
A decade of high GDP growth has led to higher
employment and purchasing power. Rapidly
increasing levels of consumption in middle-income
areas of Lima further demonstrate this trend. If it
continues, it is likely that economic growth and
social cohesion will sustain each other. However,
despite the government’s intention to boost social
spending, its ability to implement social programs to
date has proven weak, given institutional capacity
constraints. For example, although the government
has sought to reduce income inequalities through
substantial revenue transfers to the poorest regions,
weak local institutions have made it difficult to
increase infrastructure and social spending. Large
transfers of mining revenue to municipalities and
regions have also shown that many of these entities
do not have sufficient expertise to evaluate or
implement projects. In fact, some municipalities in
Peru have high levels of liquid funds that they are
unable to spend.
Economic Prospects: Expectations Are For
Solid Growth Over Next Three Years
Investment is a key driver of economic growth
Over the past two years, there has been a strong
resurgence of domestic investment, particularly
private investment, after a decline in 2009 as a
result of global economic uncertainties. Investment
has rebounded strongly and should reach 28% of
GDP in 2012. A continued high level of investment
is crucial to achieving growth rates higher than
6%, allowing Peru to reduce poverty, which affects
about 30% of its population. Maintaining economic
growth and social stability will depend on rising
employment. Another positive development is that
employment levels, which lagged the economic
expansion at the beginning of the cycle, have grown
more rapidly since mid-2005, in tandem with
increasing domestic demand.
Economic structure: diversification is underway
Peru’s GDP per capita, expected at $5,596 in 2011,
is nearly double the level in 2005 (the year before
President Alan Garcia came to power). Economic
growth will likely reach 6.5% in 2011 and will
likely remain at more than 5.5% from 2012-2014.
Continued high levels of investment, especially in
the mining sector, will largely fuel this growth. FDI
is expected to top $35 billion over the next four
years. As a result of the high level of investment,
we expect that exports will rise by more than 8%
in 2012. Peru’s extended growth trajectory started
with the boost stemming from investment in largescale projects (gas development by Camisea and
other mining projects, for example) and the rise in
commodity prices in late 2002. However, today’s
sources of growth are more diversified. Because of
rising levels of employment and disposable income,
Total FDI was $7.3 billion in 2010. While the
mining and hydrocarbons sectors continue to draw
the largest share of private investment, it has become
more broad based. A number of large private
investments continue—including the second phase
of Camisea, a liquefied natural gas project. Large
mining investments continue as well, including
Southern Peru Copper’s projects such as Tía María
and the expansions of the Toquepala and Cuajone
mines. Investments are also funding the expansion
of mines and concentration plants at Yanacocha,
Shougang, and Milpo. There are several large oil and
gas projects underway. In addition to more broadbased sectoral investment, there has been increased
FDI from Asia, especially China, South Korea, and
Japan. Peru has signed free trade agreements with
each over the past three years.
Social conflict in mining areas has proven difficult to
manage and could be a significant challenge to the
new administration.
10
private consumption will likely rise by more than
5.5% over the next three years, further underpinning
growth prospects.
Top 20 Peruvian Companies
October 2011
Despite the increase in investment, various
bottlenecks remain. Although Peru is rich in
resources, improving human capital (and,
therefore, productivity) is still a major challenge
for the country’s medium- and long-term economic
development. School attendance is not low by Latin
American standards, but the poor quality of public
education is a major weakness; a comprehensive
reform in this sector is still pending. One of
biggest constraints for growth is infrastructure.
However, over the longer term, education will
likely be a bigger factor. The government would
need to reduce high labor market informality and
improve the quality of public investment and social
spending across all levels of government to alleviate
infrastructure and social gaps, supporting ongoing
export diversification and poverty alleviation.
Strengthening public institutions, advancing
administrative simplification, and promoting
education attainment would boost human capital
and entrench high productivity growth.
Table 2 | Peru’s Economic Indicators
2005
2006
2007
2008
2009
2010
2011e
2012f 2013f
2014f
GDP per capita (US$)
2,848
3,276
3,763
4,400
4,352
5,215
5,596
5,939
6,454
6,966
Real GDP per capita growth (% change)
5.5
6.4
7.6
8.6
(0.3)
7.6
5.3
4.8
4.8
4.8
Investment/GDP (%)
17.9
20.0
22.8
26.9
20.7
25.0
26.9
27.9
27.7
27.1
Net foreign direct investment/GDP (%)
3.3
3.8
5.1
4.9
4.1
4.6
4.9
4.3
4.2
3.8
Depository corporation claims on the resident
nongovernment sector/GDP (%)
19.4
17.8
21.0
25.5
25.0
25.1
27.4
27.4
27.4
27.4
External Finances: Moderate Current Account
Deficits Going Forward
Peru has had significantly favorable terms of trade in
2011, as expectations are for the price of metals—
especially copper—to rise by 18% after increasing
by nearly 38% in 2010. Despite these improved
terms of trade, the current account deficit will
likely deteriorate to 2.7% of GDP in 2011-2012 as
imports grow even more rapidly than exports, partly
because of FDI. It is important to note that after
two years of stagnation, the volume of traditional
exports will likely expand by more than 8% per
annum in 2012-2013 as a number of large mining
projects begin.
Higher levels of international reserves and current
account receipts have kept the country’s external
liquidity—as measured by its gross external
financing needs to current account receipts plus
usable reserves—relatively stable at an estimated
72.9% despite a larger current account deficit (see
Chart 2).
October 2011
Favorable terms of trade, coupled with rising export
volumes, have led to continued improvement in
Peru’s external accounts. Peru’s narrow net external
position (net of liquid assets only) is at an expected
27% of current account receipts in 2011.
11
Mining exports changing the scales
As noted, strong mineral prices—combined with
significant volume expansion—will lead to continued
improvement in Peru’s external indicators. The
dynamism of traditional exports, which account
for 79% of total exports, support the strong
performance of exports in 2011. However, we
expect that nontraditional exports will rise by nearly
21% in 2011. Although 21% is relatively a small
portion of total exports, this figure is still significant,
particularly because nontraditional exports have
more of an impact on employment than traditional
exports. Some of these latest developments were
supported by access to the U.S. market through the
free trade agreement with the U.S. that went into
effect on Feb. 1, 2009. Furthermore, Peru has signed
a number of other free trade agreements, including
those with Canada, Singapore, Mexico, Chile,
China, South Korea, and Japan.
Mineral exports account for roughly 60% of Peru’s
total exports, with copper alone constituting 24%
and gold 18%. Oil and gas exports are growing as a
share of total exports as well. They now account for
nearly 10% of the total.
Peru’s external position should improve further
over the next five years. It is important to note that
this is not solely based on higher commodity prices.
In addition, we expect that export volumes will
increase substantially for many of Peru’s key mining
sector exports. However, higher levels of imports—
stemming partly from FDI—will likely lead to
current account deficits of 2%-3% in 2011-2013.
In addition, the central bank’s international reserves
have increased significantly over the last two years,
growing by nearly $15 billion (nearly 50%) to reach
$48 billion in 2011 compared with $33 billion in
2009.
Standard & Poor’s expects that the combination of
good fiscal management, volume growth of exports,
and high FDI levels will continue to underpin Peru’s
external accounts over the medium term. In the
future, the government’s fiscal consolidation strategy
and successful financing through the domestic
market using local-currency-denominated debt will
constrain the growth of the stock of external debt.
Table 3 I Peru’s External Indicators
2005
2006
2007
2008
2009
2010
2011e 2012f
2013f
2014f
Gross external financing needs/current account
receipts plus usable reserves
85.5
78.2
89.5
85.4
72.5
76.7
72.9
72.7
72.8
70.7
Narrow net external debt/current account receipts
61.1
32.9
11.6
(0.1)
(9.0)
(15.5)
(27.7)
(31.1)
(34.4)
(39.2)
Current account receipts/GDP
27.8
32.2
32.9
31.1
27.5
28.4
30.5
30.7
30.7
30.8
Net foreign direct investment/GDP
3.3
3.8
5.1
4.9
4.1
4.6
4.9
4.3
4.2
3.8
Current account balance/GDP
1.4
3.1
1.4
(4.2)
0.2
(1.5)
(2.7)
(2.7)
(2.6)
(1.4)
Current account balance/current account receipts
5.2
9.7
4.1
(13.5)
0.6
(5.3)
(8.9)
(8.7)
(8.4)
(4.5)
Net external liabilities/current account receipts
111.2
74.1
92.0
75.2
83.6
85.6
63.9
56.1
47.5
36.6
Usable reserves/current account payments
(months)
5.6
4.9
5.0
6.3
8.8
7.1
8.2
8.1
7.8
7.8
Usable reserves (Mil. US$)
11,002
14,006
23,555
25,347 27,331 38,041
40,230
42,484
45,176
49,911
Fiscal Policy: Higher Revenues Will Finance
The Government’s Social Programs
In the midst of an election year, with buoyant
revenues and restrained government spending, the
government ran a large fiscal surplus of 5% of GDP
in the first half of 2011. However, an increase in
spending in the second half of the year will likely
12
lead to an overall fiscal surplus for the year of 1%
of GDP in 2011. Tax revenues should rise by 13%
in 2011 to reach 20.5% of GDP, up from 19.8% in
2010. Spending, which was subdued in the first half
of 2011, will likely rise significantly over the second
half of the year to reach 19.5% of GDP, but this is
still down from 20.4% in 2010.
October 2011
points of the total 19% VAT from the current two
percentage points as well as their take of various
mining revenue sharing funds to 20% of the total
from 10%.
There is a growing consensus on the importance of
fiscal responsibility in Peru. Fiscal rationalization
became easier when relatively high economic growth
allowed the government to make some expenditure
concessions without damaging the final-balance
target. Continuing fiscal consolidation under a
less-favorable international economic environment
will still be a risk. The Fiscal Responsibility Law
established a ceiling of 1% of GDP for government
deficits in periods of economic expansion.
Peru’s still-high dependence on the commodity
sector highlights the importance of developing
stronger countercyclical economic policies.
Because dollarization and low levels of financial
intermediation still constrain monetary policy,
fiscal policy must play a dominant role. The Fiscal
Responsibility Law incorporated a countercyclical
fiscal fund into Peru’s government structure. That
fund totaled only about 2% of GDP at year-end
2010. The government introduced multiannual
budgeting in 2010 to move toward a medium-term
expenditure framework.
Debt and interest burdens
One of Peru’s major accomplishments was debt
reduction and improved debt structure. Standard &
Poor’s expects the government’s debt to reach 13%
of GDP (in net terms) in 2011 compared with nearly
20% in 2009. (Government deposits—both at the
central bank and the local banking system—will
likely total 8% of GDP at year-end 2011).
Despite recent improvements, expanding the
country’s still-relatively-low tax burden will be
an ongoing challenge, especially given its high
dependence on mining-related revenue (accounting
for nearly a quarter of total central-government
revenue). Tax rates are already high, and the
problem has its origins in high levels of informality
and tax evasion. In addition to windfall taxes on the
mining sector, expanding the tax base would likely
be more fundamental to increasing the tax burden
without damaging the formal economy. Enhanced
tax administration at SUNAT, the Superintendency
of Tax Administration, could also expand tax
revenues.
As noted, on the expenditure side, President Humala
has made explicit his major objective of boosting
social expenditure as well as improving public
infrastructure.
The decentralization process, initiated in 2002,
continues to transfer functions to local and regional
governments. Some decentralization of health
and primary education has begun as well. The
various levels of government still need to clarify
responsibilities to avoid duplication. Under President
Garcia’s administration, transfers to the local and
regional governments doubled by increasing their
take of the value added tax (VAT) to four percentage
October 2011
Active debt management has recently gradually
reduced interest- and exchange-rate vulnerability
and postponed major amortization over the next
four years (in particular, after the Paris Club debt
buyback operations). The government has also
been working extensively to deepen the domestic
capital market for issuances in Peruvian nuevo
sols, allowing the country to replace foreigncurrency-denominated debt with its local-currency
counterpart. Significantly, Peru issued a 30-year
bond denominated in local currency in the Peruvian
market at a fixed interest rate in 2007. More than
46% of Peru’s total debt is now denominated in
13
local currency, having increased very rapidly from
18% at year-end 2006. Also, exposure to variable
interest rates declined to about 12% of debt in
March 2011 from 55% in 2002. Furthermore, the
duration of Peru’s total debt is now nearly eight
years, diminishing the burden of servicing the debt
and rollover risk.
Contingent liabilities
Domestic credit to GDP is 25%. However, the high
level of dollarization poses some additional risks.
Table 4 I Peru’s Fiscal Indicators
2005
2006
2007
2008 2009
2010
2011e
2012f
2013f
2014f
Change in general government debt/GDP
(3.9)
(1.8)
(0.9)
2.2
3.6
(1.5)
(1.0)
(0.5)
(0.5)
(0.5)
General government balance/GDP
(0.5)
1.8
3.1
2.4
(1.9)
(0.4)
1.0
0.5
0.5
0.5
General government primary balance/GDP
1.4
3.7
4.8
3.9
(0.6)
0.8
2.0
1.4
1.3
1.2
General government revenue/GDP
18.4
20.0
20.8
21.1
18.9
20.0
20.5
21.0
22.0
22.5
General government expenditure/GDP
18.9
18.2
17.7
18.7
20.7
20.4
19.5
20.5
21.5
22.0
General government interest paid/general government
revenues
10.3
9.3
8.5
7.4
6.8
5.7
5.1
4.4
3.8
3.3
Net general government debt/GDP
32.4
25.5
19.8
17.9
20.4
15.5
13.1
11.6
10.3
9.0
General government debt/GDP
36.9
30.1
26.2
25.9
28.8
23.8
20.7
18.6
16.7
15.0
Monetary Policy: Further Institutionalization Of
Monetary Policy
Since December 2010, the central bank has raised
the policy rate by a cumulative 300 basis points
(bps) from a historical low of 1.25%. The Central
Bank raised the benchmark policy rate 25 bps in
its May monetary policy meeting. We expect that
the inflation rate will remain at the upper target
of its 1%-3% band in 2011, in large part because
of an increase in food and oil prices. Furthermore,
inflation should stay within this range over the
medium term.
A still-high, though declining, level of financial
dollarization, the still-low level of financial
intermediation, and the continuing process of greater
monetary institutionalization continue to constrain
monetary policy flexibility. The central bank has
implemented a system of inflation targeting and
formally liberalized the exchange rate. The central
bank also began to put in place higher reserve
requirements over the course of 2010. It is doing
this to deter short-term capital inflows to buffer the
inflation targeting framework and the risks posed to
financial stability posed by large short-term capital
inflows.
14
The current administration reappointed Julio
Velarde, a well-respected economist, as Central Bank
president at the beginning of its term. However,
there is room for greater institutionalization of the
monetary authority by a constitutional amendment
delinking the appointment of the central bank
president and board members from the presidential
cycle.
October 2011
Gradualism is a key notion in monetary policy
Financial intermediation will have to increase if
Peru is to achieve more freedom to pursue a more
active and effective monetary policy. In tandem with
dynamic consumption and domestic investment,
lending is growing at higher rates than nominal
GDP, showing variations of slightly more than 20%
year-over-year. As a result of the high credit growth,
the central bank began to implement policy measures
in an effort to slow growth by tightening prudential
regulations on consumer loan and implementation
of new pro-cyclical provisioning rules. Furthermore,
reforms to enhance the bank surveillance and
intervention regimes and implement enhanced
capitalization requirements in line with Basel II are
being undertaken. Domestic credit to GDP will likely
reach 26% at year-end 2011, recovering from a
record low of 17.7% in 2006.
strengthening
Although there is more transparency in the
implementation of monetary policy and the
government is deepening the local capital market,
major obstacles remain to fully develop monetary
policy into a stronger anchor with a countercyclical
role. Among the challenges are the still-high level of
dollarization and low financial intermediation.
The government’s strategy of increasing the use of
domestic currency began to yield favorable results.
The share of foreign-currency participation to total
loans decreased significantly to 45% as of June 2011
from 63% at year-end 2006.
Table 5 I Peru’s Monetary Indicators
2005
2006
2007
2008 2009
2010
2011e 2012f
2013f
2014f
CPI growth
1.6
2.0
1.8
5.8
2.9
1.5
3.0
2.5
2.0
2.0
Effective general overnment
interest rate (interest/debt)
4.7
5.8
6.5
6.5
5.1
4.5
4.8
4.9
4.9
4.8
Comparative Analysis: Better Economic
Indicators And A Weaker Political Stance
Peru’s regional peers in Latin America are Brazil
(BBB-/Positive/A-3), Panama (BBB-/Positive/A-3),
and Mexico (BBB/Stable/A-3). (All ratings are longterm foreign currency sovereign credit ratings as of
Sept. 15, 2011.) Extra-regional peers include Russia
(BBB/Stable/A-3), Thailand (BBB+/Stable/A-2), and
India (BBB-/Stable/A-3).
Growing consensus on macroeconomics balanced by
still-weak social stability
Although consensus on the direction of
macroeconomic policies is deepening, Peru’s
social and ethnic divisions still resemble those of
its Andean neighbors, Bolivia (B+/Positive/B) and
Ecuador (B-/Positive/C). However, the divisions
in Peruvian society are narrower than those of
its neighbors. Political instability in the other
Andean countries continues to impede economic
policy despite the region’s overall strong economic
performance. Peru is thus situated between the rest
of the region and higher-rated countries, an unusual
position where the risk of economic policy reversal
diminishes as the entire political class backs the
general direction of current economic policies.
In Peru, as in other Andean nations, consensus on
October 2011
the economic policy might weaken if the population
does not believe that economic growth is reaching
them. A lack of social progress over time might
erode the political sustainability of current policies,
making them more vulnerable to adverse shocks,
whether domestic or external. More diversified
sources of growth have moderated this risk over the
past three years by reducing GDP dependence on
the export of primary products. Therefore, the more
diverse economic growth pattern since 2005 has led
to higher employment, helping distribute the benefits
more widely and evenly. The dynamism of domestic
consumption is another indication of this trend.
Although there are similar patterns in other Latin
American countries, Peru’s extraordinarily high
GDP growth rates reflect the importance of such
developments in a country that has long been poor
and politically unstable. Greater overall satisfaction
with the current economic model, if confirmed,
is a key positive credit factor because it provides
additional political stability.
15
Relatively high and sustained economic growth, but
Solid budget performance compensates for Peru’s still-
from still-low per capita income
Peru’s GDP has grown higher than the ‘BBB’ median
in real terms over the last five years. We expect it
to continue to perform at levels significantly higher
than those of the ‘BBB’ median for the next three
years.
limited fiscal revenues
The fiscal consolidation strategy implemented by the
last two administrations and expected to continue
under the Humala administration has led to a sharp
improvement in the level of general government
debt. Peru’s fiscal performance has improved
markedly over the last five years, with a surplus
of 1.0% of GDP expected in 2011, significantly
outperforming the ‘BBB’ median’s 2.8% deficit. In
fact, Peru will likely maintain a small surplus over
the next two years compared with deficits of 2%2.5% of GDP for the ‘BBB’ median.
However, Peru’s GDP per capita of $5,596 is still
well below the ‘BBB’ median’s $10,860 and all of
its peers’, with the exceptions of India ($1,618) and
Thailand ($5,243). A broader indicator of human
development is the UNDP Human Development
Index. Peru is 63rd on the list, which is better than
most of its key peers with the exceptions of Panama
(54th) and Mexico (56th).
Consequently, Peru’s net general government debt—
at 14% of GDP in 2011—has fallen well below
the ‘BBB’ median’s 35% and well below Brazil’s
42% and Mexico’s 35%. We expect that Peru’s
net general government debt to GDP will gradually
decline further over the next three years, while the
‘BBB’ median’s should rise marginally.
Notwithstanding these achievements, Peru’s fiscal
flexibility remains limited. On the revenue side, its
fiscal revenue to GDP is still low for an economy
at this stage of development, given the high levels
of poverty and infrastructure needs. Peru’s general
government revenue, at about 20.5% of GDP, is
much lower than that of the ‘BBB’ median (34%).
16
Mexico is the only country with a lower level of
revenues at 18.3%, though India’s 21.2% is low as
well. Despite the low level of government revenue,
Peru’s debt level in terms of revenues is now lower
than the ‘BBB’ median and that of all of its peers.
Peru’s debt to revenues ratio lies at the ‘BBB’ median
of 107%. Peru’s ratio has improved markedly over
the last three years.
October 2011
As in other Latin American countries, favorable
international conditions led to a strong positive
adjustment in Peru’s external accounts. The strong
accumulation of international reserves and higher
levels of current account receipts have led to
improvements in its external liquidity, as measured
by the gross financing requirement over current
account receipts and usable reserves. The ratio has
improved to 73% in 2011 from 85% in 2008 versus
the 106% for the ‘BBB’ median. Of its peers, only
Thailand’s at 68% and Brazil’s at 73% are similar to
Peru’s.
In addition to a dynamic export sector, the lower
government borrowing requirements resulting
from fiscal consolidation and the replacement of
external debt by domestic indebtedness also played
a significant role in the adjustment. Therefore,
Peru’s narrow net external position has improved
to a creditor position of 27.4% of current account
receipts. Again, only Thailand and Russia have
similarly strong positions, with 43.6% for Thailand
and 38.8% for Russia.
Related Criteria And Research
• Sovereign Government Rating Methodology and
Assumptions, June 30, 2011
Rating history
Sovereign Rating And Country T&C Assessment
Histories
Default history
Sovereign Defaults And Rating Transition Data,
2010 Update
Ratings Detail (As Of 15-Sep-2011)*
Republic of Peru
Sovereign Credit Rating
Foreign Currency
BBB/Stable/A-3
Local Currency
BBB+/Stable/A-2
Certificate Of Deposit
Local Currency
A-2
Senior Unsecured (14 Issues)
BBB
Senior Unsecured (23 Issues)
BBB+
Sovereign Credit Ratings History
30-Aug-2011
Foreign Currency
BBB/Stable/A-3
23-Aug-2010
BBB-/Positive/A-3
14-Jul-2008
BBB-/Stable/A-3
23-Jul-2007
BB+/Positive/B
20-Nov-2006
14-Jul-2008
BB+/Stable/B
Local Currency
BBB+/Stable/A-2
23-Jul-2007
BBB-/Positive/A-3
20-Nov-2006
BBB-/Stable/A-3
Current Government
Ollanta Humala of the Peruvian Nationalist Party
Election Schedule
Next Presidential elections: April 2016
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor’s credit ratings
on the global scale are comparable across countries. Standard & Poor’s credit ratings on a national scale are
relative to obligors or obligations within that specific country.
October 2011
17
Latin America’s Resilience, Recovery, And Consolidation
Lisa M Schineller, New York (1) 212-438-7352; [email protected]
During the recent global recession, Latin America
showed unprecedented resilience and recovered
quickly. On a weighted average, real GDP for the
region climbed 6.5% in 2010 after a decline of
only 1.9% in 2009 (see table 1). Standard & Poor’s
Ratings Services expects a combination of domestic
and external demand to continue to support the
region’s economic growth, with real GDP rising
by 4.5% in 2011 and 4.2% in 2012. (Listen to
the related podcast titled, “Latin America: Credit
Quality Improves As The Region Rebounds From
Global Recession,” dated June 17, 2011.)
To be sure, the pace of growth differs somewhat
within the region. Economies in South America
have expanded faster than those in Central America,
and we expect that to continue because of South
America’s high share of commodity exports,
especially to fast-growing emerging countries in
Asia. Mexico and Central America have recovered
more slowly because of their closer economic links
with the U.S. Nonetheless, we expect remaining
output gaps to close during 2011 and economic
activity to moderate going into 2012, consolidating
at a pace consistent with trend rates of growth.
The recovery in domestic demand and narrowing
(or already closed) output gaps, coupled with
high commodity prices for both food and energy,
have contributed to an uptick in inflation. Current
inflation for the region is about 7.4%, which is
generally several percentage points higher than at the
beginning of 2010. Two exceptions are Mexico and
Venezuela, though the latter still with inflation of
more than 20%. However, inflation is still quite low
relative to the region’s inflationary past, and to date
is still below 2008’s uptick.
The medium-term foundation for domestic demand
has never been stronger given a broadening of
the middle class, formalization of labor markets,
and deeper credit markets. But external links have
propelled economic growth as well. Supportive terms
of trade for commodity exporters and capital inflows
in 2010-2011 have contributed to strong domestic
demand in many countries. A decline in commodity
prices or a sharp slowing in capital inflows
presents downside risk for the region. The stronger
macroeconomic foundation that helped Latin
America withstand the 2008-2009 recession should
help mitigate future economic shocks. The buoyancy
of external and domestic demand, however, poses
18
risks. One is the potential build-up of excesses, or
bubbles, which could make an eventual economic
slowdown a hard landing. In fact, some governments
are taking pre-emptive steps to avert these risks,
including managing currency appreciation, capital
inflows, and growth in domestic credit, and to a
lesser extent, tightening fiscal spending.
Table 1
Latin America---Growth And Inflation Outlook
(Year-over-year % change)
Latin
2006
2007
2008
2009
2010
2011f
2012f
Real GDP
5.6
5.8
4.4
(1.9)
6.5
4.5
4.2
Consumer
Prices
4.7
5.5
8.3
6.5
6.6
7.4
6.6
Real GDP
8.5
8.7
6.8
0.9
9.1
6.5
4.0
Consumer
Prices*
5.4
8.8
8.6
6.3
10.0
28.0
30.0
Real GDP
4.0
6.1
5.1
(0.6)
7.5
4.0
4.3
Consumer
Prices
4.1
3.7
5.8
4.3
5.8
6.3
4.9
Real GDP
4.6
4.6
3.7
(1.7)
5.2
6.0
5.0
Consumer
Prices
3.4
4.4
8.8
1.4
2.7
4.0
2.9
Real GDP
6.7
6.9
3.5
0.4
4.3
5.4
4.8
Consumer
Prices
4.3
5.6
7.0
4.2
3.3
3.8
3.7
Real GDP
5.2
3.3
1.5
(6.1)
5.5
4.5
3.5
Consumer
Prices
3.6
4.0
5.1
5.3
4.2
3.8
3.6
Real GDP
8.5
12.1
10.8
3.2
7.5
7.5
5.5
Consumer
Prices
2.5
4.3
8.7
2.4
3.0
7.5
5.0
Real GDP
7.7
8.9
9.8
0.9
8.8
6.0
6.5
Consumer
Prices
2.0
1.8
5.8
2.9
1.5
2.5
2.0
Real GDP
9.9
8.2
4.8
(3.3)
(1.4)
1.5
3.5
Consumer
Prices**
13.6
18.7
31.0
26.9
28.5
30.0
30.0
American
Weighted
Average
Argentina*
Brazil
Chile
Colombia
Mexico
Panama
Peru
Venezuela**
*Historical figures are based on official data, and forecasts are market estimations.
**Venezuela CPI is national. f--forecast.
A Greater Resiliency To External Shocks
Over the last decade, Latin America governments
implemented various policies that have strengthened
October 2011
Chart 2
their underlying economic fundamentals. The
region’s external position improved, including a
decline in net debt and financing needs (see charts 1
and 2). The accumulation of international reserves
to more than US$620 billion in 2010 from about
US$150 billion in 2002 played an important role in
the improvement of these external indicators.
This much lower external vulnerability was a key
component enabling governments to secure financing
from official and multilateral creditors during
the global crisis until capital markets reopened.
Healthier fiscal positions include lower debt and
deficits (see charts 3 and 4). In addition, better
terms for government borrowing, such as the ability
to issue local currency debt in domestic markets
at fixed rates, and with longer maturities, further
reduces fiscal vulnerability.
Flexible monetary and exchange rate regimes
and a successful track record of containing
inflation enabled central banks to cut interest
rates during the crisis in contrast with previous
crises. Latin America’s banking systems, whose
strength improved significantly as a result of more
conservative policies following the region’s own
banking crises in the 1980s, 1990s, and early 2000s,
also provided a foundation to weather the global
recession. Comparatively high capitalization levels
above the minimum Basle standards, predominantly
domestic currency, local deposit financing, stronger
regulation, and consolidated supervision characterize
the prominent banking systems in the region. Deeper
local capital markets that developed alongside these
sounder fundamentals provide more flexibility
for companies to fund themselves locally and in
domestic currency. In our view, these factors should
also help the region manage future negative global
shocks.
Chart 3
Chart 4
Chart 1
October 2011
19
Strong Domestic And External Demand
Stronger economies in the region have created
higher, and healthy, domestic demand growth. We
believe that robust labor and credit markets will
continue to support demand growth in the next
several years. In fact, the region’s resilience during
the recession and its quick recovery reflect this
stronger dynamic (see chart 5). This is true even
though policy distortions in some countries, such as
Argentina and Venezuela, undermine the mediumterm domestic investment outlook, in our view.
Chart 6
Chart 5
Greater macroeconomic stability and lower
inflation, in particular, have supported expansion of
the middle class and reduced poverty. Approximately
one-third of the region’s population, on average,
lived in poverty in 2010, down from more than
40% in 2002--and from approximately 50% in
1990. This improved standard of living for a larger
segment of the population translates into stronger
local consumption as well as investments in products
and services to attend to those consumers’ needs.
The combination of low inflation, better growth
prospects, and well-capitalized banking systems that
rely primarily on local funding led to the deepening
of Latin America’s credit markets, namely more
lending to consumers and businesses. This in turn
also supports more solid domestic demand. The
ratio of (weighted) average domestic credit to GDP
rose to 38% in 2010 from 22% in 2004 (see chart
6). Although this is a significant increase for the
region, financial sector intermediation is still lower
than that in Asian emerging markets (with domestic
credit to GDP of about 80% on average) and the
advanced economies (more than 100%).
America, and in South American countries in
particular. Commodities account for 60% to 90%
of South America’s total exports, in contrast with
Mexico where manufactured goods represent 80%
of total exports. South America has established trade
links with fast growing Asian countries, in particular
China (see chart 7). As a result, commodities or
raw materials as a share of total exports rose 10
percentage points over the past 10 years, according
to data from the Economic Commission for Latin
America and the Caribbean (CEPAL). China is now
the single-largest export market for Brazil (15.2%
of total exports in 2010) and Chile (23.8%), and
the second largest for Peru (18.3%). The growth
trajectory and demographics in emerging Asia
should continue to generate strong medium-term
demand and prices for commodities, in our opinion,
including food, metals, and oil, all of which South
America produces on a globally competitive basis.
Favorable terms of trade for commodity exporters
implies that a given basket of exports buys more
imports, in turn strengthening local purchasing
power and domestic demand (see chart 8).
Chart 7
Growing global demand for commodities, largely
from Asia, has also supported growth in Latin
20
October 2011
Chart 8
Another external factor supporting domestic demand
is the robust recovery in foreign capital inflows after
a retrenchment in 2008-2009. Non-residents have
increased their investments in local capital markets,
and Latin America issuance in foreign markets has
also risen. For example, in 2010, foreign direct
investment (FDI) and portfolio inflows totaled
US$230 billion for Argentina, Brazil, Colombia,
Chile, Mexico, and Peru, up from US$136 billion in
2009 and US$111 million in 2008 (see chart 9).
The rise in portfolio inflows alone to this group of
Latin American countries is even more impressive.
It almost doubled to an estimated US$128.1 billion
in 2010 from US$66.1 billion in 2009. Portfolio
inflows began to recover in the second half of
2009, after outflows of US$2.4 billion in 2008. The
three-largest recipients were Brazil, Mexico, and
Chile. Brazil received US$67.8 billion, split almost
evenly between debt and equity. Mexico received
US$37.1 billion, consisting mostly of purchases of
government securities. Chile received US$9.3 billion
of portfolio inflows, with more than 50% going
to the nonbank private sector. Peru and Colombia
received much smaller amounts, about US$3.3
billion each in 2010. And Argentina received US$7.4
billion, after several years of outflows.
Since 2009, net portfolio inflows have represented a
larger share of total net foreign investment (48%) in
Latin America compared with FDI and other/bank
financing than in previous cycles of strong capital
inflows. During the 1990s and 2000s, the share of
net portfolio flows was 30%-40%, according to the
IMF. Moreover, much of the growth in portfolio
flows has been in the form of debt, or fixed-income
securities, rather than in equity. Increased reliance on
fixed-income portfolio investment is somewhat more
risky than FDI, with a greater potential to reverse,
for example, when returns in advanced economies
become more favorable as monetary conditions
return to normal.
October 2011
Chart 9
Credit And More Credit…
Buoyant capital flows and high rates of growth in
domestic credit have contributed to worries that a
credit bubble could be emerging in Latin America.
Despite a general slowdown in credit growth by the
end of 2008 and in 2009, annual credit growth still
averaged about 20% in the region during 20042010. Much of this reflects a healthy, deepening
of credit markets: growth from a small base in the
ratio of domestic credit to GDP amid low inflation
and prospering economies. It also reflects better
access to collateral thanks to revised legislation
and bankruptcy codes since 2000 in a number
of countries. The growth in mortgage lending, in
Brazil for example, reflects this combination of
macroeconomic and microeconomic factors that
facilitated increased lending after 2003. Although
mortgage lending accounts for less than 4% of GDP,
growth rates of 40% to 50% during the past several
years have fueled discussion of a possible credit and
real estate bubble.
In our view, the growth in consumer credit, albeit
much of it with better access to collateral, warrants
scrutiny more so than the housing market. In
Brazil, for example, a large portion of financing is
in the form of cash, and there are limits on the size
of mortgages that banks will finance via directed
lending (which comprises the market). A rapid
growth in consumer credit has occurred not just in
Brazil, but elsewhere, including Colombia and Peru.
Much of the increased lending is to new borrowers
who don’t have any established credit track record,
which would include one of making their payments
during a prolonged economic downturn. The use
of “positive” credit bureaus such as in Mexico
and Brazil (legislation pending in Congress), is
important, but their credibility must be proven over
time.
21
When considering the possibility of a Latin America
bubble in credit or capital markets, it is important to
analyze the differences between the region and more
advanced economies. We need to consider the real
growth in mortgage credit, which has averaged some
15% during 2007-2010 for key Latin American
economies, in a broader context. Total mortgage
and household debt in Latin America is a fraction of
that in advanced economies--as is overall credit to
GDP. Mortgages account for less than 5% of GDP in
Brazil, Colombia, and Peru; and about 10% of GDP
in Mexico, 20% in Chile, and 25% in Panama.
Total household indebtedness (consumer and
mortgage) is 21% of GDP in Brazil, 13% in Mexico,
and about 8% in Colombia and Peru. As a percent
of household disposable income, it is 41% in Brazil
and 19% in Mexico. The corresponding figures for
advanced economies are 80% and above. As to the
risk to the capital markets, the use of securitizations
to finance the mortgage sector ranges from nonexistent (such as in Brazil) to limited (as in Mexico,
where it took a hit in 2008-2009 and has not
recovered). In Brazil and Panama, there are limits on
the size of the mortgage that banks can finance with
lower cost funding (directed credit or subsidies), and
via government funded programs in Mexico. These
programs are key for granting mortgages.
Despite the benign comparison with other regions,
growth in overall consumer lending, which has
ranged from 8% to 24% in Latin America, bears
monitoring. Debt service burdens have risen along
with the increase in debt. In Brazil, debt service
consumes 25% of household disposable income, up
from 21% in mid-2006. These figures do not include
rent; mortgages are only 17% of total consumer
debt. The rise in the debt service burden has been at
a much slower pace than the accumulation of debt
because of lengthening loan maturities and lower
interest rates. In Colombia, debt service is about
17% of wages, up from 12% in 2005, but still well
below the 25% peak in 1995 before Colombia’s
banking crisis. In comparison, the debt- servicing
ratio for U.S. households has ranged between 15%
and 17% of personal disposable income during
1995-2010.
Although debt-servicing data for Mexico are
unavailable, the majority would be for mortgages,
which account for 70% of household debt. Credit to
Mexican households increased 14% (on a nominal
basis) annually from 2003-2010 with mortgages
rising 12% and other credit 23%. In Mexico, the
rapid expansion of credit card lending that began
in 2005 and peaked in mid 2008 is an example
of excesses--fast growth from a low base, lending
to new (riskier) borrowers, and weak origination
22
practices (multiple cards to the same household).
Nonperforming loans (NPLs) for consumer credit
rose markedly, peaking at almost 10% in the first
quarter 2009. Now they’re a little more than 4%.
Consumer credit contracted (in nominal terms) from
mid-2008 through the first quarter of 2010.
This experience provides a warning for fast growth
of credit elsewhere. The use of automatic payroll
deductions (as in Brazil and Mexico) and leasing
mechanisms somewhat mitigates lender’s risk of
access to collateral. Barring a change in the rules-ofthe-game amid a stress scenario (i.e., courts limiting
bank access to collateral), the key risks stem from
prolonged unemployment or high inflation that
erodes real incomes and implies higher interest rates.
Some of the risks inherent in the region’s credit
growth relate to the resurgence of capital inflows to
Latin America (and emerging markets).
Although the region’s banking systems rely
predominately on local funding, there has been
a slight rise in the share of foreign funding to
10% in 2010, from 6% of bank liabilities in mid2009, according to IMF calculations. Smaller, or
niche, banks in the region tend to rely more on
wholesale or external funding, rendering them more
vulnerable. Typically, they aren’t as systemically
important, but small banks with signs of distress
could foretell emerging weakness.
Some Policy Makers Are Taking Proactive Measures
A reversal of fortunes, such as a deterioration
in the favorable terms of trade or a reversal of
capital inflows, in our view, would likely slow
domestic demand in Latin America. Indeed, when
global conditions reversed most recently in 20082009, retrenchment followed. It is important, in
our view, that Latin American policies are not
complacent in the face of such risks. This entails
timely withdrawal of the countercyclical fiscal,
monetary, and credit policies that limited the depth
of economic contraction and provided an important
foundation for rebound in 2010. This shift to greater
flexibility in setting policy during a global crisis
is new to Latin policy makers; the region hadn’t
executed countercyclical policy ever before during
a recession. Another challenge includes combating
rising inflation and avoiding overheating while
simultaneously managing currency appreciation
and capital inflows. In effect, this implies achieving
competing policy objectives. Persistent, fast credit
growth in a number of countries and the possible
emergence of excesses or bubbles heighten the
potential for an even harder landing following an
external shock.
October 2011
Policy makers in Brazil, Chile, Colombia, Mexico,
and Peru are aware of the risks associated with
fast-growing credit, even from a low base, and how
the persistent capital inflows to Latin America may
exacerbate a credit bubble. To varying degrees, they
are taking steps to moderate this risk. Their actions
include modest fiscal tightening, more restrictive
monetary policy, and direct efforts to manage capital
inflows and slow domestic credit growth. The
latter are generally considered part of the so-called
“macro-prudential” toolkit.
year that reduce growth in spending to take pressure
off domestic demand. Brazil also made spending
adjustments this year. Mexico’s budget trajectory
already included a phasing out of policy stimulus
over several years (and Mexico does not have an
overheated economy).
Governments have also been tightening their
monetary policies since the second quarter of 2010.
Initially, this was undertaken to normalize the loose
monetary conditions put in place in 2008-2009
(see chart 10). Central banks also raised reserve
requirements, reversing the cuts done during the
crisis. During 2010, monetary policy decisions
transitioned to combating rising inflation and
engineering a slowdown in activity amid signs of
buoyant domestic demand and closing output gaps
(see table 2). The Central Bank of Chile has raised
policy rates a total of 450 basis points (bps) since
last year. In Brazil, the increase has been 325 bps, in
Peru 300 bps, and Colombia 100 bps. The Mexican
central bank is the only central bank that has not
raised interest rates. This is not a surprise since the
country’s estimated output gap is still negative.
While we expect Mexico’s inflation to slow in 2011,
the central bank of Mexico is likely to act quickly
should food and energy prices push up the inflation
rate. In general, we expect that central banks will
raise interest rates in 2011, as needed, to limit the
inflation effects of food and energy price increases.
While higher, inflation is still broadly consistent with
inflation targets in these economies.
Following the strong recovery in 2010, many
governments are in the process of withdrawing
countercyclical policy stimulus. As such, we expect
fiscal deficits to decline again to an average of 1.9%
this year, from 3.2% and 2.2% in 2009 and 2010
respectively (see chart 4). Government budget plans
in Latin America generally call for slower growth in
spending. Chile, for example, announced cuts this
Chart 10
Central banks and governments are also taking
preventive macro-prudential measures, since raising
interest rates to slow the economy and inflation
potentially attracts further capital inflows. This is
Table 2
Monthly Inflation
Year-over-year change (%)
2010
2011
Nov.
Dec.
Jan.
Feb.
March
April
Argentina (official)
11.0
10.9
10.6
10.0
9.7
9.7
--
--
Brazil
5.6
5.9
6.0
6.0
6.3
6.5
4.5 (+/-2)
12
Chile
2.5
3.0
2.7
2.7
3.4
3.2
3 (+/-1)
5
Colombia
2.6
3.2
3.4
3.2
3.2
2.8
3 (+/-1)
3.75
Mexico
4.3
4.4
3.8
3.6
3.0
3.4
3 (+/-1)
4.5
Panama
4.3
4.9
4.8
5.0
5.5
6.3
--
--
Inflation Target
Current
Policy
Rate
Peru
2.2
2.1
2.2
2.2
2.7
3.3
2 (+/-1)
4.25
Venezuela (Caracas)
26.9
27.4
28.9
29.8
28.7
24.0
--
--
Sources: Central Banks of Brazil, Chile, Colombia, Mexico, and Peru, respectively, and INDEC (Argentina). Data as of June 1, 2011.
October 2011
23
especially true because of the low policy rates in
advanced economies. To manage capital inflows and
currency appreciation, central banks in Brazil, Chile,
Colombia, Mexico, and Peru are accumulating
international reserves. The banks’ methods vary
from discretionary purchases in the spot and
derivatives foreign exchange markets (Brazil and
Peru) to more rules-based mechanisms via monthly
or daily preannounced spot or options purchases
(Chile, Colombia, and Mexico). In addition, in late
2010, Peru eased limits on pension funds investing
abroad, while Colombia lowered the amount of
foreign currency the Ministry of Finance and the
state-owned oil company Ecopetrol could bring into
the country. Peru and Brazil have also taken more
direct and aggressive steps to discourage short-term
inflows. Peru increased the reserve requirements
on nonresidents’ deposits and holdings of central
bank certificates of deposit and limited financial
institutions’ foreign currency derivative positions.
In early 2011, the Brazilian central bank limited
the size of any bank’s short foreign exchange
position that is not subject to unremunerated reserve
requirements. Brazil took its most noteworthy action
in October 2010, when, in the span of weeks, the
government raised the financial transaction (IOF)
tax on nonresidents’ fixed income portfolios twice to
6%. As a result, there’s intermittent recurrent market
concern that the government could raise the IOF tax
yet again or extend it to cover nonresident equity
investments. The government also applied the IOF to
external debt issued for less than two years.
Brazil has also been the most active in deploying
macro-prudential measures aimed specifically at
slowing credit growth via tighter lending standards.
In December 2010, for example, the Brazilian
central bank raised reserve requirements, imposed
higher capital requirements on longer-term consumer
and auto loans, and raised the minimum required
payment on credit cards. In 2011, it increased the
IOF tax on consumer credit to 3% from 1.5%.
These measures have not been aimed at, and haven’t
slowed, the pace of lending from state-owned banks,
whose lending has grown at a faster rate than
lending from private banks.
Latin America Could Likely Withstand Another Global
Crisis
The economic outlook for Latin America includes
both risks and opportunities. In terms of external
or global risks, oil price volatility amid political
instability in the Middle East risks increasing Latin
America’s inflation rates and, depending on the
severity of a price shock, could hurt the region’s
economic growth. In general, a downside scenario
24
for the region includes reversal of capital inflows
amid higher risk aversion, with a detrimental
impact on the cost and the availability of funding
for the public and private sectors. In a more benign
scenario, this could stem from central banks in
advanced economies returning monetary policies to
normal. A more severe scenario is one of sovereign
fiscal distress in Europe or market concern over
future U.S. fiscal policy, which could raise long-term
bond yields.
Growth dynamics in China also play an important
role in commodity prices and exports from many
countries in Latin America. The region faces
downside risk from a fall in commodity prices
and an economic slowdown in China. Strong
global commodity demand and prices are helping
to moderate deterioration in the region’s current
account deficits. Current account surpluses during
2003-2007 moved into deficit in 2008, owing to
strong domestic demand-led growth of imports.
After moderating in 2009 as GDP slowed or
declined, current account deficits are widening once
again, albeit modestly. We expect the average current
account deficit (weighted average) to increase to
1.5% of GDP in 2011 and 2012 from 1.1% in
2010. The IMF has underscored the fact that based
on 2005 terms of trade, these deficits would be
much larger--possibly by four-percentage points for
some countries--highlighting the risk for adjustment
should commodity prices fall.
Latin America’s current ability to manage these
global downside risks is similar to its ability
during the recent global recession, though perhaps
somewhat weaker until governments fully withdraw
their policy stimulus. The failure to withdraw the
stimulus at a sufficiently rapid pace presents risk
of overheating, resulting in even higher inflation
and eventually, perhaps, a hard landing. In our
view, Latin American governments should continue
to monitor the evolution of their local financial
markets to mitigate the possibility of asset or credit
bubbles, since any persistent and fast rate of credit
growth warrants caution.
Kelli Bissett and Matthew Walter provided research
assistance to this report.
Related Research
“Special Report: Latin America Capitalizes On Its
Resistance,” June 13, 2011
October 2011
How Vulnerable Are Latin American Corporates To
Commodity Prices? A Sensitivity Analysis
Reginaldo Takara, Sao Paulo (55) 11 3039-9740; [email protected]
The global downturn of 2008-2009 had a significant
effect in commodities markets. As demand fell,
global commodity prices plummeted, suddenly and
steeply. As a result, credit quality for commoditieslinked companies in Latin America also declined.
Although prices have since recovered along with the
global economy, these companies remain vulnerable
to another steep drop.
Although timing and amplitude may vary, major
commodities have moved in tandem across the
board--agricultural, metals, chemicals, crude oil, etc.
(see chart 2). After the global recession-related drop
in 2008-2009, some metal commodities took longer
to recover, as was the case with aluminum and steel,
mainly because of still-significant idle capacity.
Chart 1
The fluctuation of commodity prices affect, to
varying degrees, many Latin American companies
that Standard & Poor’s Ratings Services rates, either
because they’re large exporters of primary products
or because they sell their products in domestic
markets at prices pegged to international ones. We
ran sensitivity tests on the operating margins and
financial leverage of these companies to extrapolate
how they would likely perform should commodity
prices decline, all else being equal.
In general, higher-rated entities are less exposed to a
commodity price decline because of strong business
fundamentals (in the form of cost advantages) or
sound financial profiles (i.e., lower leverage and
strong liquidity). Lower-rated entities, on the other
hand, experience the effects of price declines more
severely through both loss of operating profitability
and deterioration of financial leverage. For every
10% price drop, we estimate EBITDA margins
would decline, on average, about 10% to 30%
relative to our 2011 base-case projections, with total
debt to EBITDA ratio increasing by an average of
20% to 50%.
We don’t necessarily expect commodity prices to
tumble in the next few years. However, we do see
many possible scenarios in which this might happen,
and if it does, it would weaken the credit quality of
rated entities in Latin America. And given China’s
increasing relevance as a major end-market for
commodity products exported from Latin America,
an economic slowdown in that country could
plausibly be a reason for a commodity price plunge.
Commodity prices are inescapably volatile.
Following the trend of the broader global economy,
they climbed in 2004-2007, then flew up in 20072008 with skyrocketing demand in Asia (mainly
China) before heading into free fall with the abrupt
shift in expectations and the global crisis late in
2008 and early 2009 (see chart 1). Prices started
recovering by mid-2009, and continued to do
so through 2010, subsiding modestly in the past
months.
October 2011
Agricultural commodities such as sugar skyrocketed
in 2010 because of strong demand globally; the same
happened later with soybeans. Iron ore and copper
ramped up in 2010, boosting producers’ cash flows.
Although pulp prices have flattened in 2011 from
their significant improvement last year, they’re still
quite high and contributed to cash windfalls for
companies in the sector.
In contrast, global trends do not affect cement as
much, particularly because overseas transportation
is nonexistent (except for semi-finished clinker)-prices are more affected by regional economic
trends. However, cement volumes have also been
volatile because of weaker demand in some markets
in North America (to which some Latin American
producers have exposure). Thus, testing sensitivity to
lower prices can also assess these cement producers’
resilience to generally less-favorable revenues.
The 2008-2009 Crisis Can Provide Lessons For The Future
Although Latin America’s local markets were
resilient during the recent recession, commodityoriented companies in the region struggled. The
2008-2009 crisis tested these companies not only
with price declines--average prices in 2009 were
30%-35% lower than the averages in 2008--but
25
strong pre-crisis capital structures. We downgraded
pulp producers Arauco and CMPC by one notch
each in 2009, but the main reason was their
aggressive debt-funded capacity expansion projects
and mergers and acquisitions (M&A). Their
profitability weakened in the period but remained
high compared with global peers, and their credit
profiles remained strong enough in our view to
preserve their investment-grade status.
Chart 2
also with significant volume declines. Domestic
demand did not fall as steeply as it did in other parts
of the world, but a complete freeze of international
credit and trade put commodity exports at a virtual
standstill late in 2008 and most of 2009. With
export customers in Asia or Western Europe and
elsewhere unable to finance their own working
capital, commodity demand and prices tumbled.
Financial prudence paid off during the crisis. After
a big initial hit to their operating margins, most
companies survived (with some notable exceptions)
because of their ability to quickly cut fixed costs,
improve productivity, and aggressively adjust
working capital needs.
The sectors that suffered the most during the 20082009 commodity crisis, relative to EBITDA margin
declines, were agricultural commodities, metals and
mining (with steel suffering the most because of
significant demand slowdown), and forest products
companies (also because of volume declines);
building materials’ performance was close to neutral,
and chemicals and oil and gas companies actually
improved. The average EBITDA margin expansion
of oil companies in 2008-2009 reflected resilience
for the exploration and production (E&P) business
in the region and some margin expansion for
Petrobras. That company’s profitability is strongly
influenced by its domestic fuel realization price
policy, which does not correlate with volatile, shortterm oil prices.
Companies that fared well during the downturn
were the ones that had either secured liquidity by
building cash reserves and refinancing before credit
froze or expanded more cautiously. Steelmakers
Usiminas, CSN, Gerdau, and CAP, for example,
faced steep margin declines in 2008-2009 but
managed through the downcycle because of their
26
Two characteristics were common among issuers
whose credit weakened more steeply in 2009. The
first was a bet on market growth using heavy capital
expenditures, M&A, or working capital build-up
financed with debt. The second was significant
leverage, either with debt or derivatives. When
market conditions reversed course, companies in
these situations found it much more difficult to
generate enough cash to service debt while facing a
virtual shutdown in refinancing.
Indeed, some rated entities in the region went
through financial trouble as the 2008-2009 crisis
unfolded, including (but not limited to) meat
producer Independencia S.A. and soybean producer
Imcopa Importacao, Exportacao e Industria de
Oleos S.A., both of which defaulted in 2009.
Similarly, Bracol Holding Ltda. (the holding
company of Bertin Group, now part of JBS) also
faced a strong deterioration of its credit profile
while burning cash reserves very quickly. The crisis
also caught poultry company Sadia S.A. (now part
of BRF Brasil Foods) and pulp company Aracruz
Celulose S.A. (now part of Fibria), but less so
because of the cash flow deterioration than because
of their bets on leveraged derivatives that triggered
giant losses when the Brazilian real weakened by
the end of 2008. The sudden and steep decline in
prices also caused some companies to face price
and cost mismatches that were difficult to handle.
Chile’s Empresa Nacional de Petroleo S.A. (ENAP),
for instance, reported large losses (actually negative
EBITDA) in 2008 because it had to refine very
expensive imported crude oil and sell it at much
lower prices.
Although the 2008-2009 crisis did not cause many
defaults in our universe of rated entities, even the
companies that came through relatively unscathed
might not fare so well when facing a more severe
stress environment. Commodity prices recovered
quickly after their trough in 2010, and they never hit
record lows, even in 2009. This made it possible for
companies to return to reporting strong cash flows
very fast, but that might not be the case if prices
tumble again in the future.
October 2011
Operating Profitability And Financial Leverage Are Key
Variables In Our Sensitivity Analysis
Standard & Poor’s sensitivity analysis focused on
companies’ operating profitability (measured by
EBITDA margin) and financial leverage (measured
by total debt to EBITDA). We estimated the level
of commodity reliance and the percentage of costs
that moves in tandem with commodity prices (for
instance, feedstock and energy), based on our views
of each sector and entity. We used our 2011 basecase projections for revenues, EBITDA, and total
debt, as our reference to compute how much these
indicators would weaken if commodity prices fell.
Companies with more-rigid cost structures--high
fixed costs or an inability to raise prices in response
to variable-cost increases--generally take a harder
hit when commodity prices decline. Companies
with low operating profitability also suffer because
they have limited ability to deal with unexpected
events. Higher financial leverage makes the effect of
profitability variability on credit quality even more
severe. On the other hand, companies that trade
commodities (buy and sell them with a spread, as in
the case of Ceagro, or fuel distribution businesses
such as Cosan’s, Ultrapar’s, and Copec’s) basically
pass through costs and are almost commodity-price
neutral (We assume spreads compress when pricing
weakens, though.) Similarly, for companies that
have high variable feedstock costs (the case of BRF
Brasil Foods, Camil, Braskem, and Petrotemex), we
assumed some cost reduction in tandem with endproduct price declines.
Operating margin is another important
consideration because it defines how much room a
company has to absorb the commodity price shock.
Typically, capital-intensive sectors such as metals
and mining, forest products, and oil and gas are
the ones with stronger EBITDA margins (in excess
of 35%-40%; see chart 3). The recent crisis hit
companies in the metals and forest products sectors
with a steep decline in margins in 2009, but they
quickly recovered in 2010. Others that report a
heavy component of feedstock costs and are heavily
invested in working capital, such as petrochemicals
and agricultural commodities, report lower
profitability (EBITDA margins of 10%-15%, and
sometimes less.)
producer Fibria’s huge derivatives losses. Oil and
gas and metals and mining companies came in at the
lower end of the leverage range, reflecting generally
conservative financial policies and deleveraging
undertaken thanks to their cash windfalls in
previous years.
Chart 3
Higher-Rated Companies Have Been More Resilient
Most companies report margin deterioration in
the 10%-30% range for every 10% price decline
(see chart 5). Generally speaking, companies with
higher ratings benefit from lower sensitivity in both
their profitability and leverage due to a change in
their end-product commodity prices. Despite their
heavy dependence on low value-added commodities,
Codelco, Vale, and Minera Escondida should be,
in our opinion, among the least sensitive to price
declines because of their world-class cost position
and very high profitability. We also consider
CSN, Grupo Mexico, and Fibria to be in this
category because of their stronger cost positions
Chart 4
Agricultural commodities and forest products
companies, meanwhile, have the highest leverage
(total debt to EBITDA; see chart 4). The latter was
strongly affected by both financing for heavy capital
expenditures in 2007 and 2008 and leading pulp
October 2011
27
and low margin volatility relative to our base-case
projections.
If commodity prices were to drop, we would
expect the agricultural products sector to perform
the weakest, followed by metals and mining and
chemicals. Oil and gas and forest products are
less sensitive, on average, to price changes, in our
sensitivity analysis. The 2008-2009 experience
shows a similar picture, with forest products
struggling more because of volume effects in 2009
(see chart 7). During the crisis, the performance of
the oil and gas industry was distorted by Petrobras’
EBITDA margin improvement due to its local fuel
realization price policies, which is barely correlated
with short-term oil prices.
Companies whose feedstock makes up the bulk
of their costs and is correlated with end-products
are not that sensitive to weaker commodity prices
(Camil, Copec, Braskem, and Petrotemex fall in that
category), but they are affected by our assumption of
lower spreads (see chart 5). Indeed, these companies
typically report tight EBITDA margins, which make
them vulnerable to spread revenue-cost compression
(Ceagro, for example).
Chart 5
Chart 7
As can be expected, the percent weakening of the
leverage ratio is more severe in the lower rating
categories, if we exclude Usiminas as an investmentgrade outlier. That company stands out because
it wasn’t able to recover as quickly as did other
steelmakers, who streamlined their operations in
response to the 2008-2009 crisis. Most companies’
leverage weakens by 20% to 50% for every 10%
price decline in commodity prices (see chart 6). The
larger dispersion among the speculative-grade ranks
may stem from the myriad other factors that affect
such companies, such as concentration, size, low
market share, externalities and diseconomies of scale
and scope, and sovereign risks.
The differences between our sensitivity analysis
and actual 2008-2009 results are greater when
considering the percent change in total debt to
EBITDA. That’s because our test only takes into
account additional debt emerging from EBITDA loss
while each company’s capital strategy affected its
historical leverage. For example, many investmentgrade companies in cash-rich sectors, such as Vale,
Petrobras, Copec, Arauco, and CMPC, increased
their debt (worsening their debt ratio) even during
the 2008-2009 crisis to fund increasing capital
expenditures in capacity expansion or acquisitions.
On the other hand, most companies in the ‘B’ rating
category actually reduced their debt position and
improved their debt leverage ratios during the 20082009 credit crunch--Marfrig was an exception with
its many acquisitions in the period. The increase
in leverage in the 2008-2009 period, in the case of
agricultural commodity companies, came from both
additional debt to finance acquisitions and capital
expenditures (such as in the case of JBS and Marfrig,
two of the largest companies analyzed), as well as
from weakening cash flows. The improvement in
the leverage ratio for building material companies
in 2008-2009 come from deleveraging initiatives
Chart 6
28
October 2011
by virtually most companies in the sector, especially
Votorantim and Cimento Tupi.
for companies whose cost structures are primarily
in local currency, such as mining and forest
products companies (and steelmakers, to a lesser
extent, depending on the level of integration with
feedstock). On the other hand, currency effects
are less relevant for companies that sell a lot in
the domestic market (in these cases, a depreciation
of the currency is also typically associated with
a slowdown of the domestic demand) or in cases
where the difference between feedstock cost and endproduct prices (for instance, petrochemical spreads)
tightens as a result of weaker domestic demand.
Chart 8
Many Other Factors Influence Actual Results
Our sensitivity analysis does not take into account
all the factors that can affect the performance of
Latin American corporate issuers during a period of
commodity price declines. First, as mentioned above,
companies in Latin America rapidly adapted to the
new, weaker operating environment in 2008-2009
by adjusting for the new volume-price level. This
allowed them to resume better operating margins
and profitability, which further improved once
demand recovered. Although some companies may
not have much left to cut, this ability could help
companies again in the future.
We also used a simplistic and generic estimate
of commodity dependence and cost flexibility
in our sensitivity analysis, which ignores the
specificities of each entity. (However, we do fully
factor these specificities into our individual rating
analyses.) Many companies in the region are able
to sustain prices for some time after a price drop
in international markets because of their domestic
market power or because their products are
somewhat differentiated. Although working capital
needs can become a significant burden soon after
a price decline, companies may also reduce them
gradually when volumes and feedstock costs are
declining, which could produce some cash inflows
that would help them withstand the slowdown.
Finally, commodity prices (quoted in U.S. dollars)
historically have shown a strong negative correlation
with foreign exchange rates in the region, such
that a wide fluctuation of commodity prices has
typically been offset by an opposite move in the
exchange rate. This helps preserve cash flows
when denominated in local currencies, a benefit
October 2011
Many of these factors played a role in causing the
distinction between our sensitivity analysis and
actual results. Several companies in the ‘B’ rating
category, for instance, performed better because they
were efficient in dealing with the weak operating
environment, while others benefited from the local
market. On the other hand, some companies in
higher rating categories took severe hits both in
prices and volumes.
Between 2008 and 2009, some lower-rated entities
improved leverage ratios. However, the fact that
investment-grade companies significantly increased
their total debt to EBITDA ratios during 2008-2009
did not necessarily leave them with worse credit
metrics than those lower-rated entities that improved
that ratio because they started from stronger levels.
Investment-grade companies faced relatively modest
credit deterioration, with one-notch downgrades or
negative outlook revisions. Ratings on companies
with more aggressive financial profiles performed
rather differently, sometimes with multiple-notch
downgrades, and some entities defaulted on their
debt. Again, conservative financial policies helped.
Chart 9
29
This is indeed our most relevant conclusion: Because
price declines hurt operating profitability for all
entities (at about 10% to 30% for every 10% price
decline, though at the lower end of this range in
the case of higher-rated entities), a strong financial
profile will make the difference for credit quality if
commodity markets suddenly weaken. The 20082009 global slowdown gives us a glimpse of what
could happen again with Latin American companies
in these sectors, because the price and volume
change then was abrupt and intense. However, prices
recovered just as quickly in the second half of 2009
for most sectors. Therefore, the effects of a potential
commodity price drop may be much harsher if the
trough were to last longer.
Chart 10
30
October 2011
Issuer Ratings
Latin American Commodities Companies
Company name
Sector
Country
Foreign currency rating
Outlook/CreditWatch
Corporacion Nacional del Cobre de Chile
Metals
Chile
A
Stable
Vale S.A.
Metals
Brazil
BBB+
Stable
Compania de Petroleos de Chile COPEC S.A.
Oil
Chile
BBB+
Stable
Empresas CMPC S.A.
Forest
Chile
BBB+
Stable
Minera Escondida Ltda.
Metals
Chile
BBB+
Stable
Votorantim Participacoes S.A.
Building
Brazil
BBB
Stable
Celulosa Arauco y Constitucion, S.A. (ARAUCO)
Forest
Chile
BBB
Stable
Sociedad Quimica y Minera de Chile, S.A.
Chemicals
Chile
BBB
Stable
Petroleos Mexicanos (PEMEX)
Oil
Mexico
BBB
Stable
Companhia Siderurgica Nacional (CSN)
Metals
Brazil
BBB-
Stable
Braskem S.A.
Chemicals
Brazil
BBB-
Stable
Ultrapar Participacoes S.A.
Chemicals
Brazil
BBB-
Stable
Petroleo Brasileiro S.A. - Petrobras
Oil
Brazil
BBB-
Positive
CAP S.A.
Metals
Chile
BBB-
Stable
Grupo Mexico, S.A.B. de C.V.
Metals
Mexico
BBB-
Positive
Industrias Peñoles, S. A. B. de C. V.
Metals
Mexico
BBB
Stable
Ecopetrol S.A.
Oil
Colombia
BBB-
Stable
Usinas Siderurgicas de Minas Gerais S.A. (Usiminas)
Metals
Brazil
BBB-
Negative
Gerdau S.A.
Metals
Brazil
BBB-
Negative
BRF Brasil Foods S.A.
Agro
Brazil
BB+
Positive
Klabin S.A.
Forest
Brazil
BB+
Stable
Suzano Papel e Celulose S.A.
Forest
Brazil
BB+
Stable
Fibria Celulose S.A.
Forest
Brazil
BB
Positive
JBS S.A.
Agro
Brazil
BB
Positive
Cosan S.A. Industria e Comercio
Agro
Brazil
BB
Stable
Grupo Petrotemex S.A. de C.V.
Chemicals
Mexico
BB
CreditWatch Neg
Alto Parana S.A.
Forest
Argentina
BB-
Stable
Camil Alimentos S.A.
Agro
Brazil
BB-
Stable
Magnesita Refratarios S.A.
Metals
Brazil
BB-
Positive
Petrobras Argentina S.A.
Oil
Argentina
BB-
Stable
Marfrig Alimentos S.A.
Agro
Brazil
B+
Stable
Loma Negra C.I.A.S.A.
Building
Argentina
B+
Stable
Cimento Tupi S.A.
Building
Brazil
B
Stable
Virgolino de Oliveira S.A. - Acucar e Alcool
Agro
Brazil
B
Stable
Minerva S.A.
Agro
Brazil
B
Positive
Ceagro Agricola
Agro
Brazil
B
Stable
Grupo Fertinal, S.A. de C.V.
Chemicals
Mexico
B+
Stable
Cemex S.A.B. de C.V.
Building
Mexico
B
CreditWatch Neg
Siderurgica del Turbio S.A.
Metals
Venezuela
B
CreditWatch Neg
Related Criteria And Research
• “Special Report: Latin America Capitalizes On Its
• “The Potential Risk Of China’s Large And
Growing Presence In Commodities Markets,” June
1, 2011
• “Latin America Is Enjoying A Strong Economic
Recovery, But Inflation Is Rising,” March 2, 2011
October 2011
• “Assumptions: Revised Oil and Natural Gas Price
Assumption For 2011, 2012, and 2013”, Feb. 25,
2011
• “Standard & Poor’s Raises Its Aluminum And
Copper Price Assumptions For 2011-2013 And
Those For Gold For 2012-2014, Leaving Other
Metal Price Assumptions Unchanged,” Jan. 17, 2011
31
Latin America Is Seeing A Rise In Privately Financed
Infrastructure Projects
Pablo Lutereau, Buenos Aires (54) 11-4891-2125; [email protected]
In the past several months, government agencies in
Latin America have announced intentions to have
private investors build or finance more than $170
billion in new infrastructure projects in the region
over the next the next few years. (The total varies
significantly, depending on the source.) The agencies
have earmarked about one-half of that money
for transportation and logistics (including ports,
airports, roads, and mass transportation), while
one-third will go toward the oil and gas sector. Out
of the $170 billion, Brazil accounts for the lion’s
share--$130 billion or so, but according to other
sources, this figure could easily double, especially
when considering some expected projects from
Petrobras, the big Brazilian oil company.
Other countries that are actively promoting
private infrastructure investment are Peru (mainly
through its public agency, Proinversion), Chile, and
Colombia, which together may account for between
10% and 15% of the total.
Many years of steady growth in Latin America,
plus its prospects for a sound economic future,
have actually created potential bottlenecks in
infrastructure: insufficient port handling capacity
to deal with higher trade volumes; overcrowded
highways, which must be expanded to accommodate
increasing traffic volumes and make transportation
of certain goods more efficient; inadequate mass
transportation systems, which must be built out to
improve the quality of life in the cities and reduce
travel time between cities. These issues must be
resolved to help spur continued growth. So, in
theory, at least, the new infrastructure projects will
provide attractive opportunities for investors who
believe that the region’s capital markets are coming
of age. Thus, this new round of spending could
augur a broader trend in the region in which private
parties take on more of the government’s traditional
role in building infrastructure.
Overview
• Infrastructure spending in Latin America could
exceed $170 billion over the next few years.
• Although the need for large infrastructure
financing is increasing, governments’ ability to
finance those projects is weakening because of
budgetary demands.
• This new round of financing is likely to come
mostly from the private sector rather than from
governments.
32
Until now, financing by private parties has been
cyclical and relatively limited in Latin America. In
the past, different countries at different times were
able to attract sponsors and investors to develop
projects. That was the case in Argentina, Chile, and
Mexico in the 1990s, thanks to market-friendly
regulatory frameworks and investors’ perception
that those conditions would persist. But regulatory
frameworks and macroeconomic conditions in Latin
America (except Chile) proved to be volatile and
couldn’t sustain the appropriate environment for
long-term private financing, so the region failed to
attract the continuous flow of foreign and domestic
private financing needed for large public projects.
Things could be changing, however, in part because
the size and number of infrastructure projects may
reassure investors who might otherwise worry
that the new round of private financing could be
short-lived. While there’s no doubt that some of the
proposed projects won’t get built, we believe private
investors will find many opportunities. Furthermore,
we expect that a significantly larger share than in
the past will be domestic and regional investors
(through pension funds and insurance companies)
that traditionally have tended to put their money in
banks or in sovereign debt. If this occurs, it would
be more evidence that the region’s capital markets
are continuing to develop.
Sound Economic Prospects Should Fuel Investment
Latin American economies have been solidly
growing for the past decade. In 2010, despite poor
economic conditions in Europe and the U.S., the
region’s real GDP grew 6.5%, whereas from 2002
until 2010, it averaged 3.7% annually. In our view,
economic prospects for the region remain sound. We
expect GDP to grow 4.6% this year and 4.2% in
2012, and we believe that significant improvements
in infrastructure will be a key to sustaining that
growth in coming years. The transportation sector
(all aspects) and oil and gas are the most ripe for
such investments.
However, despite the current prosperity in the
region overall, prospects for new projects may
vary by country, depending on their legal, political,
and institutional environments. All of three of
these factors are cornerstones for the effective and
predictable regulations that are central to attracting
sponsors and investors, which in turn will help lower
the cost of financing.
October 2011
Investors Are Drawn To A Strong Business Framework
The cost of financing infrastructure projects in
Latin America has historically been higher than in
other regions because the risks involved were partly
project-specific--e.g., lack of cars for a new toll road,
or lower-than-projected traffic for a modernized
airport. They were also country-specific, such as
currency mismatches between a project’s revenues
and cost of capital, or the inability to enforce
investors’ property rights. In addition, the track
record of private-party investing in infrastructure
was unclear. For instance, in Argentina, most utilities
have been waiting since the 2001-2002 economic
crisis for a full renegotiation of their concession
contracts.
Investors, both sponsors and creditors, want to see a
profitable opportunity, a clear business framework,
and financing alternatives (among other things)
before they commit capital to infrastructure projects.
Also critical is the expected performance of all the
players when the economy is not doing well, which
will affect whether a project can raise its revenues
over time--for instance, by charging higher tolls on
road projects.
These issues are relevant not only to the equity
providers (the sponsors) but also to creditors,
because in the end, infrastructure projects rely
on rates and tariffs to repay investors. The
interrelation of all parties concerned in Latin
American infrastructure projects has not been
uniform in this regard--and the track record is short
for many countries, such as Peru and Colombia.
Chile is a positive example, given that economic
conditions there for infrastructure projects are
fairly predictable; changes to those conditions
require agreement with private parties under the
terms defined in the concession the government
grants, and the government tends to create true
partnership structures with the private sector. This is
a contrast to the situation in other countries, such as
Argentina, where the utilities’ concession contracts-which regulate and define all future expectations
and the company’s ability to adapt to changing
macroeconomic conditions--have been pending
renegotiation for a decade.
In evaluating a country’s business framework, we
consider, in addition to the institutional, legal, and
political environment, the regulatory framework,
the sustainability of the local or national economy,
and the sophistication and strength of domestic
capital markets. There is no easy way to get a clear
picture of all this for infrastructure projects. It is
clear, however, that many of these factors are usually
October 2011
beyond the government’s direct control.
Some investors tend to view the sovereign’s credit
rating or credit quality as a proxy for the business
framework. However, a strong business environment
usually involves other factors, including a strong set
of written laws, institutions to enforce those laws,
and a track record of sustaining such institutions
and laws. By these measures, Latin America has
significantly improved in recent years, particularly
because many countries in the region (Brazil, Chile,
Colombia, Mexico, Peru, and Uruguay, among
others) have shown stability despite changes in
political administrations.
In many Latin American countries, such as Peru and
Chile, the regulatory environment is designed in a
way that does not constrain credit quality. However,
such regulatory structures may be relatively untested
in a sovereign stress situation--or perhaps the legal
and regulatory framework isn’t robust enough
to guarantee the rights of private parties under
government concession contracts or financing
documents.
In the past 30 years, Latin American countries
have developed their infrastructure using a wide
range of legal structures. Argentina, Chile, and
Peru experimented with privately financed energy
projects, and Argentina, Brazil, Chile, Mexico,
and Peru tried to build or upgrade toll roads with
private funds. Chile used public/private partnerships
(PPP) for jails, while Argentina used a licensing
mechanism for telecommunications projects. We
don’t expect to see new private financing in the form
of privatizations (i.e., the transfer of assets from the
public sector to the private sector). Furthermore,
we think that political trends in the region are such
that PPP-like mechanisms are more likely, with more
intervention by the public sector than in the past.
We think the degree of government involvement or
intervention will vary from country to country and
from sector to sector.
Legally, corporations have developed most privately
financed infrastructure in Latin America so far, and
to a much lesser extent have used project finance
techniques. Yet in the past few years, we have seen
more use of project finance--e.g., in the energy
sector in Chile, for water projects in Peru, and for
toll roads in Panama and Brazil. As domestic capital
markets evolve, we expect to see more asset-based
financing. We think this is particularly likely because
asset financing related to infrastructure projects
tends to be long-term financing that fits well with
the investment strategies of pension funds and
insurance companies.
33
Global Capital Markets Remain Key To Financing
Compared with corporate financing, infrastructure
project financing requires long tenors, because they
are capital intensive and the debt takes longer to
repay. For investors in Latin America, this could
mean more exposure to changing environments,
so the institutional environment and the legal
framework become extremely relevant. The tenor
of financing often is shorter in Latin America than
in Europe, the U.S., Canada, or Australia; a shorter
tenor sometimes means a lot of the debt amortizes
in the last years of the financing, and in the case
of government concessions or PPPs, this creates
credit uncertainty. In addition, although Latin
American capital markets have been maturing, the
need for infrastructure financing is so significant
that domestic financing is still insufficient in most
markets (except in Chile and Brazil). This means
that Latin America still needs the global capital
markets, where financing is likely to create a
currency mismatch between revenues and debt,
with borrowing in hard currency (most likely, U.S.
dollars) and revenues in domestic currency.
Even so, the alternatives for financing have
improved significantly in recent years. Not only
is there plenty of liquidity in the global markets,
34
but most Latin American countries, such as Brazil,
Colombia, Mexico, and Peru, have been growing
and expanding their domestic capital markets.
The ability to finance in local currency provides a
significant strength for infrastructure projects that
serve domestic markets. By contrast, projects tend to
finance oil, gas, and export-oriented projects in U.S.
dollars. As a sign of their increasing sophistication,
Latin American capital markets can now provide
financing to projects with longer tenors. In the
region’s most advanced capital markets, 10-year
bonds in local currency are increasingly common,
and in some markets, such as Chile and Mexico, it
is possible to issue bonds in domestic currency of 20
years or longer for infrastructure financing.
Private Investment Will Likely Increase
In the past, Latin America has experimented with
funding infrastructure projects through private
financing. Now we believe the time has arrived when
investors feel more confident about putting their
money into such ventures. This is true even--and
maybe especially--for investors in the region who’ve
typically laid their bets elsewhere.
Related Research
October 2011
South American Banks’ Resilience Should Support Rapid
Credit Growth
Sergio Garibian, Buenos Aires (54) 11-4891-2119, [email protected];
Milena Zaniboni, Sao Paulo (55) 11 3039-9739, [email protected];
Sergio Fuentes, Buenos Aires (54) 11-4891-2131, [email protected];
Sebastian Liutvinas, Buenos Aires (54) 11-4891-2109, [email protected];
Delfina Cavanagh, Buenos Aires (54) 11-4891-2153, [email protected]
A favorable economy and solid metrics for the
local financial systems have spurred growth in the
southernmost Latin American countries since 2009.
After a short-lived reduction in credit expansion as
banks were trying to assess the impact of the global
credit crisis, banks in Argentina, Brazil, Chile, and
Peru have credit portfolios that continued to grow
at a rapid pace. Recent expansion has led to more
banking activities than before the global financial
crisis, and we expect continued growth even in
Brazil, where the central bank created regulations
aimed to contain credit growth and inflation. (Listen
to the related podcast titled, “Why South American
Banks Are Well-Prepared For Credit Growth,” dated
June 15, 2011.)
inclusion has pushed consumer lending, overall
credit penetration in the region is still low, and,
except for Chile, mortgage lending is just beginning
to grow. Although rapid credit expansion can lead
to higher problem loans, the quality of banks’ credit
portfolio improved again in 2010 and 2011 after
some deterioration in 2009. We expect credit quality
to remain stable at current levels for the majority
of South American banking systems with some
manageable deterioration in Brazil given banks’
provisioning and profitability. Even after years of
greater volatility and credit growth, banks in the
region have maintained adequate capitalization
through both internal generation and increasing
their capital bases.
Chart 2
Overview
• Banks in Argentina, Brazil, Chile, and Peru have
credit portfolios that grew quickly.
• Consumer lending and corporate sector financing
helped increase private sector loans.
• We believe the South American banks are wellprepared to handle strong credit growth.
Chart 1
We believe the South American banks are wellprepared to deal with strong credit growth and
will maintain adequate risk, relatively good
capitalization, and a sufficient cushion in net interest
margin (NIM) despite strong competition in their
markets.
Consumer lending and corporate sector financing
have driven an increase in private sector loans in
the past year. However, the credit-to-GDP ratio
is still low compared with the financial systems
of most developed economies. Although social
October 2011
35
Key Indicators In 2010 (%)
Argentina
Brazil
Chile
Peru
Gross NPAs/customer loans
2.1
3.2
2.7
1.5
Loan loss reserves/NPAs
165.8
152.6
93.7
245.6
Capital ratio
17.7
13.6
13.1
13.7
Customer loans/Total assets
39.0
41.4
69.3
61.1
Liquid assets/Total assets
33.3
43.7
N/A
20.3
Total customer loans growth (2010 vs. 2009)
37.2
25.6
8.7
18.7
ROA
2.8
1.6
1.5
2.4
ROE
24.4
16.8
18.6
24.2
Noninterest expense/revenues
55.1
62.9
45.9
41.4
N/A--Not applicable. Capital Tier 1 level as defined by each country´s regulator.
Argentine Banks Should Stay Stable Despite Risks And
Inflation
After recovering from the financial crisis of 2002,
Argentine banks maintained steep growth in loans
to the private sector (of more than 20%) during the
past seven years -- except in 2009 (9.3%) because of
international turmoil. We expect banks to continue
to show enough flexibility and stability to keep
delivering high growth, adequate asset quality,
and adequate profitability for the next two years.
However, the Argentine financial system still suffers
from weaknesses such as the lack of development
lending, the prevalence of short-term funding, and
the risks inherent to the Argentine economy, in
which high inflation has made it difficult to plan
beyond the short term.
Lending to the private sector increased 22.3% on
average for the past three years, raising its share
of total assets to 39% in December 2010 (13% of
the loans-to-GDP ratio). Although consumer and
commercial loans increased at almost the same rate
as the system, at 30.9% and 25.7%, respectively,
for the same period, mortgages grew at a slower
rate of 17.2%. As of December 2010, commercial
loans represented the largest portion of loans to the
private sector at 52%, and consumer loans were
37%. Mortgage loans represented only 11% in
2010, down from 13.7% in 2007. The low longterm funding, high property values compared with
salaries, and the absence of individuals who met the
banks’ requirements for loans continue to represent
major challenges for mortgage lending.
Although the local banking system has grown in
the past few years, consistent growth in the private
sector and extending credit terms represent the main
difficulties for the next three years. Private sector
growth is especially important because of the low
36
13% credit-GDP ratio compared with other Latin
American countries and a 24% precrisis level.
We also believe that sound economic policies and a
predictable legal and regulatory framework remain
key factors for the development of the Argentine
banking system.
The Argentine financial system continues to enjoy a
low nonperforming loans (NPLs) ratio of 2.1% and
an adequate loan loss reserves ratio of 165.8% as
of Dec. 31, 2010. The system continued exhibiting
good profitability ratios, recording a 2.8% return
on assets (ROA) in 2010 that compares well with an
average ROA of 2.2% in the past three years.
Capitalization has also remained adequate and stood
at 17.7% in 2010, according to local regulator
methodology. Although the system has a shortterm funding base, we consider it to have adequate
liquidity because of its relatively high liquid assets.
Cash, money market instruments, and liquid market
securities represented 33.2% of total assets and
45.2% of total deposits as of December 2010.
We expect the Argentine banking system to continue
growing more than 30% in nominal terms in 2011,
enjoying good profitability with ROA at about
2.5%, and posting adequate capitalization. We also
believe asset quality will remain stable in the next
year, with NPLs at less than 2.5%.
Conservative Supervision And Banks’ Adequate
Financial Profiles Should Mitigate Risks In Brazil
Macroeconomic stability in Brazil has added nearly
30 million people to the middle class and given
them new access to banking services and consumer
credit. The volume of credit to both individuals
and corporations in Brazil has grown steadily and
October 2011
quickly since 2007, reaching 46.6% of GDP in April
2011 from a low 27% just 10 years ago. Although
credit to GDP is still low compared with developed
economies, we are monitoring the quality of loans
closely because, in our view, any fast expansion in
credit brings substantial risk to banks’ portfolios.
We believe that banks have maintained adequate
origination standards. However, the payment
behavior of this class of first-time borrowers hasn’t
been tested in a down cycle -– simply because the
country has not faced one recently –- and remains
our key concern for the Brazilian banking system.
Although the NPL-to-total loans ratio has been
falling since September 2009, reaching a low of
4.7% for nonearmarked loans (as opposed to
directed lending to agribusiness, housing, and
BNDES) and 3.3% for total system loans, recent
central bank data indicate some increase in early
delinquency (NPLs between 15 and 90 days), which
could be signs of a worsening loan portfolio. Still,
we believe that Brazilian banks are well-prepared to
face a potential deterioration in credit quality.
However, we don’t expect a significant increase in
NPLs in the Brazilian banking system.
Families’ leverage -- the ratio of debt to disposable
income -- is fairly high, even when compared with
developed economies, at approximately 25%. In
addition to a relatively high debt burden, we expect
families’ budgets to be tighter given higher inflation
and cost of credit, and the shortening of average
loan tenor as a consequence of recent policies that
the Brazilian central bank implemented, which are
intended to contain credit growth and limit risks.
However, assets or salaries (auto loans and payroll
deductible loans, respectively) secure the types of
consumer lending that have grown the most in recent
years, mitigating credit risk. These asset classes
corresponded to 76% of nonearmarked credit as of
April 2011.
We believe that Brazilian banks can absorb higher
NPLs because:
• The system is well-provisioned for the aggregate
of the system (168% of NPLs as of April 2011)
and reported about R$10 billion in excess of
the minimum that the Central Bank requires,
which provides adequate cushion to face higher
delinquencies.
• Banks can adjust their lending strategy, and
therefore their loan portfolios, quickly because
average loan tenor is still short (27 months for loans
to individuals and 22 months for corporate loans).
In the global credit crisis of 2008 and 2009, private
October 2011
Brazilian banks quickly stopped lending or tightened
standards to try to reduce problems.
• Banks have maintained high risk spreads (27.7%
as of April 2011) throughout economic cycles. With
NIM of about 6%, the Brazilian financial system can
absorb higher losses.
• Banks are adequately capitalized, and we view the
quality of capital as good. Regulatory capital for
the consolidated system stayed at 17.1% in 2010
with Tier I at 14% in 2010 (which compares with
a minimum Tier I by Basel of 4%). The minimum
capital ratio in Brazil is 11% of risk-weighted assets,
though Basel would require 8%.
We believe that the strength of the system relies on
prudent regulation and comprehensive supervision
from the Brazilian central bank. With a more
consolidated framework for policy making and
enforcement, we believe the central bank has the
tools to monitor the system and detect early signs
of problems in liquidity, capital, or credit quality,
and it has the capacity to act swiftly. Measures the
central bank took in December 2010 indicated that
it is attentive to risks in the credit portfolio, which
it demonstrated by acting to reduce the growth in
consumer lending. The central bank also raised
capital requirements for longer term and riskier
(higher loan to value (LTV)) loans and also boosted
reserve requirements.
Data that the central bank released in May regarding
the loan portfolio indicated that such measures
have eased the pace but not curtailed credit growth.
Nonearmarked credit to consumers grew just 1%
in April compared with the previous month, but it
is already 18.3% higher than in the same period of
2010. Corporate loans increased by 1.7% in April
and 7.2% compared with April 2010.
The Brazilian development bank Banco Nacional
de Desenvolvimento Economico e Social (BNDES;
foreign currency: BBB-/Positive/--, local currency:
BBB+/Stable/--), which until 2010 had been a key
proponent of countercyclical fiscal policies and
credit growth, has eased the pace of disbursements
significantly in 2011, and its direct and on-lending
credit (loans originated by other banks but funded
by BNDES) have grown only 0.3% in April and
2.5% year to date. We expect fewer loans to come
from BNDES, which is also part of the government’s
effort to cool the credit market and ease pressure on
inflation.
In general, banks expect their credit portfolios to
grow 15%-20% in 2011, with a strong focus on
37
payroll deductible loans and housing and corporate
lending, which tend to have lower NPLs than other
consumer financing such as auto and personal
loans. We expect the Brazilian banks to face some
deterioration in the quality of their loan portfolio
in 2011, leading to higher provisioning costs that
higher interest margins after the recent monetary
tightening should partly mitigate.
Low Risk And A Good Economy Support Chilean Banks
The Chilean financial system is solid, and we expect
the growing economy and relatively low political
and regulatory risk to keep it stable. Domestic credit
to the private sector represented almost 85% of GDP
-- the most of any country in South America -- and
it’s growing quickly at 2x GDP growth. The rate is
similar to 2010’s but less than the 3.5x rate of 20042008, when the Chilean economy grew about 5%
per year because of the favorable global economy.
We expect GDP to grow 6%-7% and credit to grow
10%-15% in 2011.
The Chilean financial system is highly concentrated
with about 25 banks. The largest six in terms
of loans enjoy relatively high credit quality and
represent about 85% of total domestic credit. The
largest player in the Chilean financial system is the
Spanish-owned Banco Santander-Chile S.A. (A+/
Positive/A-1), with a 21% share in total loans.
However, many local banks are among the top
six, including Banco de Chile S.A. (A+/Stable/A-1),
although Citibank N.A. (A+/Negative/A-1) owns
50% of the company that controls the bank; Banco
de Credito e Inversiones (A-/Positive/A-2); and
Corpbanca (BBB+/Positive/A-2). The only stateowned bank is Banco del Estado de Chile (A+/
Positive/A-1), with a 15% share in total loans. Banco
del Estado has a large share in retail mortgages,
mainly in the lower income segment.
Corporate lending accounts for a large proportion of
domestic credit and accounts for significantly more
residential mortgages than in other South American
countries -- about 25%, compared with about 11%
in Argentina, less than 15% in Brazil, and 15% in
Peru -- partly because of the more stable economy.
Domestic credit in Chile is higher than the regional
average in retail mortgages, but the system has lower
NPLs, adequate provisions, and guarantees from the
Chilean government.
38
Chart 3
To counter the global financial crisis, Chilean
banks adopted a more conservative policy, which
significantly decelerated credit growth. Consumer
loans increased by 15% in 2007, 10% in 2008, and
only 1% in 2009 before rebounding to 12% growth
in 2010.
In general, Chilean banks have healthy asset quality
with NPLs reaching 2.7% of the system’s loans as of
December 2010. The banks are also highly efficient,
with nonoperating expenses at 45% of operating
revenues, less than the 63% of Brazil’s and 55%
of Argentina’s, and in line with 41% for Peru. The
banks showed good profitability, with average ROA
at about 1.5% as of December 2010, including the
low profitability of Banco Estado because of higher
income tax than private banks (58% versus 18%).
Chilean banks also post adequate RAC at 7%-9%,
partly because of strong economic growth in Chile
since 2003, except in 2009.
Favorable funding with a relatively large deposit
base from retail and institutional investors (pension
and mutual funds), which represents about 70%
of total liabilities, also enhances Chilean banks’
credit. Deposits come from a well-developed
domestic capital market that allows the banks to
have access to long-term funding in local currency
by placing long-term bonds in inflation-adjusted
currency to finance residential mortgages and
Chilean corporations with revenues in Chilean
pesos. In addition, Chilean banks enjoy good access
to credit in the international markets through bonds
and foreign bank borrowings, which allow them
to improve their corporate lending. Chilean banks
also benefit from government support, such as the
October 2011
liquidity injection during the 2008-2009 financial
crisis, which proved to be an effective way to
minimize the impact.
We expect the growing economy to boost Chilean
banks and the availability of banking services in the
country to reach an about 90% domestic credit-toGDP ratio by 2012. The banks should have healthy
asset quality with NPLs at less than 3%, good
profitability with return on average assets (ROAA)
of 1.5%, and adequate capitalization, assuming
good internal capital generation with dividend
payouts of about 50%.
Regulations Helped Enhance Banks In Peru
The Peruvian financial system showed resilience
during the 2009 global economic downturn.
The banking system maintained solid indicators
and began to grow again in 2010. The system’s
recovery has largely resulted from regulations
that encouraged transparency and embraced
international risk management best practices coupled
with conservative underwriting, low leverage from
individuals and corporations, and an improvement
in the payment culture.
The global downturn in 2009 ended four years
(2005-2008) of high credit expansion at an annual
average rate of 27%. Credit significantly decelerated
to 0.6% growth in 2009 but expanded at an 18.7%
rate in 2010, in line with local economic growth.
The system enjoyed healthy asset quality with a low
NPL ratio of 1.5% and a high loan loss reserves
ratio of 245.6%, as of December 2010. Asset quality
has been steadily improving for the past five years.
NPLs reached 5.8% in 2003 and 2.1% in 2005,
and slightly increased to 1.6% in 2009. At the same
time, the banks showed good liquidity (20% of
total assets as of end-December 2010), and profits
are relatively high. The banking system exhibited a
stable, high ROAA at an average 2.4% for the past
five years. Capitalization has also remained sound
and stood at 13.7% in 2010, according to Peruvian
regulator methodology.
Since 2006, total lending has increased at a 21%
annual rate. While mortgage and commercial loans
increased at a similar annual average rate of 19.6%
and 20.4%, respectively, for the same period,
consumer loans exhibited higher growth rates of
25.5%. Still, consumer loans represent a minor
October 2011
share of total loans at 17% in 2010, increasing from
14.4% in 2005. Commercial loans represent the
largest proportion, at 68.9%, of total loans in 2010.
Mortgages are at only 14.1% of total loans and have
remained relatively stable for the past five years.
Despite improving, high dollarization -- using
foreign currency instead of domestic -- of the
economy and banks’ balance sheets still represents
the financial system’s main constraint. The system
has been steadily declining to 52.4% dollarization
in total loans as of December 2010 from 71.5% in
2005 and 77.9% in 2003. Deposits are also mostly
denominated in foreign currency at 48% of total
deposits in 2010, down from 66.5% in 2005.
Credit expansion has been significant and faster than
GDP growth, deriving in a higher credit-GDP ratio
at an estimated 24.6% in 2010 from 19% in 2005.
However, lending to the private sector is still low
relative to GDP compared with other countries in
the region.
Given the favorable economy in Peru that we
expect for the next two years, and if the political
environment doesn’t deteriorate, we expect the
banking industry to continue growing at high
rates, similar to 2010. And we expect the Peruvian
banking system to be able to maintain its credit
quality and adequate financial performance despite
high growth.
The Banks Are Set To Grow
In Argentina, Brazil, Chile, and Peru, banks have
shown rapid growth in credit portfolios, and
lending has grown in each country. Expansion has
led to more banking activity than before the 2009
global financial crisis. Private sector loans have
increased in the past year, even though the banks
have low funds for private borrowing compared
with the financial systems of other regions. Credit
quality has improved while the banks maintained
high provisioning levels. Capitalization should also
remain adequate to accommodate credit growth, and
higher earnings should act as a buffer for losses. As
a result of all of the improvements, we believe that
these South American banking systems are ready to
handle strong credit growth and should maintain
adequate risk and good capitalization.
Related Research
39
Will Future Flow Securitizations Help Fund Peru’s
Growing Mining Export Industry?
Eric Gretch, New York (1) 212-438-6791, [email protected];
Sol Ventura, Buenos Aires (54) 11-4891-2114; [email protected];
Juan Pablo De Mollein, New York (1) 212-438-2536, [email protected].
Much of Latin America is experiencing an economic
boom, thanks largely to its considerable supply
of commodities—whose prices have risen rapidly
in step with demand from China. Peru has been a
big beneficiary of the commodities windfall, which
contributed to nearly 9% expansion in the country’s
economy in 2010. In fact, Peru’s mining and energy
sector expects $50 billion in new investments over
the next decade, a sum that includes the recent $4.8
billion investment in Peru’s Conga mine. Officials
hope the mine will produce as much as 680,000
ounces of gold and 235 million pounds of copper
within five years of its opening in 2015.
Such long-term investments show confidence that
commodity prices will keep rising. But if China’s
economy and its demand for commodities were to
cool, prices would begin to slip. Just a decade ago,
for instance, a global economic slowdown caused
the average prices for copper, oil, pulp, gold, and
silver to drop significantly in a year’s time.
Overview
• Peru’s growing mining export industry is poised
for further expansion.
• The high costs of funding expansion projects,
combined with Peruvian banks’ restrictive lending
policies and the need to hedge against price
fluctuations, could make future flow securitizations
an attractive funding option for some producers.
• Previous commodity-backed export future flow
transactions in Peru and other parts of Latin
America have generally performed well and
maintained their credit quality.
Price volatility is part and parcel of the commodities
markets, and to mitigate that risk, some producers
in Peru and other parts of Latin America have
entered into commodity-backed export future
flow transactions: Securitizations that involve the
future sale of their commodities. While Peru has
tapped this market to fund projects in the past, it
has no transactions currently outstanding—and the
obvious question is why these producers, who’ve
been reaping enormous profits, would seek such
alternative financing.
Although Peruvian commodity companies have
built up huge cash reserves, expansion projects,
40
such as the Conga mine, cost billions of dollars, and
access to bank credit isn’t easy because of Peruvian
banks’ very restrictive lending policies. Moreover,
commodity companies planning for potential price
volatility may view securitization as a way to cover
today’s exploration costs using future production.
In a country where roughly 60% of exports are
minerals, and which plans to become a major
regional natural gas exporter, planning and building
for tomorrow will be crucial.
Commodity-Backed Export Future Flow Securitizations
Have Performed Well Historically
Commodity-backed export future flow
securitizations generally ensure the future sale of
producers’ commodities in one of two ways. The
first is to sell all or some of their commodity export
receivables into an offshore trust. In such cases,
the transactions are either backed by the entire
operations of the company or particular mines, oil
fields, or products. Alternatively, the producer could
sell a set quantity of that commodity—in the form of
export contracts—which, at a stressed price, would
be expected to generate enough cash flow to cover
the transaction’s debt service.
Under the first scenario, the investor bears both
the risk of variations in export volumes and the
commodity price in question. Under the second
scenario, the contracts typically stipulate fixed
volume levels and occasionally incorporate pricing
floors. Nevertheless, the investor in these cases takes
on the risk of the offtakers, although this is generally
mitigated through replacement language. Overall,
the producer’s creditworthiness is a key indicator of
how well that transaction might perform. History
has shown that low-cost producers with conservative
financial policies have stayed profitable even during
the low end of pricing cycles with these transactions.
Here are some examples of transactions out of Latin
America that have successfully already paid off:
Yanacocha Receivables Master Trust
• Initial rating: ‘BBB-’
• Originator: Minera Yanacocha S.A.
• Issuance date: May 14, 1997
• Country: Peru
• Amount: $100 million
October 2011
Yanacocha Receivables Master Trust was a
securitization of future gold receivables (see chart
1 for the transaction structure). The interest and
principal payments due to certificate holders were
backed by the future sale of proven gold reserves
world. The rating on the transaction was higher
than the foreign currency rating on Peru given
the strategic nature of Yanacocha’s operations,
the lack of refining capacity in Peru at the time,
and the structural features of the transaction that
discouraged government interference that could
result in a loss of hard currency flows.
Coverage ratios for the Yanacocha transaction
remained strong throughout its life despite
fluctuating gold prices, which dropped to a low of
$255 per ounce in mid-1999 from a high of $334
per ounce in June 1997, when Standard & Poor’s
first rated the transaction. Debt service coverage
ratios fluctuated with the price of gold, peaking
at 14.5x in March 2000, when gold prices were
October 2011
to third-party purchasers. When Standard &
Poor’s Ratings Services assigned its rating to the
transaction, Minera Yanacocha S.A. (Yanacocha)
was the largest gold producer in Latin America
and operated one of the lowest-cost mines in the
approximately $288 per ounce. The coverage ratio
dropped to a low of 7.91x at the end of 2001 as a
result of lower gold prices (approximately $271 per
ounce) and higher debt service following the issuance
of additional loans with the International Finance
Corp. The continued strength of the transaction
and the stability of the ratings were a testament to
the company’s ability to efficiently and effectively
operate the mine during periods of volatile price
movements.
Oil Purchase Co. and Oil Purchase Co. II
• Original ratings: both ‘BBB’
• Originator: Ecopetrol (a state-owned oil company)
• Issuance date: Oct. 28, 1997 and May 11, 1999
• Country: Colombia
• Size: $290 million
41
The Oil Purchase Co. (OPC) and Oil Purchase Co.
II (OPC II) transactions were securitizations of
future crude receivables associated with certain of
Ecopetrol’s oil fields (see chart 2 for the transactions’
structure). The transactions benefited from an
existing offtaker contract with Repsol S.A. to the
size of 550,000 barrels of crude each month, with
a floor price of $13.00 per barrel. At the time of
exports in 1996 accounted for 27% of the country’s
exports. As a state-owned company, Ecopetrol
contributed about $2 billion to the government’s
revenues through taxes, revenues, and dividends.
In the event of a sovereign crisis that necessitated
foreign exchange, the production, shipping, and
sales of oil from these fields would have been a top
priority for the government.
The OPC and OPC II transactions performed well
despite volatile oil prices. For example, oil prices
dropped to around $13 per barrel in 1999 and
spiked to more than $30 dollars a barrel in 2000.
42
the transaction, Ecopetrol was the sole supplier
of refined oil products, principally gasoline, in
the Colombian domestic market. We rated the
transaction higher than the foreign currency rating
on Colombia given the importance of Ecopetrol’s
export business, which accounted for 15% of
Colombia’s total exports in 1996. Overall, oil
The transactions withstood the drop and continued
to perform given Ecopetrol’s ability to produce and
export a sufficient amount of oil from its Cusiana
and Cupiagua fields. A price hedge in the crude oil
supply contracts covered price risk. The contracts
on the OPC transaction, for example, obligated
the buyer, Repsol, to take delivery of a specific
number of barrels at a minimum price so that debt
service coverage remained above 1x, even when
oil prices dropped to below the $13 hedge price in
1998. Since the structure eliminated price risk, our
ratings reflected Ecopetrol’s ability and willingness
to fulfill its obligations under the contracts, even
October 2011
while assuming greater stressed prices than it had
experienced in 1998. Despite the strong performance
of the transaction, we downgraded it twice from the
initial ‘BBB’ rating to ‘BB+’ in May 2000 as a result
of a deteriorating sovereign environment, which we
believed could weaken the future performance of the
transaction. Despite our concerns, the transaction
performed as expected and matured in 2002.
Southern Peru Ltd.
• Original rating: ‘BBB-’
• Originator: Southern Peru Ltd. (subsidiary of
Southern Peru Copper Corp.)
• Issuance date: May 30, 1997
• Country: Peru
• Size: $150 million
The Southern Peru Ltd. secured export notes were
backed by a percentage security interest in future
receivables from the sale of copper to specific
offtakers (see chart 3 for the transaction structure).
At the time of issuance in 1997, Southern Peru
Copper Corp. was the eighth-largest copper
producer and one of the 10 lowest-cost producers
in the world. We rated the transaction above the
foreign currency rating on Peru given the importance
of Southern Peru Copper Corp.’s export business,
which accounted for 27% of Peru’s copper exports
and 13% of total Peruvian exports in 1996.
Overall, copper exports accounted for 40% of total
exports. Moreover, there was no unmet domestic
demand: The country exported 94% of its copper.
While the deal performed well, we downgraded it
October 2011
43
to ‘BB-’ from ‘BBB-’ over the course of two years
because the parent company’s balance sheet severely
deteriorated. In fact, shortly after repayment of this
deal, the parent selectively defaulted on its corporate
debt.
What Will Fund Peru’s Continued Mining Industry Boom?
Peru’s exploration investment continues to surge.
But that doesn’t mean the country’s mining industry
isn’t without its challenges—particularly with
financing future exploration and drilling. The
commodities price boom won’t last forever, and
producers will need to find ways to hedge against
future price volatility. It is always convenient and
prudent for commodities producers to have different
financing alternatives to face macroeconomic
challenges like price volatility. Among these, future
flow securitizations represent secured options for
investors. These structures, given the adequate credit
enhancements, allow for a transaction’s rating to be
higher than the issuer’s credit rating and, thus, often
achieve more competitive interest rates for funding
investments and capital expenditures.
In the past, producers in the country have
successfully turned to commodity-backed
export future flow transactions to address these
issues. What remains to be seen is whether these
transactions will prove to be attractive in today’s
market.
44
October 2011
October 2011
45
Selected Financial Data And Credit Statistics
Peer Comparison Table
Company
Alicorp
S.A.A
Compania
de Minas
Buenaventura S.A.A.
Corporacion
Lindley S.A.
Edegel
S.A.A.
EDELNOR
S.A.A.
EnerSur
S.A.
Gloria
S.A.
Luz del
Sur
S.A.A.
Minera
Barrick
Misquichilca S.A
Minera
Yanacocha
S.R.L
1,336.2
808.5
572.4
412.7
609.7
398.9
814.6
613.8
1,200.0
1,866.8
EBITDA
219.9
310.5
79.7
209.5
165.9
142.1
132.2
182.9
1,004.3
1,113.4
Net income from cont. oper.
101.1
662.9
13.4
86.6
68.2
81.1
75.6
104.3
621.3
591.2
Funds from operations (FFO)
Mill US$, Last fiscal year
Revenues
221.3
528.2
52.9
180.0
107.3
116.1
96.4
128.0
677.3
703.7
Cash flow from operations
89.4
418.2
49.9
147.0
123.2
136.7
67.4
127.9
569.9
623.7
Capital expenditures
33.0
40.8
81.7
19.1
58.5
33.7
51.9
43.5
48.1
246.5
Free operating cash flow
56.3
377.3
(31.8)
127.9
64.7
103.1
15.5
84.3
521.7
377.2
Discretionary cash flow
17.2
260.3
(31.8)
51.9
22.2
58.9
(28.8)
5.8
519.9
377.2
Cash and short-term investments
44.8
442.0
15.1
29.5
56.5
49.6
28.0
4.8
63.1
880.9
Debt
200.3
0.0
222.7
444.6
356.8
306.2
144.8
219.9
320.3
189.8
Equity
605.1
2,607.9
208.7
856.0
330.6
250.9
440.8
409.2
2,968.2
2,303.4
Debt and equity
805.4
2,607.9
431.5
1,300.6
687.4
557.1
585.6
629.1
3,288.5
2,493.1
EBITDA margin (%)
16.5
38.4
13.9
50.8
27.2
35.6
16.2
29.8
83.7
59.6
EBITDA interest coverage (x)
19.6
35.4
3.6
8.6
7.3
10.9
14.2
12.9
309.1
120.8
Return on capital (%)
23.5
30.7
11.5
9.4
15.1
22.3
18.6
22.4
31.4
37.3
110.4
N.M.
23.8
40.5
30.1
37.9
66.6
58.2
211.5
370.8
28.1
N.M.
(14.0)
28.8
18.1
33.7
10.7
38.4
162.9
198.8
0.9
0.0
2.8
2.1
2.2
2.2
1.1
1.2
0.3
0.2
24.9
0.0
51.6
34.2
51.9
55.0
24.7
35.0
9.7
7.6
1,254.9
652.9
492.9
388.4
541.2
405.8
716.6
550.4
1,278.4
1,865.7
169.1
223.0
71.8
189.2
147.9
152.3
103.8
161.7
1,046.6
1,105.2
67.1
469.9
14.8
68.4
58.7
80.2
76.8
89.9
635.4
589.3
160.9
357.9
50.2
141.1
95.7
111.8
88.8
113.1
707.3
788.3
90.1
293.4
46.6
127.9
99.5
95.0
44.1
113.5
707.5
782.1
31.0
43.7
64.0
17.4
62.4
26.3
31.5
46.2
25.5
168.4
59.1
249.7
(17.4)
110.4
37.1
68.7
12.6
67.2
682.0
613.7
35.2
180.1
(17.4)
52.9
(8.7)
8.4
(24.3)
1.0
681.4
340.4
FFO/debt (%)
Free operating cash flow/debt (%)
Debt/EBITDA (x)
Total debt/debt plus equity (%)
Average of past three fiscal years
Revenues
EBITDA
33.9
431.8
11.3
29.4
27.6
38.5
22.8
5.1
40.4
590.3
Debt
236.5
181.4
167.5
465.8
317.2
277.5
151.2
217.2
279.0
272.0
Equity
509.2
2,067.9
176.7
787.6
296.6
225.3
380.1
358.9
2,346.9
1,747.1
Debt and equity
745.8
2,249.3
344.2
1,253.4
613.8
502.8
531.3
576.1
2,625.9
2,019.2
EBITDA margin (%)
13.3
34.2
14.6
48.5
27.4
37.5
14.4
29.4
81.9
59.2
10.9
12.9
3.1
6.0
6.8
11.9
9.8
12.0
172.9
94.4
18.0
30.4
15.4
8.6
14.6
24.2
20.5
20.8
40.8
44.6
FFO/debt (%)
66.2
197.2
30.3
29.8
30.2
40.3
59.0
51.8
253.5
289.8
23.8
137.6
(10.1)
23.3
11.4
24.7
7.5
30.5
244.4
225.6
1.4
0.8
2.3
2.5
2.1
1.8
1.5
1.3
0.3
0.2
32.1
8.1
48.5
37.3
51.7
55.2
28.6
37.8
10.6
13.5
Debt/EBITDA (x)
46
October 2011
Company
Minsur
S.A.
Petroperu
S.A
Saga
Falabella
S.A.
Shougang
Hierro Peru
S.A.A.
657.9
697.5
Sociedad
Minera
Cerro
Verde
S.A.A.
Supermercados
Peruanos
S.A.
Telefonica
Del Peru
S.A.A.
Telefónica
Móviles
S.A.
UCP
Backus y
Johnston
S.A.A.
Volcan
Compañia
Minera
S.A.A.
Mill US$, Last fiscal year
Revenues
1,212.6
3,555.0
2,369.0
854.1
2,633.9
1,348.9
1,141.6
973.3
EBITDA
629.6
182.7
90.0
458.2
1,753.5
60.8
1,066.7
513.0
367.0
495.8
371.8
106.7
52.3
291.5
1,054.4
19.0
305.1
250.7
184.4
272.2
393.7
146.9
59.4
344.3
1,148.5
42.5
744.0
410.6
281.9
397.8
402.9
(64.4)
75.4
347.2
1,256.9
56.3
764.9
460.4
336.6
353.9
131.8
68.1
16.5
55.8
122.2
60.2
470.0
235.5
96.2
93.0
271.1
(132.5)
58.9
291.4
1,134.7
(3.9)
294.9
224.9
240.5
260.9
169.6
(132.5)
37.5
238.5
184.7
(3.9)
9.7
(22.6)
53.7
185.0
618.5
57.4
29.1
246.7
388.1
38.7
201.6
69.0
87.5
135.4
Debt
290.3
439.2
57.8
257.4
8.5
118.3
1,483.7
340.1
82.9
42.9
Equity
1,810.7
480.8
145.5
356.9
1,550.5
144.2
1,266.9
327.1
656.7
1,075.6
Debt and equity
2,101.1
920.0
203.3
614.3
1,559.0
262.5
2,750.6
667.2
739.6
1,118.5
EBITDA margin (%)
51.9
5.1
13.7
65.7
74.0
7.1
40.5
38.0
32.1
50.9
40.1
50.3
24.8
13,544.6
N.M.
3.9
12.6
36.0
67.3
349.6
FFO/debt (%)
Debt/EBITDA (x)
27.0
18.5
45.6
89.2
101.3
18.1
22.6
61.0
34.8
36.3
135.6
33.5
102.8
133.8
13,553.2
36.0
50.1
120.7
340.1
927.1
93.4
(30.2)
101.8
113.2
13,390.3
(3.3)
19.9
66.1
290.2
608.1
0.5
2.4
0.6
0.6
0.0
1.9
1.4
0.7
0.2
0.1
13.8
47.7
28.4
41.9
0.5
45.1
53.9
51.0
11.2
3.8
Average of past three fiscal years
Revenues
853.3
3,150.1
405.3
478.4
1,987.5
705.4
2,445.7
1,205.5
986.1
754.3
EBITDA
500.6
113.7
50.3
267.8
1,379.3
46.5
1,005.6
450.0
332.4
339.0
303.8
18.1
27.6
158.5
827.1
13.0
244.8
213.9
160.4
206.3
324.0
42.4
31.8
196.8
909.9
33.7
734.4
351.7
248.3
300.0
315.6
(12.0)
42.2
169.1
853.5
51.4
639.7
383.2
300.2
261.6
64.5
44.5
7.0
52.7
115.8
55.9
435.4
207.9
112.9
85.8
251.1
(56.5)
35.2
116.4
737.7
(4.5)
204.4
175.3
187.4
175.8
162.3
(56.5)
24.7
34.5
17.2
(4.5)
(19.8)
(6.6)
(16.2)
106.4
492.8
46.4
12.8
103.7
357.7
34.6
140.8
53.8
70.8
148.2
Debt
212.4
393.4
44.3
148.3
11.1
109.1
1,432.4
280.8
78.4
110.0
Equity
1,412.5
361.6
85.0
222.5
1,440.3
112.8
1,247.9
328.6
637.3
953.7
Debt and equity
1,624.9
755.0
129.4
370.7
1,451.4
221.9
2,680.3
609.4
715.7
1,063.7
EBITDA margin (%)
59.2
3.5
12.4
55.8
69.4
6.6
41.1
37.3
33.7
44.9
50.0
18.5
13.8
1,492.7
1,541.1
3.4
11.2
31.9
18.7
145.5
31.0
6.0
29.9
76.4
82.3
16.4
18.2
58.6
32.7
24.8
FFO/debt (%)
156.6
9.0
71.2
135.9
8,176.2
30.7
51.3
125.4
318.1
272.8
123.1
(15.3)
79.1
79.7
6,629.2
(5.0)
13.7
61.2
237.3
159.8
Debt/EBITDA (x)
0.4
3.6
0.9
0.5
0.0
2.4
1.4
0.6
0.2
0.3
12.9
52.5
34.4
39.4
0.8
49.3
53.4
45.8
10.8
10.3
N.M. Not Meaningful
October 2011
47
48
October 2011
Credit Reports
October 2011
49
Alicorp S.A.A.
Diego Ocampo
Issuer Credit Rating
Not Rated
Industry Sector
Consumers
Main shareholder
Grupo Romero (45.09%)
Business Risk Profile
Fair
Financial Risk Profile
Intermediate
Main Credit Factors
Strengths:
• Diversified product portfolio with good
competitive positions in Peru
• Low debt levels
Weaknesses:
• Lack of geographic diversification
• Exposure to certain commodities on its cost side
adds volatility to margins
Rationale
Standard & Poor’s Rating Services’ assessment
of Peru-based consumer company Alicorp S.A.A.
(Alicorp) reflects its fair business-risk profile and
intermediate financial-risk profile.
Alicorp’s business-risk profile benefits from its
leading position in the Peruvian consumer market.
This position stems from Alicorp’s well-renowned
brand portfolio, its long-standing presence in the
market, and its nation-wide coverage distribution
network. These, together with good economic
conditions in Peru that increase consumer spending,
and the company’s effective cost structure have
resulted in adequate profit margins for the past two
years.
Counterbalancing factors for Alicorp’s business-risk
profile are its lack of diversification across markets
and some exposure to commodity-type raw materials
–like soy and wheat, which adds volatility to profits
of certain product lines (such as food).
The company’s relatively low debt, and stable
operating cash generation underpin its financial-risk
profile.
Alicorp’s product portfolio mainly comprises food
categories, animal nutrition, personal care, and
laundry products such as laundry soaps, detergents,
and fabric softeners. The company also produces
and sells food products for industrial customers
50
(industrial flours, premixes, fat derivatives, oils,
and margarine). Food categories consist mainly of
pasta, cookies, sauces, ice creams, instant desserts,
soy milk, edible oils, margarines, and powdered
drinks. As of December 2010 the company’s product
portfolio was well positioned in Peruvian markets,
with estimated market shares for cookies of 33%,
95% for mayonnaise, 47% for ketchup, 57% for
edible oils, 55% for margarines, 62% for powder
drinks, 81% for laundry soaps, 47% for detergents,
55% for shampoos, 55% for industrial flours, and
34% for premixes.
Amid a currency appreciation of the Peruvian Sol of
about 7% year over year, Alicorp’s revenues grew
by approximately 11% in the past 12 months as of
June 2011, measured in U.S. dollars. The currency
appreciation and the high cost of critical raw
materials led to a mild profitability deterioration
resulting in an EBITDA generation of $206 million
(14.3% of revenues) for the 12 months ended in
June 2011, down from $214 million (16.9%) a year
before.
During the past 12 months as of June 2011 the
company generated cash flow from operations
(CFO) of $43 million and raised debt for $109
million, which it used to fund capital expenditures of
$26 million, asset purchases of $30 million (related
with some acquisitions in Argentina) and cash
dividends of $53 million. Financial debt as of June
2011 amounted to $309 million, resulting in debtto-EBITDA, debt-to-capitalization, and FFO-to-debt
ratios of 1.5x, 33.9%, and 34.5%, respectively.
Liquidity as of June 2011 was somewhat tight, with
short-term financial commitments of $189 million
while cash reserves were $69 million. However,
the company’s ability to generate free cash flow,
its flexible dividends, and its relatively good access
to the domestic banking system and debt market
enhanced its financial flexibility.
Located in Peru, Alicorp is majority owned by
Grupo Romero. In fiscal 2010, 86% of its revenues
were originated in Peru, while the rest consisted
mainly of exports to other Latin American
countries. The company is expanding its geographic
coverage through off-shore investments such as the
acquisitions of two companies in Argentina (with
consolidated revenues of $35 million) in June 2011
that produce pasta and juices.
October 2011
Alicorp S.A.A -- Financial Summary
Industry Sector: Food & Kindred Products
--Fiscal year ended Dec. 31--
2010
2009
2008
2007
1,336.2
1,270.3
1,158.2
928.2
EBITDA
219.9
182.6
104.9
114.9
Net income from continuing operations
101.1
75.4
24.8
51.6
221.3
171.8
89.6
119.2
89.4
174.0
7.1
15.3
33.0
29.1
30.9
26.5
56.3
144.8
(23.9)
(11.1)
17.2
112.3
(23.9)
(11.1)
44.8
39.7
17.3
9.6
Debt
200.3
206.3
303.0
206.4
Equity
605.1
503.1
419.5
432.2
Debt and equity
805.4
709.4
722.5
638.6
EBITDA margin (%)
16.5
14.4
9.1
12.4
19.6
10.7
6.1
55.2
24.0
20.6
11.8
14.1
110.4
83.3
29.6
57.8
28.1
70.2
(7.9)
(5.4)
0.9
1.1
2.9
1.8
24.9
29.1
41.9
32.3
(Mil. $)
Revenues
Adjusted ratios
FFO/debt (%)
Debt/EBITDA (x)
Debt/debt and equity (%)
October 2011
51
Compañía de Minas Buenaventura S.A.A.
Candela Macchi
Issuer Credit Assessment
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Benavides Family (27%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Conservative debt levels
• Equity investments in Peruvian large gold producer
Yanacocha and Peruvian large copper producer
Cerro Verde
• Favorable industry conditions
Weaknesses:
• Highly volatile cash flow
• Relatively low scale of operations globally
• Low diversification of production
Rationale
Standard & Poor’s Ratings Services’ assessment
of Peruvian-based precious metals producer
Compañía de Minas Buenaventura S.A.A. (Minera
Buenaventura) mainly reflects the company’s good
replacement ratio of its reserves (close to 1x in the
past 30 years), and its strong and strategic non
controlling equity investments in Peruvian Minera
Yanacocha S.R.L. (Yanacocha) and Cerro Verde
S.A. (Cerro Verde) which have provided with a
meaningful stream of dividends in the past. The
company’s relatively low scale, the highly cyclical
nature of the precious-metals sector, its relatively
short proven reserves life, and the geographical
concentration of its production in Peru partly offset
the strengths.
During the 12 months ended in June 2011,
Buenaventura’s consolidated revenues increased
about 60% compared with the same period a year
before, mainly fueled by higher prices and increases
in gold and copper sales (of about 8% and 7%
52
respectively). This scenario, coupled with relatively
stable operating costs, resulted in an improvement of
EBITDA generation that reached $436 million from
$190 million reported a year earlier.
As of June 2011, the company did not have longterm financial debt, as it cancelled a syndicated
loan of $205 million and bank loans of about
$10 million, during 2010. The strong cash-flow
generation allowed Minera Buenaventura to pay
down all of its existing debt, to prefund its capital
expenditure plan (of about $60 million annually),
and to make dividend distributions of about $76
million.
We believe Minera Buenaventura enjoys a strong
liquidity position to meet its financial needs during
the next 2 to 3 years. As of June 2011, the company
had a relatively high cash position of about $461
million and zero debt maturities. In addition, the
company’s dividend policy has remained relatively
flexible, which gives additional room to maneuver
under a stress scenario.
Minera Buenaventura is mainly engaged in the
exploration, mining, and processing of gold, silver,
and other metals (mainly lead and zinc) in Perú.
It operates several mines including Orcopampa,
Poracota, Julcani, Recuperada, Uchucchacua,
Antapite, and Ishihuinca, all located in Peru. In
addition, Minera Buenaventura through a 43.48%
equity stake, controls Sociedad Minera El Brocal
S.A.A., a Peruvian mine engaged in the production
of silver, lead, and zinc. Also, the company owns a
43.65% equity stake of Peru-based Yanacocha, a
relatively large global gold producer, and a 19.3%
stake in Peru-based Cerro Verde S.A., a relatively
small but competitive global copper producer,
controlled by Freeport-McMoRan Copper &
Gold Inc. (BBB/Stable/--). The company’s majority
shareholder is the Benavidez Family, with a stake
of 27%, while the remaining 73% is held by
Institutional Investors and Peruvian Pension Funds.
October 2011
Compañía de Minas Buenaventura S.A.A. -- Financial Summary
Industry Sector: Metals & Mining
2010
2009
2008
2007
Revenues
808.5
599.0
551.1
786.4
EBITDA
310.5
180.4
178.2
403.0
662.9
593.6
153.3
460.7
528.2
443.2
102.3
333.5
418.2
402.5
59.6
261.8
(Mil. $)
40.8
44.9
45.5
64.7
377.3
357.6
14.1
197.0
260.3
316.9
(36.8)
127.1
442.0
511.6
341.9
384.5
Debt
0.0
224.1
320.3
84.1
Equity
2,607.9
2,064.3
1,531.6
1,580.2
Debt and equity
2,607.9
2,288.4
1,851.9
1,664.3
EBITDA margin (%)
38.4
30.1
32.3
51.2
35.4
15.4
5.7
46.8
30.7
31.0
29.2
40.9
FFO/debt (%)
N.M
197.8
31.9
396.4
N.M
159.6
4.4
234.3
0.0
1.2
1.8
0.2
N.M
9.8
17.3
5.1
Adjusted ratios
Debt/EBITDA (x)
N.M. - Not Meaningful.
October 2011
53
Corporación Lindley S.A.
Luciano Gremone
Not Rated
Industry Sector
Consumer Products –
Beverage Industry
Main shareholder
Lindley Family (59.1%)
Satisfactory
Significant
Main Credit Factors
Strengths:
• Exclusive Coca-Cola bottler in the Republic of
Peru
• Strong and diversified product portfolio
• Stable cash-flow generation
• Adequate liquidity
• Strong operational support from The Coca Cola
Co.
Weaknesses:
• Exposure to commodity prices
• Sensitive and fragmented demand
Rationale
Standard & Poor’s Ratings Services’ assessment of
Corporacion Lindley S.A., the Peruvian exclusive
Coca-Cola bottler, reflects the company’s satisfactory
business-risk profile and its significant financial-risk
profile.
Lindley’s satisfactory business-risk profile is
supported by strong brand recognition in the
Peruvian carbonated soft-drink (CSD) market, a
large and diversified product portfolio, a strong and
exclusive distribution network, and high market
penetration reaching more than 240,000 points of
sale throughout the country.
In 2010, the company produced and distributed 236
million unit cases (UC)--85 million UCs to Inca Kola
and 65 million UCs to Coca Cola--representing a
7.4% compounded annual growth rate from 20052010, the largest in the region. Between Coca-Cola
and Inca Kola, Lindley holds more than 50% of the
total CSD market or 5x its closest competitor. This
allowed the company to introduce and cross-sell
other TCCC products and brands such as isotonic
beverages, drinking waters, fruits, nectars, and
energy drinks.
Manageable debt amortization, adequate liquidity,
considerable capital expenditures, and an adequate
ability to generate funds from operations (FFO)
underpins Lindley’s financial-risk profile.
The company’s EBITDA margin has been relatively
steady, between 14% and 16% in the past four
years, reflecting Lindley’s ability to operate in a
volatile commodity environment and demand price
sensitivity. In the 12 months ended in June 2011,
the company’s EBITDA reached $81 million, 14%
higher than a year before. It generated $50 million
in FFO, and used this mainly to fund considerable
capital expenditure of $52 million aimed at building
new facilities, improving profitability and expanding
its distribution network.
Lindley’s liquidity is viewed as somewhat tight due
to some short term debt concentration. As of June
2011 short term debt amounted to $55 million
compared with cash and equivalents of only $3
million. Despite this, we expect the company’s
good presence in the Peruvian financial system and
its positive cash generation to provide sufficient
financial flexibility in the short term.
Since The Coca Cola Co.’s (TCCC) acquisition of
a 38.5% equity share of Lindley in 1999 and the
acquisition of Embotelladora Latinoamericana
S.A. (ELSA) in 2004, Lindley became the exclusive
Coca-Cola bottler in the Republic of Peru (BBB-/
Positive/A-3) with more than 65% of the CSD
market share and the exclusive rights to produce,
bottle, and distribute all TCCC’s products
throughout the country.
54
October 2011
Corporación Lindley S.A.
Industry Sector: Diversified Consumer Products
2010
2009
2008
2007
572
509
398
349
EBITDA
80
72
64
48
13
21
10
12
53
53
45
37
50
42
48
21
(Mil. $)
Revenues
82
54
56
40
-32
-13
-8
-19
-32
-13
-8
-19
15
12
7
10
Debt
223
168
112
119
Equity
209
181
140
138
Debt and equity
431
349
252
257
13.9
14.1
16.1
13.8
3.6
3.7
2.4
2.4
11.5
17.4
18.7
14.3
FFO/debt (%)
23.8
31.4
40.2
31.2
(14.0)
(7.6)
(6.9)
(16.1)
2.8
2.3
1.8
2.5
51.6
48.1
44.4
46.2
Adjusted ratios
EBITDA margin (%)
Debt/EBITDA (x)
October 2011
55
Edegel S.A.A.
Candela Macchi
Issuer Credit Assessment
Not Rated
Industry Sector
Utilities
Main shareholder
Empresa Nacional de
Eletricidad S.A. (62.5%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Leading power generator in the Peruvian electric
market
• Relatively low-cost producer
• Adequate mix between private contracts and spotmarket sales
Weaknesses:
• Competitive pressures in the electric industry and,
• Aggressive dividend policy (100% of net income)
Rationale
of Peruvian-based power generator Edegel S.A.A
(Edegel) reflects its fair business-risk profile resulting
from the company’s strong competitive position
in the Peruvian market, with almost 30% of
participation in the National Electrical Grid System
(SEIN), its adequate diversification of energy sources
(45% hydro and 55% thermal as of December
2010), and its low generation costs. The high
competitive pressures in the Peruvian electric market
and Edegel’s exposure to droughts partially offset
the above-mentioned factors.
The assessment also reflects the company’s
intermediate financial-risk profile, underpinned by
manageable debt levels, relatively stable cash-flow
generation, partly counterbalanced by an aggressive
dividend policy of distributing 100% of the
company’s net income during 2011.
compared with $178 million, a year before. In line
with 2010, during the 12 months as of June 2011
main credit metrics improved, as seen in EBITDA
interest coverage and debt-to-EBITDA ratio that
reached 9.5x and 1.5x, respectively (from 7.4x and
2.0x in the same period of 2010).
Total debt as of June 30, 2011 was $337 million,
down from $444 million in 2010, mainly comprising
financial leases and bonds. We assessed the
company’s financial policy as moderate. During the
last five years, Edegel exhibited a maximum debt-toEBITDA ratio of 3.3x, that partially offsets its high
dividend distributions, which ranged between 90%
and 100% of its net income in the mentioned period.
In our opinion, Edegel has an adequate liquidity
position, based on the combination of a healthy cash
balance and a manageable debt maturity schedule.
It also has adequate free cash-flow generation
ability, and historically very low capital expenditures
($20 million-$30 million). These partially mitigate
relatively high dividend payments. As of June 30,
2011, Edegel had about $68 million in aggregated
cash and cash equivalents, and marginal short-term
debt.
Edegel has the highest installed capacity in Peru.
The company generates power through seven
hydroelectric and two thermal power plants, holding
a total generating capacity of 1,668 MW. Of the
total generation, 746 MW is based on hydroelectric
power sources and 922 MW on thermal gas-fired
power plants. It generates nearly 26% of the
country’s power needs.
Edegel’s seven hydroelectric power plants are located
in the basins of the Santa Eulalia, Rimac, Tarma,
and Tulumayo rivers. The company also has two
thermal plants operating in the areas of Cercado
de Lima and Ventanilla. The company’s majority
shareholder is Empresa Nacional de Eletricidad S.A.
(BBB+/Stable/--), with a controlling stake of 62.5%
During the 12 months ended in June 30, 2011,
Edegel’s revenues grew about 12% compared with
the same period a year before, mainly boosted by
favorable prices in new power-purchase agreements
(PPAs), and the termination of some PPAs that bore
prices below market standards. EBITDA generation
during the same period reached about $228 million,
56
October 2011
Edegel S.A.A. -- Financial Summary
Industry Sector: Electric Utility Company
2010
2009
2008
2007
Revenues
412.7
389.5
363.0
350.1
EBITDA
209.5
208.7
149.3
162.1
(Mil. $)
86.6
83.2
35.5
60.8
180.0
149.5
93.8
105.9
147.0
166.1
70.5
109.0
19.1
25.4
7.8
32.3
127.9
140.7
62.7
76.7
51.9
73.7
33.0
30.1
29.5
41.3
17.3
9.6
Debt
444.6
462.7
490.0
457.6
Equity
856.0
812.0
694.8
745.6
1,300.6
1,274.7
1,184.7
1,203.2
Debt and equity
Adjusted ratios
EBITDA margin (%)
50.8
53.6
41.1
46.3
8.6
4.9
5.7
4.4
9.6
10.1
6.6
7.5
FFO/debt (%)
40.5
32.3
19.1
23.2
28.8
30.4
12.8
16.8
2.1
2.2
3.3
2.8
34.2
36.3
41.4
38.0
Debt/EBITDA (x)
October 2011
57
Empresa de Distribución Eléctrica de
Lima Norte S.A.A. – EDELNOR S.A.A.
Javier Vieiro Cobas
Not Rated
Industry Sector
Utilities
Main shareholder
Inversiones Distrilima
51.68%) – Ultimately
controlled by Endesa S.A.
Satisfactory
Intermediate
Main Credit Factors
Strengths:
• Solid competitive position in the power-distribution
sector in Peru
• Relatively stable cash-flow generation
• Sizable residential and commercial customer bases
• Strong relationship with creditworthy sponsor
Weaknesses:
• Significant dividend payments
• Relatively high past-due receivables
Rationale
Peru-based power distributor EDELNOR S.A.A.
reflects the combination of a satisfactory businessrisk profile and an intermediate financial-risk profile.
EDELNOR benefits from a solid competitive
position as a result of its exclusive concession to
distribute electricity in the north of Metropolitan
Lima and the provinces of Callao, Huaura, Barranca,
Huaral, and Oyón; and its adequate cash-flow
protection metrics that are supported by rising
consumer demand. The company’s strong dividend
distribution and relatively high past-due receivables
partially offset the strengths.
The company’s good competitive position in the
Peruvian electricity sector as a result of its exclusive
concession to distribute electricity in part of the
city of Lima to about 1.1 million customers,
including residential, commercial, and industrial
clients, supports its business-risk profile. However,
the company’s relatively high levels of past-due
receivables (currently representing about 25 days of
revenues) partially offset the strengths.
58
EDELNOR’s financial-risk profile is underpinned by
its relatively good cash-flow protection measures,
low leverage, and stable operating margins. Total
revenue increased about 5% in 2010 from 2009,
mainly boosted by an increase in the physical
volume of energy sold, and partially offset by a
decrease in the average sale price of energy. The
growth in physical sales reflected Peru’s economic
recovery in 2010 (GDP grew about 8.8% in
2010) and a continued population increase in the
company’s concession area. Amid low inflation levels
and high GDP growth, EBITDA margins remained
stable in the past four years at about 27%, without
meaningful volatility.
EDELNOR’s financial debt as of June 2011 was
about $348 million. Leverage was relatively stable
in the past couple of years with debt-to-EBITDA
at about 2.2x. The company’s debt-to-total
capitalization ratio reached 49.2%, as of June 2011,
from 52.5%, as of June 2010. The company’s credit
metrics were relatively stable in the past couple of
years, with cash flow from operations -to-debt and
EBITDA interest coverage ratios exceeding 30% and
7x, respectively.
We asses the company’s liquidity as adequate given
its relatively high cash levels at $21.6 million,
compared with short-term debt maturities of $33.3
million, as of June 2011. In addition, the company’s
free operating cash flow has been consistently
positive, reaching $49.1 million in the twelve months
ended June 2011, compared with $52.4 million in
the twelve months ended June 2010. However, the
company made significant dividend payments in the
past. It distributed $42.5 million and $52.4 million
in fiscals 2010 and 2009, respectively.
EDELNOR is an electric power distribution
company in Peru. The company serves
approximately 1.1 million residential, industrial,
and commercial customers in northern Metropolitan
Lima and other provinces. The company was
founded in 1994 and is based in Lima, Peru.
Inversiones Distrilima and Enersis have a 51.68%
and 24% stake in EDELNOR, respectively.
Inversiones Distrilima and Enersis are indirectly
controlled by ENDESA Group.
October 2011
Empresa de Distribución Eléctrica de Lima Norte S.A.A. - EDELNOR S.A.A. -- Financial Summary
Industry Sector: Utility Company
2010
2009
2008
2007
Revenues
609.7
559.4
454.7
446.5
EBITDA
165.9
149.0
128.8
121.8
(Mil. $)
68.2
59.2
48.8
40.3
107.3
95.1
84.6
72.9
123.2
98.8
76.3
50.6
58.5
64.9
63.6
43.4
64.7
33.8
12.7
7.2
22.2
(18.6)
(29.8)
(23.0)
56.5
15.5
10.8
5.5
Debt
356.8
322.1
272.7
255.3
Equity
330.6
293.3
265.8
269.1
Debt and equity
687.4
615.4
538.6
524.4
27.2
26.6
28.3
27.3
7.3
6.9
6.1
8.1
15.3
15.1
14.0
11.7
FFO/debt (%)
30.1
29.5
31.0
28.6
18.1
10.5
4.7
2.8
2.2
2.2
2.1
2.1
51.9
52.3
50.6
48.7
Adjusted ratios
EBITDA margin (%)
Debt/EBITDA (x)
October 2011
59
EnerSur S.A.
Javier Vieiro Cobas
Not Rated
Industry Sector
Utilities
Main shareholder
GDF Suez S.A. (61.73%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Solid competitive position in the power-generation
and transmission sector in Peru
• Relatively stable cash-flow generation
• Strong relationship with creditworthy customers
Weaknesses:
• High customer concentration
• Some reliance on short-term debt financing
Rationale
of Peru-based power generation and transmission
company EnerSur S.A. reflects the combination
of a fair business-risk profile and an intermediate
financial-risk profile.
EnerSur benefits from a solid competitive
position, reliance on creditworthy customers, and
relatively good credit metrics. The company’s high
concentration of debt maturities in the short term
and high customer concentration mitigate these
strengths.
The company’s business-risk profile is underpinned
by its good competitive position in the Peruvian
electricity sector as the second-largest private powergeneration company in the country and its fairly
diversified electricity-generation sources. However,
the company has significant customer concentration.
In 2010, power sales to Southern Peru Copper Corp.,
Chilean Branch (SPCC; BBB-/Positive/--) represented
about 39% of the company’s total sales. EnerSur has
60
a power purchase agreement and services agreement
with SPCC until 2017.
EnerSur’s relatively stable cash-flow generation and
good cash-flow protection measures support its
financial-risk profile. However, the company has
relatively high short-term debt maturities. EnerSur’s
revenues increased about 7% in 2010 from 2009,
mainly because of new contracts with regulated
customers, higher revenues from unregulated
customers (26% increase), and higher capacity
payments. Operating costs also increased about 7%
in 2010 from 2009, resulting in a stable EBITDA
margin of about 35%.
With financial debt of about $338 million as of June
2011, EnerSur’s debt-to-EBITDA ratio was 2.2x as
of the same date, compared with 1.5x as of June
2010. The company’s credit metrics were relatively
stable and strong in the past couple of years, with
the cash flow from operations-to-debt and EBITDA
interest coverage ratios exceeding 30% and 10x,
respectively.
We assess the company’s liquidity to be adequate,
given its relatively high cash holdings of about $28
million as of June 2011, compared with short term
debt maturities of about $38 million as of June
2011. In addition, the company’s free operating
cash flow in the twelve months ended June 2011
reached about $38 million. However, in fiscal 2010
the company distributed dividends for about $44
million. The company’s policy is to distribute at least
30% of annual earnings as dividends.
EnerSur engages in the generation, transmission,
and commercialization of electricity for regulated
and unregulated clients. The company generates
and distributes electricity directly and through
partnerships. It operates three thermal powergeneration plants, a hydroelectric plant, and an
electricity substation, and sells its electricity through
the Peruvian National Interconnected Electricity
Grid. The company has a current generation
capacity of about 1,030 megawatts.
October 2011
EnerSur S.A. -- Financial Summary
2010
2009
2008
2007
Revenues
398.9
372.3
446.1
274.5
EBITDA
142.1
129.8
185.0
126.7
81.1
66.0
93.5
63.1
116.1
94.4
124.8
93.6
136.7
61.8
86.4
89.5
33.7
27.2
18.0
19.2
103.1
34.6
68.4
70.2
58.9
(36.2)
2.4
(18.8)
49.6
24.5
41.3
44.8
Debt
306.2
281.3
245.0
211.4
Equity
250.9
220.8
204.2
190.0
Debt and equity
557.1
502.1
449.2
401.4
EBITDA margin (%)
35.6
34.9
41.5
46.2
10.9
10.2
14.8
12.6
22.3
19.4
31.6
21.5
FFO/debt (%)
37.9
33.6
50.9
44.3
33.7
12.3
27.9
33.2
2.2
2.2
1.3
1.7
55.0
56.0
54.5
52.7
(Mil. $)
Adjusted ratios
Debt/EBITDA (x)
October 2011
61
Gloria S.A.
Cecilia Fullone
Not Rated
Industry Sector
Consumer Products
Main shareholder
José Rodriguez Banda S.A.
(75.55%)
Fair
Significant
Main Credit Factors
Strengths:
• Solid market position as one of the three largest
dairy producers in Perú
• Vertical integration leads to more-efficient
operations
• Relatively high bargaining power with farmers
• Low debt levels and adequate liquidity
Weaknesses:
• Exposure to a highly competitive environment
• Narrow product diversification
• Limited flexibility to pass on increasing costs of
raw milk to prices
Rationale
Peru-based consumer company Gloria S.A. reflects
the combination of a fair business-risk profile and a
significant financial-risk profile.
Gloria’s business-risk profile is mainly driven by
its good competitive position in the industry, its
extensive distribution network, and good brand
recognition. In addition, the company has integrated
most of its production processes and has relatively
high bargaining power with farmers due to the scale
of its operations. Main counterbalancing factors
for Gloria’s business-risk profile are its low product
diversification as evaporated milk represents more
than 60% of sales, and its limited flexibility to pass
on cost increases of raw milk to prices.
Fluid milk consumption per capita in Perú has been
increasing steadily during the past 10 years, reaching
approximately 65 liters per capita per year. However,
penetration is still low compared with other Latin
American countries, where consumption averages
140 liters per year and below the level recommended
by the Food and Agriculture Organization (120 liters
62
per year). Of all the raw milk produced in Peru,
approximately 75% is transformed into evaporated
milk. Gloria has a leading position in this segment,
with an approximate 80% market share. Overall,
the dairy industry in Perú is highly concentrated
as three companies –Gloria, Nestle and Laive—
dominate almost 95% of the market.
Low leverage levels, adequate liquidity, and a strong
ability to generate free cash flow underpin Gloria’s
financial-risk profile.
In the 12 months ended in June 2011, Gloria’s
revenues increased 12% as a result of higher prices
and higher volumes sold. The strong performance
also boosted EBITDA generation, which increased
38%, reaching $131 million. In the same period,
cash flow from operations (CFO) stood at $53
million and was mainly devoted to fund relatively
high capital expenditures of $70 million, that
included improvements in its yoghurt and
evaporated milk manufacturing plants. In addition,
Gloria paid dividends of $45 million, during the 12
months ended in June 2011. The company financed
part of its cash shortfalls with intercompany loans
and the issuance of long term debt for a total of $45
million.
Gloria’s total leverage is relatively low with debt
standing at $168 million as of June 30, 2011,
resulting in conservative credit metrics: debt-toEBITDA and CFO-to-debt of 1.3x and 31.8%,
respectively.
In our opinion , as of June 2011 Gloria’s financial
flexibility was somewhat tight due to some short
term debt concentration. Scheduled debt payments
for the next 12 months were $50 million, while cash
holding stood at $10 million.
Gloria is part of Grupo Gloria, one of the biggest
conglomerates in Perú. The company specializes in
the production of evaporated milk, being the leading
producer worldwide. In addition, the company
manufactures and distributes other fresh dairy
products such as condensed and UTH milk, yogurt,
and cheese.
October 2011
Gloria S.A. -- Financial Summary
2010
2009
2008
2007
Revenues
814.6
688.2
647.0
599.0
EBITDA
132.2
92.7
86.6
86.5
75.6
62.3
92.5
60.0
96.4
67.4
102.7
71.8
67.4
73.5
(8.6)
13.3
51.9
18.4
24.2
22.2
15.5
55.1
(32.9)
(8.9)
(28.8)
18.8
(63.0)
(39.4)
28.0
34.8
5.5
6.0
Debt
144.8
162.1
146.7
162.0
Equity
440.8
401.7
297.7
337.2
Debt and equity
585.6
563.8
444.4
499.3
EBITDA margin (%)
16.2
13.5
13.4
14.4
14.2
8.0
8.2
7.4
18.6
17.1
26.3
17.7
FFO/debt (%)
66.6
41.6
70.0
44.3
10.7
34.0
(22.4)
(5.5)
1.1
1.7
1.7
1.9
24.7
28.8
33.0
32.5
(Mil. $)
Adjusted ratios
Debt/EBITDA (x)
October 2011
63
Luz del Sur S.A.A.
Javier Vieiro Cobas
Not Rated
Industry Sector
Utilities
Main shareholder
Ontario Quinta S.R.L.
(61.16%)
Satisfactory
Intermediate
Main Credit Factors
Strengths:
• Solid competitive position in the powerdistribution sector in Peru
• Relatively stable cash-flow generation and good
credit metrics
• Sizable residential and commercial customer bases
Weaknesses:
• Relatively high short term debt concentration
• Relatively high past-due receivables
Rationale
Peru-based power distributor Luz del Sur S.A.A.
reflects the combination of a satisfactory businessrisk profile and an intermediate financial-risk profile.
Luz del Sur benefits from a solid competitive
position as a result of its exclusive concession
to distribute electricity in eastern, central, and
southern Metropolitan Lima; low energy losses;
and its adequate cash-flow protection metrics that
are supported by rising consumer demand. The
company’s less than adequate liquidity position,
strong dividend distribution and relatively high pastdue receivables partially offset the strengths.
The company’s good competitive position in the
Peruvian electricity sector as a result of its exclusive
concession to distribute electricity in part of the city
of Lima to more than 890,000 customers, including
residential, commercial and industrial clients,
supports its business-risk profile. In addition, Luz
del Sur’s losses are relatively low at about 7.5%.
The company’s relatively high levels of past-due
receivables (currently representing about 25 days of
revenues) partially offset the strengths.
64
Luz del Sur’s financial-risk profile is underpinned by
its relatively good cash-flow protection measures,
low leverage, and stable operating margins. Total
revenue increased about 3.4% in 2010 from 2009.
This was mainly due to a 7% increase in the
physical volume of energy sold, and partially offset
by a decrease in the average sale price of energy.
The growth in volumes reflected Peru’s economic
recovery in 2010 (GDP grew about 8.8% in 2010).
Amid low inflation levels and high GDP growth,
EBITDA margins remained stable in the past four
years at about 30%, without meaningful volatility.
With financial debt of about $220 million as of
June 2011, Luz del Sur’s debt-to-EBITDA ratio was
1.2x for the 12 months ended June 2011 (less than
the 1.4x posted as of June 2010). The company’s
debt-to-total capitalization ratio reached about
34% as of June 2011 from 36.4% as of June 2010.
In addition, the company’s credit metrics were
relatively stable and strong in the past couple of
years, with cash flow from operations-to-debt and
EBITDA interest coverage ratios exceeding 50% and
12x, respectively.
We asses the company’s liquidity to be somewhat
tight given its low cash levels of about $5.8 million
as of June 2011 compared with short-term debt
maturities of about $60 million. This is partially
offset by its continued positive free operating
cash flow. In the twelve months ended June 2011
the company reached a free operating cash flow
of about $75 million. In addition, the company
made significant dividend payments in the past. It
distributed $78 million and $69 million in 2010 and
2009, respectively.
Luz del Sur operates as an electric power
distribution company in Peru. The company serves
approximately 890,000 residential and industrial
customers in 30 districts of eastern, central, and
southern Metropolitan Lima, which includes about
4 million inhabitants. It was formerly known as
Edelsur. The company was founded in 1994 and is
based in Lima, Peru. Luz del Sur is a subsidiary of
Ontario Quinta S.R.L.
October 2011
Luz del Sur S.A.A. -- Financial Summary
2010
2009
2008
2007
Revenues
613.8
571.9
465.5
461.0
EBITDA
182.9
161.3
140.9
136.1
104.3
95.8
69.7
62.9
128.0
115.4
95.7
95.7
(Mil. $)
127.9
124.9
87.6
67.3
43.5
48.3
46.8
33.4
84.3
76.6
40.8
33.9
5.8
7.5
(10.3)
(9.3)
4.8
4.7
5.6
11.3
Debt
219.9
220.8
211.0
213.0
Equity
409.2
369.4
298.0
292.6
Debt and equity
629.1
590.2
509.1
505.6
EBITDA margin (%)
29.8
28.2
30.3
29.5
12.9
13.0
10.3
7.9
22.8
22.3
17.9
16.6
FFO/debt (%)
58.2
52.3
45.4
44.9
38.4
34.7
19.3
15.9
1.2
1.4
1.5
1.6
35.0
37.4
41.5
42.1
Adjusted ratios
Debt/EBITDA (x)
October 2011
65
Minera Barrick Misquichilca S.A.
Diego Ocampo
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Barrick Gold Corp.
(100%)
Fair
Modest
Main Credit Factors
Strengths:
• Worldwide low-cost gold producer, supported by
the relatively high ore-grade of its mines
• Strong free cash-flow generation
• Very low debt levels
• Strong operational support from creditworthy
parent
Weaknesses:
• Highly volatile cash flow due to the cyclical gold
industry
• Lack of product and asset diversification
• Relatively short life of mines
Rationale
of Peru-based mining company Minera Barrick
Misquichilca S.A. (Misquichilca) reflects the
combination of a fair business-risk profile and a
modest financial-risk profile.
Misquichilca’s highly efficient operations and
operational support from 100% owner Canadian
mining company Barrick Gold Corp. (Barrick, A-/
Negative/A-2) support Misquichilca’s business-risk
profile.
The company’s costs effectiveness stems from the
relatively high ore-grade of its mines. This allows
it to achieve stronger profitability through the
cycle than other gold producers and provides some
shelter against the natural volatility of gold prices.
In 2010, Misquichilca’s largest mine (Laguna Norte)
contributed about 73% of its total gold production
at cash costs of $182 per troy ounce, after deducting
by-products.
The factors counterbalancing Misquichilca’s
business-risk profile are its commodity-type nature,
66
its modest positioning as a global gold producer-with an estimated market share of less than 1%, its
low asset diversification, and the relatively short life
of its two mines, Laguna Norte (2019) and Pierina
(2014). Combined, these mines have proven and
probable reserves of 6.7 million ounces of gold and
27 million ounces of silver (estimated at $1,000 per
ounce of gold and $16 per ounce of silver).
Very low leverage, adequate liquidity, low capital
expenditures, and a strong ability to generate free
cash flow underpin Misquichilca’s financial-risk
profile.
The company’s EBITDA margin has remained at
more than 75% for the past four years, reflecting
Misquichilca’s very low operating leverage and
efficient cost structure. In the 12 months ended in
June 2011, the company’s EBITDA reached $812
million, which allowed it to generate cash flow
from operations (CFO) of $528 million. These
were used to fund low capital expenditures of $48
million. The company’s excess cash is managed by
Barrick globally, so Misquichilca usually loans the
excess cash flow to the group. As of June 2011,
Misquichilca was owed $2.7 billion by subsidiaries
of Barrick.
As of June 30, 2011, Misquichilca’s adjusted debt
was $344 million, comprising mainly financial debt
of $167 million and asset-retirement obligations of
$177 million. The company’s financial debt consists
mainly of two local bonds of $50 million each that
mature in 2012 and 2013. Total leverage is very low
as evidenced by its debt-to-EBITDA and debt-tototal capital ratios of 0.4x and 9.5%, respectively.
In our opinion, as of June 2011 Misquichilca’s
liquidity was adequate. Cash balances were $243
million, while scheduled payments on its financial
debt for 2011 amounted to only $12 million. In
addition, even when it faces annual amortizations
on its bonds of $50 million in 2012 and 2013, its
robust ability to generate cash should prove more
than enough, even at more-conservative price
scenarios. In fact, annual discretionary cash-flow
generation has averaged $620 million for the past
four years.
Barrick indirectly owns 100% of Misquichilca.
The group ranks among the world’s largest gold
producers with an estimated market share of about
9%, a broad base of operations, and below-average
cash costs. It also has a leading market position in
copper.
October 2011
Minera Barrick Misquichilca S.A -- Financial Summary
2010
2009
2008
2007
Revenues
1,200.0
1,269.9
1,365.2
1,100.4
EBITDA
1,004.3
1,027.1
1,108.3
881.5
621.3
625.9
659.1
489.9
677.3
700.6
744.1
588.9
569.9
883.7
668.9
491.5
48.1
17.3
11.2
54.7
521.7
866.5
657.7
436.9
519.9
866.5
657.7
436.9
63.1
31.2
27.0
45.9
320.3
254.2
262.6
269.0
Equity
2,968.2
2,349.2
1,723.3
1,064.2
Debt and equity
3,288.5
2,603.4
1,985.9
1,333.2
83.7
80.9
81.2
80.1
309.1
178.9
120.9
68.7
31.4
40.6
58.0
55.0
FFO/debt (%)
211.5
275.7
283.3
218.9
162.9
340.9
250.5
162.4
Debt/EBITDA (x)
0.3
0.2
0.2
0.3
9.7
9.8
13.2
20.2
(Mil. $)
Debt
Adjusted ratios
EBITDA margin (%)
October 2011
67
Minera Yanacocha S.R.L.
Diego Ocampo
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Newmont Mining Corp.
(51.35%)
Fair
Modest
Main Credit Factors
Strengths:
• Low-cost gold producer
• Strong liquidity
• Operational support from creditworthy parent
Weaknesses:
• Declining ore grade and output capacity
• Relatively short life of mines
• Highly volatile cash flow in the cyclical gold
industry
• Lack of product and asset diversification
Rationale
of Peruvian gold mine Minera Yanacocha S.R.L.
(Yanacocha) reflects the combination of a fair
business-risk profile and a modest financial-risk
profile.
Yanacocha’s business-risk profile is mainly
characterized by its relatively low production costs
that allow it to reach high operating margins, and by
the operational support it gets from its controlling
shareholder Newmont Mining Corp. (BBB+/
Stable/--). These factors override the commodity-type
nature of its business, its relatively small size with
an estimated market share of less than 2%, its low
asset diversification, and the relatively short life of its
mines, which are expected to decline in production
consistently through 2017.
The company’s financial-risk profile mainly benefits
from strong liquidity, robust cash-flow generation
levels, and very conservative financial leverage, all
of which results in strong coverage and leverage
metrics.
68
Yanacocha’s three active open-pit mines (Cerro
Yanacocha, La Quinua, and Chaquicocha)
produced about 1.5 million ounces of gold in
2010 and have proven and probable reserves of
5 million ounces. The company plans to extend
the life of its operations through expansions to
current mines and the gold project Conga, situated
in nearby Yanacocha. The project has finalized
feasibility studies and is awaiting approval from
the government of Peru. It would demand a total
investment of about $1.8 billion and would produce
an annual output estimated at 400,000 ounces per
year, starting in 2015. Reserves of this project are
estimated at 6.1 million ounces of gold and 1,660
million pounds of copper. In all cases gold reserves
were calculated using a gold price of $950 per
pound.
Although rising due to declining ore grade, cost
effectiveness continues to compare well with
industry average. During fiscal 2010 the company
reported costs before amortization of $431 per
ounce (after deducting by-products), compared
with $310 in 2009 and industry averages of
$557. Conga’s costs were estimated at $400 per
ounce. The higher production costs resulted in a
decline of EBITDA margin to 59.6% in fiscal 2010
from 63.9% a year before. Gold prices helped
counterbalance the rise in costs, as during 2010 they
ranged between $1,100 and $1,400 per ounce, well
above 2009 standards of $800 to $1,100 per ounce.
In 2010, the company’s revenues and EBITDA
reached $1.9 billion and $1.1 billion, respectively,
compared with $2.1 billion and $1.3 billion in 2009.
The decline in revenues and EBITDA was mainly due
to lower volumes sold, as the company’s production
capacity was reduced due to the declining ore
grade. Output in 2010 reached 1.5 million ounces,
compared with 2.1 million a year before. Despite
this, main credit metrics remained very strong, due
to Yanacocha’s very low debt levels and strong
operating performance.
As of December 2010, Yanacocha’s adjusted debt
amounted to $190 million consisting mainly in
asset retirement obligations and resulting in very
conservative leverage metrics: Debt-to-capitalization
and debt-to-EBITDA ratios stood at 7.6% and
0.2x, respectively. Also, main coverage metrics were
October 2011
robust, as evidenced by EBITDA interest coverage
and funds from operations-to-debt ratios of 120.8x
and 371%, respectively.
As of December 2010 Yanacocha had robust cash
balances of $881 million, well above operating
and financial needs. Furthermore, the company’s
ample ability to generate free cash flow enhances its
financial flexibility.
Yanacocha is controlled by Newmont Mining Corp.
through its ownership of 51.35% of its capital. The
rest of the equity is owned by Compañía de Minas
Buenaventura S.A. (43.65%) and International
Finance Corp. (5%).
Minera Yanacocha S.R.L -- Financial Summary
2010
2009
2008
2007
Revenues
1,866.8
2,089.1
1,641.3
1,148.5
EBITDA
(Mil. $)
1,113.4
1,335.7
866.4
501.7
591.2
712.8
463.8
244.2
703.7
1,023.4
637.8
379.6
623.7
987.3
735.4
271.3
246.5
97.8
161.0
222.4
377.2
889.5
574.4
48.9
377.2
659.5
(15.6)
(51.1)
880.9
732.6
157.5
288.4
Debt
189.8
304.1
322.2
316.2
Equity
2,303.4
1,711.1
1,227.0
1,353.2
Debt and equity
2,493.1
2,015.2
1,549.2
1,669.4
59.6
63.9
52.8
43.7
120.8
97.8
70.6
35.2
37.3
57.0
41.0
21.1
FFO/debt (%)
370.8
336.5
198.0
120.0
198.8
292.5
178.3
15.5
Debt/EBITDA (x)
0.2
0.2
0.4
0.6
7.6
15.1
20.8
18.9
Adjusted ratios
EBITDA margin (%)
October 2011
69
Minsur S.A.
Darío López Zadicoff
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Brescia family (99%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Sound competitive position in the tin market
• Strong cash-flow generation
• Enhanced product and geographic diversity
Weaknesses:
• Operates in cyclical industry with volatile prices
• Reduced profitability
Rationale
cement subsidiary. Adjusted debt to EBITDA and
CFO-to-debt ratios stood at 0.5x and 111%, for the
12 months as of June 2011.
As of June 2011, liquidity was adequate, given
cash balances of $568 million, short term debt of
$243 million and strong cash-flow generation, with
discretionary cash-flow of $371 million in the 12
months ended June 2011.
Minsur is controlled by the Brescia Family. The
company’s main business is the operation of two
tin mines, in Peru (San Rafael) and Brazil (Pitinga),
from where it extracts this metal largely used as an
input for welding. With roughly 36,000 metric tons
of refined tin in 2010, Minsur is the fourth-largest
producer worldwide. In addition, in 2009, Minsur
bought a majority stake in Cementos Melon S.A.
(not rated), formerly a Chilean subsidiary of Lafarge
S.A. (BB+/Stable/B). The Chilean cement business
accounted for about 25% of consolidated revenues
in 2010.
of Peru-based Minsur S.A. (Minsur) reflects the
combination of a fair business-risk profile and an
Minsur’s business profile is driven by its sound
competitive position in the tin market, as the
world’s fourth-largest producer (10% market
share). Furthermore, the recent incursion in the
Chilean cement industry enhanced Minsur’s product
and geographic diversification, despite some
deterioration in its aggregate operating performance.
The company’s high exposure to volatile tin
prices somewhat offsets its strengths. Minsur’s
financial profile is characterized by strong cashflow generation, very low debt and significant cash
holdings.
During the 12 months ended in June 2011, Minsur’s
revenues reached $1,399 million, increasing 35%
year over year. Accordingly, EBITDA generation
reached $677 million, a 36% higher than previous
year, as well as cash-flow from operations (CFO)
which increased $371 million. The sound operating
performance allowed the company to maintain
credit metrics robust, despite debt increases of $78
million, on higher short-term debt of the Chilean
70
October 2011
Minsur S.A. -- Financial Summary
2010
2009
2008
2007
1,212.6
650.6
696.7
551.7
EBITDA
629.6
338.1
534.2
416.8
371.8
252.2
287.4
278.8
393.7
224.9
353.5
269.2
402.9
140.8
403.2
307.6
131.8
50.1
11.6
12.0
271.1
90.7
391.5
295.5
169.6
(17.3)
334.7
234.5
618.5
363.5
496.4
620.3
Debt
290.3
297.2
49.8
5.5
Equity
1,810.7
1,411.4
1,015.4
856.1
Debt and equity
2,101.1
1,708.6
1,065.2
861.7
EBITDA margin (%)
51.9
52.0
76.7
75.6
40.1
29.1
155.4
263.3
27.4
20.2
53.2
47.0
135.6
75.7
709.5
4,882.4
93.4
30.5
785.9
5,359.4
0.5
0.9
0.1
0.0
13.8
17.4
4.7
0.6
(Mil. $)
Revenues
Adjusted ratios
FFO/debt (%)
Debt/EBITDA (x)
October 2011
71
Petróleos del Perú – Petroperú S.A.
Luciano Gremone
Not Rated
Industry Sector
Oil & Gas
Main shareholder
Republic of Peru
(100%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Very high likelihood of potential extraordinary
support from the government of Peru
• Strong market position in the growing Peruvian
fuel market (about 45% market share)
• Good financial flexibility enhanced by government
ownership
• Vertical integration with retail activities (service
stations)
Weaknesses:
• Inherent volatility derived from exposure to oil
prices and refining margins
• High debt concentration in the short term
• High needs of working-capital financing
Rationale
of Peru’s 100% state-owned oil and gas company,
Petroleos del Peru – Petroperu S.A.’s credit quality
reflects our opinion that there is a very high
likelihood that the Republic of Peru would provide
timely and sufficient extraordinary support to
Petroperu in the event of financial distress.
Our view of a very high likelihood of extraordinary
government support is based on our assessment
of Petroperu’s very important role as a significant
fuel refiner and distributor in Peru: Petroperu
supplies about 45% of the local market’s needs.
The company also has a very strong link with the
Peruvian State that has strong and stable ownership
in the company.
On a stand-alone basis, Petroperu’s credit quality
benefits from its strong market position as one of
the two main oil refiners in the country, favorable
growth prospects for fuel demand in Peru, and
its vertical integration with retail activities. Those
factors are counterbalanced in our view by the
72
inherent volatility of the company’s profitability
and cash-flows, its high concentration of debt in
the short term, and high required working-capital
financing. We asses the company’s business-risk
profile as fair and its financial risk profile as
intermediate.
The company’s strong competitive position (holding
about 46% of Peru’s refining installed capacity) is
somewhat protected by the strong barriers of entry
stemming from the large investments required for the
construction of greenfield refineries. The company’s
main competitor is Refineria La Pampilla S.A.A., a
company from the Repsol group that accounts for
about 52% of the country’s installed capacity in
refineries.
Petroperu’s financial performance is somewhat
volatile, mainly given its exposure to international
oil prices and refining margins that result in volatile
debt levels to finance inventories. Nevertheless,
the company has been able to maintain relatively
moderate leverage with a total-debt-to-EBITDA of
less than 2.5x. In fiscal 2010, Petroperu’s funds from
operations (FFO)-to-total-adjusted debt and totaladjusted debt-to-EBITDA ratios reached 33.5% and
2.4x, respectively, showing a deterioration from the
48.5% and 1.8x in 2009, mainly as a result of higher
debt to finance increased inventories and capital
expenditures. We expect the company’s leverage
and cash-flow protection metrics to remain volatile
but likely within ranges commensurate with our
assessment of its intermediate financial risk profile
(total-adjusted debt-to EBITDA ratio of less than 3x
and FFO-to-total debt ratio of at least 30%).
We assess Petroperu’s liquidity position as adequate,
mainly given its relatively strong access to credit
lines and good financial flexibility, enhanced by the
government’s ownership. The company had about
$70 million in cash and cash equivalents as of June
30, 2011, while its financial debt was $320 million,
concentrated in the short term. Such concentration
is partially offset by the fact that most of the
financial debt is for import financing and matched
with high inventory levels that reached about $780
million as of June 2011. We believe Petroperu would
continue benefiting from its sound relationship with
banks, while its liquidity position would depend
on its working-capital cycle that is in turn highly
dependant on oil prices and refining margins.
October 2011
Petroperú S.A -- Financial Summary
Industry Sector: Oil & Gas
2010
2009
2008
2007
3,555.0
2,505.7
3,389.7
2,577.7
EBITDA
182.7
161.3
(2.8)
289.8
106.7
91.8
(144.3)
113.7
146.9
139.0
(158.6)
181.7
(64.4)
232.0
(203.6)
(111.8)
68.1
34.2
31.0
25.6
(132.5)
197.8
(234.6)
(137.4)
(132.5)
197.8
(234.6)
(137.4)
57.4
37.1
44.6
75.0
Debt
439.2
286.4
454.6
281.9
Equity
480.8
358.5
245.5
428.2
Debt and equity
920.0
644.9
700.1
710.1
5.1
6.4
(0.1)
11.2
50.3
27.3
(0.4)
60.3
18.5
19.0
(17.1)
30.3
FFO/debt (%)
33.5
48.5
(34.9)
64.5
(30.2)
69.0
(51.6)
(48.7)
2.4
1.8
(162.0)
1.0
47.7
44.4
64.9
39.7
(Mil. $)
Revenues
Adjusted ratios
EBITDA margin (%)
Debt/EBITDA (x)
October 2011
73
Saga Falabella S.A.
Diego Ocampo
Not Rated
Industry Sector
Retail
Main shareholder
S.A.C.I. Falabella.
(83%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Relatively good positioning in the incipient
department stores market, in Peru
• Conservative debt levels
• Good operating cash generation
• Operational support from its parent
Weaknesses:
• Lack of geographic and business diversification
• Inherent exposure to economic cycles
Rationale
Peruvian retailer Saga Falabella S.A. (Saga) reflects
the combination of a fair business-risk profile and an
A leading position in the incipient Peruvian market
of department stores and the operational support
of its shareholder, S.A.C.I. Falabella (Falabella, not
rated) mainly underpin Saga’s business-risk profile.
With 17 department stores comprising a total
selling space of about 111,000 square meters as of
December 2010, Saga leads the Peruvian market
of department stores through a 57% market share,
according to market estimates.
The company is owned by the Chilean retailer
Falabella, which also has a credit card operation in
Peru that mostly finances department-store shoppers;
a supermarket chain (Tottus); a home-improvement
division (Sodimac); and a real estate operation
through its ownership of shopping malls.
clothing, and design in its product portfolio. In fact,
in 2009 the company experienced a decrease in
same-store sales of 0.1% year over year due to the
crisis, and then grew 11.6% in 2010 as economic
conditions improved.
Saga’s financial risk profile is mainly driven by
relatively good free cash-generation thanks to
its positive cash cycle and relatively low capital
expenditures, a conservative debt level, and adequate
During the 12 months as of June 2011 the
company’s revenues rose by 17% (measured in U.S.
dollars), which allowed it to reach a record EBITDA
generation of $92 million. The strong performance
supported funds from operations of $69 million,
which it used to partially fund working capital
needs of $51 million, capital expenditures of $16
million and dividends of $16 million. The balance
was financed with debt and cash holdings. Despite
this, credit metrics remained robust with debtto-EBITDA, funds from operations-to-debt, and
EBITDA interest coverage ratios of 0.9x, 87%, and
20.8x respectively, during the 12 months ended in
June 2011.
As of Jun. 30, 2011, Saga’s liquidity was adequate.
Although the company had cash balances of $10
million and short-term debt maturities of $47
million, the company’s financial flexibility is
enhanced by its ability to generate free operating
cash flow, which averaged $53 million annually for
the past two years.
With reported revenues and EBITDA of $8.9
billion and $1.385 million, respectively, in 2010,
Saga’s controlling shareholder Falabella is a leading
integrated retailing company, with operations in
Chile, Peru, Argentina, and Colombia. Falabella is
83.6% owned by seven Chilean families.
Partially counterbalancing the positive factors is the
fact that department stores are traditionally more
exposed to economic cycles than are other types of
retail businesses such as supermarkets, given the
relatively higher proportion of electronic, apparel,
74
October 2011
Saga Falabella S.A. -- Financial Summary
Industry Sector: Retail
2010
2009
2008
2007
657.9
558.0
484.8
426.9
EBITDA
90.0
60.8
54.2
45.1
52.3
30.4
29.4
25.6
59.4
35.9
36.0
28.8
75.4
51.2
28.0
32.1
16.5
4.4
24.8
20.2
58.9
46.7
3.2
11.9
37.5
36.4
(27.7)
3.7
29.1
9.2
13.7
8.2
Debt
57.8
75.2
103.1
74.8
Equity
145.5
109.6
82.1
87.3
Debt and equity
203.3
184.8
185.1
162.1
EBITDA margin (%)
13.7
10.9
11.2
10.6
24.8
8.4
8.7
8.5
45.6
31.7
31.5
29.3
FFO/debt (%)
102.8
47.7
34.9
38.5
101.8
62.2
3.1
15.9
0.6
1.2
1.9
1.7
28.4
40.7
55.7
46.2
(Mil. $)
Revenues
Adjusted ratios
Debt/EBITDA (x)
October 2011
75
Shougang Hierro Peru S.A.A.
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Shougang Corporation
(99%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Cost-efficient operations
• Low debt levels
Weaknesses:
• Single asset nature, with limited product diversity
Rationale
Shougang Hierro Peru S.A.A. (Shougang Hierro)
reflects the company’s fair business-risk profile and
Shougang Hierro’s business-risk profile benefits from
its cost-efficient operations, which result in higher
profitability than industry average. This is due to
the relatively high grade of its ore reserves and its
cost-efficient logistics, as the mine is nearby the port
from which it exports the bulk of the production.
Shougang Hierro’s exposure to the cyclical iron
ore industry, which is characterized by high price,
revenue and earnings volatility, partially offsets its
strengths. Furthermore, the company has limited
asset, product and geographic diversity, as its only
revenue-generating asset is the San Juan de Marcona
iron ore mine. Shougang Hierro’s financial-risk
profile benefits from low leverage, which mitigates
inherent cash-flow volatility.
76
In the 12 months ended in June 2011, revenues
increased by 208% as compared to the 12 months
ended in June 2010, thanks to significantly higher
iron ore prices and to a lesser extent, an increase of
volumes sold (about 19%). This supported higher
EBITDA generation and cash-flow from operations,
which reached $784 and $624 million, respectively,
and positively impacted credit metrics. In particular,
adjusted debt-to-EBITDA was 0.3x, and funds from
operations to debt 243%, compared with 1.6x and
33%, in the same period a year before.
As of June 2011, liquidity was adequate, given
cash balances of about $550 million, short term
debt of roughly $250 million and strong cash-flow
generation, with discretionary cash-flow of $530
million in the 12 months ended June 2011. The fact
that the bulk of short-term debt was owed to the
company’s main shareholder also adds flexibility.
Shougang Hierro is controlled by Shougang
Corporation, which is among China’s largest
steel producers. The company is the sole Peruvian
producer of iron ore, with roughly 6 million tones
in 2010 from the San Juan de Marcona mine mainly
shipped to its controlling shareholder. Through a $1
billion investment, for which the company has just
secured a syndicated credit line worth $240 million,
it expects to increase the yearly output of the mine
to 10 million tons.
October 2011
Shougang Hierro Peru S.A.A. -- Financial Summary
2010
2009
2008
2007
Revenues
697.5
309.2
428.4
335.1
EBITDA
458.2
114.3
231.0
169.0
291.5
52.6
131.6
91.8
344.3
86.3
159.9
114.6
347.2
17.5
142.5
134.7
55.8
59.0
43.3
23.5
291.4
(41.5)
99.2
111.2
238.5
(161.1)
26.1
34.6
246.7
11.1
53.4
47.1
Debt
257.4
187.4
0.0
0.5
Equity
356.9
119.7
190.8
154.8
Debt and equity
614.3
307.1
190.8
155.3
65.7
37.0
53.9
50.4
13,544.6
241.0
7,461.3
988.2
89.2
32.7
108.1
87.5
FFO/debt (%)
133.8
46.0
N.M.
22,338.1
113.2
(22.1)
N.M.
21,661.4
0.6
1.6
0.0
0.0
41.9
61.0
0.0
0.3
(Mil. $)
Adjusted ratios
EBITDA margin (%)
Debt/EBITDA (x)
October 2011
77
Sociedad Minera Cerro Verde S.A.A.
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Freeport-McMoRan
Copper & Gold Inc.
(54%)
Satisfactory
Intermediate
Main Credit Factors
Strengths:
• Cost-efficient production
• Operational support from creditworthy parent
Weaknesses:
• Single asset nature, with limited product diversity
Rationale
Sociedad Minera Cerro Verde S.A.A. (Cerro Verde)
reflects the company’s satisfactory business-risk
profile and intermediate financial-risk profile.
During the 12 months ended in June 2011, Cerro
Verde’s revenues grew 52%, compared with the
prior year. This was mostly driven by higher copper
prices (about 29% according to the London Metal
Exchange) and, to a lesser extent, by a 10% increase
of volumes, with copper sales at roughly 700
million tons. EBITDA generation of $2,223 (up
from $1,342) was boosted by both higher revenues
and improved profitability. This sound operating
performance resulted in a 47% increase of cash-flow
from operations to $1,359 million.
As of June 2011, liquidity was adequate, with no
short term debt commitments and cash holdings of
about $1 billion.
Cerro Verde’s main shareholder is Freeport, with
a 54% stake. Sumitomo Metal Mining Co. Ltd.
(not rated) and Compania de Minas Buenaventura
S.A.A. (not rated) own minority stakes (21% and
19%, respectively). Through the operation of the
Cerro Verde mine, the company is the third largest
Peruvian copper producer, with 312,000 tons in
2010. The bulk of its revenues (80% in 2010)
derives from trade with its shareholders, mainly
through long-term agreements.
Cerro Verde’s business-risk profile benefits from
low production costs, sizable proven and probable
copper reserves (estimated at roughly 12 billion
tones as of December 2010) and a life-of-mine
planned at over 75 years. The company also counts
with operational support from its main shareholder,
Freeport-McMoRan Copper & Gold Inc. (Freeport;
BBB/Stable/--), which is the world’s second-largest
copper producer. Cerro Verde’s exposure to the
cyclical copper market, which is characterized
by high price volatility, its single asset nature
and limited product diversity, partially offset the
strengths. In particular, the Cerro Verde mine is
the only revenue-generating asset, and its output is
mainly copper (94% of sales in 2010).
Cerro Verde’s financial risk profile is driven by its
strong free cash-flow generation and almost zero
financial debt (adjusted debt only comprises very
low asset retirement obligations).
78
October 2011
Sociedad Minera Cerro Verde S.A.A. -- Financial Summary
2010
2009
2008
2007
Revenues
2,369.0
1,757.5
1,835.9
1,794.6
EBITDA
1,753.5
1,202.1
1,182.3
1,347.6
1,054.4
708.5
718.4
804.7
1,148.5
625.0
956.1
1,057.4
1,256.9
399.6
903.9
1,118.6
122.2
91.3
133.7
99.8
1,134.7
308.3
770.1
1,018.7
184.7
(63.4)
(69.9)
398.7
388.1
203.4
481.7
630.4
8.5
13.0
11.9
84.7
Equity
1,550.5
1,446.1
1,324.2
1,445.7
Debt and equity
1,559.0
1,459.1
1,336.0
1,530.4
EBITDA margin (%)
74.0
68.4
64.4
75.1
N.M.
N.M.
440.3
121.6
101.3
73.8
70.7
76.1
FFO/debt (%)
13,553.2
4,789.1
8,061.1
1,248.3
13,390.3
2,362.2
6,493.1
1,202.7
Debt/EBITDA (x)
0.0
0.0
0.0
0.1
0.5
0.9
0.9
5.5
(Mil. $)
Debt
Adjusted ratios
October 2011
79
Supermercados Peruanos S.A.
Diego Ocampo
Not Rated
Industry Sector
Retail
Main shareholder
IFH Peru Ltd. (99.99%)
Fair
Financial Risk Profile Signficant
Main Credit Factors
Strengths:
• Relatively good positioning in the Peruvian foodretail market
• Significant growth opportunities in the medium
term
Weaknesses:
• Lack of geographic and business diversification
• Relatively large capital expenditures may limit free
cash-flow generation
• Stiff competition may put pressure on the
company’s growth needs
Rationale
of Peruvian retailer Supermercados Peruanos S.A.
(SPSA) reflects the combination of a fair businessrisk profile and a significant financial-risk profile.
SPSA’s business-risk profile benefits from its 30%
estimated market share in the still-low developed
but growing Peruvian supermarket industry, and
good brand recognition. The relatively low scale of
its operations and a stiff competitive environment
counterbalance the positive factors.
The Peruvian retail market is still underdeveloped.
According to the Peruvian Chamber of Commerce
penetration levels are estimated at less than 20%
in Lima, compared with 80% in Santiago de Chile
or Rio de Janeiro. The food retail market in Peru is
dominated by traditional, more-informal markets
(bodegas) that concentrate about 70% of the sales
in Lima and more than 90% outside Lima. The
relatively low penetration provides significant
industry growth potential to all market participants.
SPSA has close to 190,000 square meters of selling
area in 67 malls (most of them hypermarkets).
The Plaza Vea hyper and supermarket chain and
Mass discount stores rank second in the Peruvian
supermarket business, with an estimated 35% share.
Chilean integrated retailer Cencosud (not rated)
80
leads the market, with another Chilean retailer,
Falabella, in third place.
The company’s business model is focused on food
retail, which entails lower profit margins than other
categories (such as clothing or furniture) but is
less subject to economic downturns. SPSA’s main
competitors are integrated into different business
units, which adds strength and resilience to their
operations. Cencosud operates the Wong super
and hypermarket chain, and Falabella’s flagship in
Peruvian food retail market is its supermarket chain
Tottus. Both Chilean retailers also provide financing
to shoppers through their own credit cards, and
Falabella operates a department-store division
(SAGA Falabella) and a home-improvement chain
(Sodimac).
The company’s financial-risk profile is mainly driven
by healthy coverage ratios, supported by relatively
stable cash-flow generation from operations,
manageable debt levels, and adequate liquidity.
Debt-to-EBITDA, funds from operations (FFO)to-debt, and EBITDA interest coverage ratios
were 2.6x, 28.5%, and 3.7x, respectively, in the
12 months ended in June 2011. Also, as of June
30, 2011, the company had cash balances of $14
million and short-term debt of $69 million (mainly
consisting of a mix of short-term revolving bank
loans and bonds amortizations).
The company has been entirely devoting its internal
cash generation to fund capital expenditures, as it
has an aggressive growth plan. During the past four
years the company invested an aggregated sum of
$189 million, while consolidated cash flow from
operations totaled $180 million. As a consequence,
the company was able to grow its operations
systematically, to revenues and EBITDA levels of
$935 million and $62 million, respectively, in the
12 months ended in June 2011, from $435 million
and $18 million in 2007. During that time, debt
increased to $160 million as of June 2011, from $87
million.
SPSA is ultimately owned by IFH Peru Ltd. (IFH;
BB-/Stable/--), an investment holding company
controlled by the Peruvian family Rodriguez
Pastor. IFH also owns the Peruvian bank Banco
Internacional del Perú – Interbank (BBB-/Stable/--),
the ‘Inkafarma’ drugstore chain, and other
investments mainly in real estate.
October 2011
Supermercados Peruanos S.A. -- Financial Summary
Industry Sector: Supermarkets
2010
2009
2008
2007
854.1
705.2
556.8
434.6
EBITDA
60.8
43.9
34.8
19.8
19.0
13.3
6.6
3.9
42.5
32.6
25.9
18.8
56.3
60.8
37.1
34.9
60.2
49.7
57.9
44.0
(3.9)
11.1
(20.8)
(9.1)
(3.9)
11.1
(20.8)
(9.1)
38.7
46.4
18.6
35.2
Debt
118.3
112.7
96.4
86.9
Equity
144.2
110.1
84.0
77.1
Debt and equity
262.5
222.8
180.4
163.9
EBITDA margin (%)
7.1
6.2
6.2
4.6
3.9
2.8
3.7
3.4
18.1
17.7
13.6
6.3
FFO/debt (%)
36.0
28.9
26.9
21.7
(3.3)
9.9
(21.6)
(10.5)
1.9
2.6
2.8
4.4
45.1
50.6
53.4
53.0
(Mil. $)
Revenues
Adjusted ratios
Debt/EBITDA (x)
October 2011
81
Telefónica del Perú S.A.A.
Cecilia Fullone
Not Rated
Industry Sector
Telecommunications
Main shareholder
Telefónica S.A. (98.4%)
Business Risk Profile Satisfactory
Financial Risk
Profile
Intermediate
Main Credit Factors
Strengths:
• Good market position as the largest fixed and
mobile telecommunications company in Perú
• Solid profitability and debt-service coverage
metrics
• Operational support from its parent
Weaknesses:
• The fixed telephony segment is mature and highly
regulated
• High competitive pressures put downward pressure
on prices and margins, mainly in the fixed segment
• Large capital expenditures and high dividends, but
with some room for flexibility
Rationale
Peru-based telecommunication company Telefónica
del Perú S.A.A. reflects the combination of a
satisfactory business risk profile and an intermediate
financial risk profile. The assessment is supported
by the company’s good competitive position as a
leading telecommunication provider, its operational
support from Telefónica S.A (BBB+/Stable/A-2)
and its solid cash-flow protection metrics. These
strengths mitigate the increasing competitive
pressures in the industry and the decreasing revenues
and margins in fixed telephony.
Peru’s fixed-line penetration is among the lowest
in Latin America, (Telefónica del Perú had
approximately eight lines per 100 inhabitants as
of March 2011) and most of the fixed lines are
concentrated in Lima. On the other hand, the mobile
customer base has significantly increased, achieving
approximately 31 million customers as of June
2011.
Competition is encouraged in Perú through a
regulatory regime that includes regulated fixed
82
and long-distance tariffs, infrastructure sharing,
and mobile number portability, which became
compulsory for all operators in 2010. Telefónica del
Perú and Telefónica Móviles are the largest fixedand mobile-telephony providers, respectively, in the
country, with about 93% and 63% market shares
in lines in service and customers. In the 12 months
ended in June 2011, the fixed and paid TV segments
represented about 68% of total revenues. In line
with the trend in Latin America, the fixed business
is likely to remain stagnated, which should be partly
mitigated by sustained participation in flexible plans,
broadband Internet, and digital-TV businesses. In
the mobile business, competitive pressures might
intensify due to the entrance of Vietnam-based
Viettel Group at the beginning of 2011.
During the past 12 months ended in June 2011,
Telefónica del Peru’s revenues reached $2.7 billion,
mainly fueled by increases in the mobile segment.
Nevertheless, revenues in the fixed-telephony
segment decreased due to lower traffic and
interconnection charges.
The company’s EBITDA margin has remained above
40% for the past four years. In the past 12 months
ended in June 2011, funds from operations (FFO)
reached $680 million and was mainly used to fund
capital expenditures of $454 million and to pay
dividends of $285 million.
As of June 2011, Telefónica del Perú’s debt levels
were relatively low, totaling $1.47 billion and
resulting in robust credit metrics. Debt-to-EBITDA,
FFO-to-debt, and EBITDA interest coverage ratios
were 1.3x, 47%, and 12.7x, respectively.
In our opinion, as of June 2011, liquidity was
adequate. Even when the company reported shortterm debt of $423 million and cash holdings of $297
million, it has a FFO generation in excess of $700
million per year, good access to debt markets and,
flexible capital expenditures and dividend policies.
Telefónica del Perú is the leading provider of fixed
and mobile telecommunication services in Perú.
The company provides fixed and mobile telephony
services, domestic and international long-distance
calls, and broadband services, among others. Spanish
Telefónica S.A. has a 98.4% controlling interest in
Telefónica del Perú.
October 2011
Telefónica Del Perú S.A.A, -- Financial Summary
Industry Sector: Telecom
2010
2009
2008
2007
Revenues
2,633.9
2,495.3
2,207.7
2,148.6
EBITDA
1,066.7
1,046.6
903.5
871.3
305.1
278.4
150.8
2.6
744.0
773.5
685.7
633.0
764.9
814.0
340.3
451.0
470.0
446.9
389.2
361.1
294.9
367.1
(48.9)
89.9
(Mil. $)
9.7
42.6
(111.8)
89.9
201.6
129.7
91.0
173.1
Debt
1,483.7
1,481.9
1,331.6
1,336.5
Equity
1,266.9
1,218.1
1,258.9
1,214.2
Debt and equity
2,750.6
2,699.9
2,590.5
2,550.7
EBITDA margin (%)
40.5
41.9
40.9
40.6
12.6
11.6
9.7
11.5
22.6
20.1
13.0
5.3
FFO/debt (%)
50.1
52.2
51.5
47.4
19.9
24.8
(3.7)
6.7
1.4
1.4
1.5
1.5
53.9
54.9
51.4
52.4
Adjusted ratios
Debt/EBITDA (x)
October 2011
83
Telefónica Móviles S.A.
Cecilia Fullone
Not Rated
Industry Sector
Telecommunications
Main shareholder
Telefónica de Perú
(99.99%)
Satisfactory
Intermediate
Main Credit Factors
Strengths:
• Good market position as the largest mobile
telephony player with approximately 63% market
share
• Solid profitability and debt-service coverage
metrics
• Synergies with Telefónica de Perú
Weaknesses:
• Operates in a highly competitive market
• Large capital expenditures and high dividends
Rationale
Peru-based telecommunication company Telefónica
Móviles S.A. (TM) reflects the combination of a
satisfactory business risk profile and an intermediate
financial risk profile. The assessment is supported
by the company’s good competitive position as
a leading telecommunication provider and its
solid cash flow protection metrics. It also reflects
the synergies achieved with its main shareholder,
Telefónica de Perú, which has a 99.99% controlling
interest in the company. However, the company
operates in a highly competitive market, which is
subject to increasing regulatory risks, such as mobile
portability number and reduction in interconnection
charges. We believe that those initiatives would
not have a significant impact on the company’s
profitability.
Following the global trend, the mobile customer
base in Perú has increased strongly during the past
five years, reaching 31 million customers as of June
2011, according to company’s estimates. In the same
period, Peru’s mobile penetration achieved 103.5%,
which is in line with average for Latin America and
compares favorably with the country’s economic
indicators. However, there is a huge gap between
urban and rural regions, ranging from 133% in
84
Lima to 16% in some of the lowest-income areas
of the country. Peru’s mobile broadband market is
also growing strongly, driven by the relatively lessdeveloped fixed broadband network. In this context,
we believe there would be some growth potential
through continued expansion in lines and traffic and
higher penetration of value-added services.
TM enjoys a leading competitive position in the
Peruvian mobile telecom market, with a 63% share,
followed by America Movil and Nextel, with 34%
and 3% market shares, respectively. Competitive
pressures might intensify in coming periods due to
the entrance of Vietnam-based Viettel Group at the
beginning of 2011.
In the past 12 months ended in June 2011, TM’s
revenues grew 11%, mainly due to increases in the
number of postpaid subscribers and, to a lesser
extent, higher revenues in the broadband segment.
This boosted adjusted EBITDA generation to
approximately $531 million and cash flow from
operations (CFO) to $498 million. CFO was used
to fund capital expenditures of $219 and to pay
dividends of $320 million.
As of June 2011, TM’s debt levels were low, totaling
approximately $390 million and resulting in robust
credit metrics. Debt-to-EBITDA, CFO-to-debt, and
EBITDA interest coverage ratios were 0.7x, 129%,
and 32x, respectively, which is in line with the credit
metrics posted by its regional peers.
In our opinion TM enjoys an adequate liquidity
position, given the company’s good cash generation,
which is mainly used to finance high capital
expenditures. In addition, the company’s high
dividend policy is relatively flexible, which gives TM
additional room to maneuver. As of June 30, 2011,
the company had cash holdings of approximately
$141 million and short-term financial debt of
approximately $172 million.
TM is the leading provider of mobile
telecommunication services in Perú. The company
operates under the brand name Movistar and offers
prepaid and postpaid mobile telephony to 19 million
clients, interconnection, roaming, and mobile
broadband, among other services. TM is 99.99%
owned by Telefónica del Perú S.A.
October 2011
Telefónica Móviles S.A. -- Financial Summary
Industry Sector: Telecom
2010
2009
2008
2007
1,348.9
1,221.0
1,046.7
853.9
EBITDA
513.0
455.8
381.2
235.3
250.7
226.8
164.2
34.3
410.6
356.3
288.2
185.8
460.4
467.7
221.5
117.9
235.5
187.2
200.9
154.9
224.9
280.5
20.7
(37.0)
(22.6)
61.0
(58.2)
(37.0)
69.0
52.5
39.9
43.4
Debt
340.1
280.5
221.7
196.9
Equity
327.1
311.5
347.3
270.6
Debt and equity
667.2
592.0
569.0
467.6
EBITDA margin (%)
38.0
37.3
36.4
27.6
36.0
27.0
34.1
16.5
61.0
58.7
55.7
19.1
120.7
166.8
99.9
59.9
66.1
100.0
9.3
(18.8)
0.7
0.6
0.6
0.8
51.0
47.4
39.0
42.1
(Mil. $)
Revenues
Adjusted ratios
FFO/debt (%)
Debt/EBITDA (x)
October 2011
85
Unión de Cervecerías Peruanas Backus y Johnston S.A.A.
Cecilia Fullone
Not Rated
Industry Sector
Diversified Consumer
Products – Beverages
Main shareholder
SABMiller PLC. (99.2%)
Satisfactory
Intermediate
Main Credit Factors
Strengths:
• Strong and diversified product portfolio
• High market penetration
• Operational parent support
• Low leverage
Weaknesses:
• Exposure to commodity prices
• Sensitive demand linked to GDP variations
Rationale
Peruvian beverage producer Union de Cervecerias
Peruanas Backus y Johnston S.A.A. (Backus) reflects
the combination of its satisfactory business-risk
profile combined with its intermediate financial-risk
profile.
Backus’s business-risk profile is underpinned by a
strong presence in the Peruvian beer market with
a large and well-diversified product portfolio, high
market penetration, considerable brand recognition
and strong operational support from parent
SABMiller. Even though the company is engaged
in the production, bottling, and distribution of
beer, soft drinks, water, juices, and liquors, beer
represented 95% of total revenues in 2010. Cristal,
Pilsen Callao, Cusqueña, and Pilsen Trujillo are
among Backus’s top brands, with 33.8%, 15.1%,
10%, and 7% of market share, respectively. During
the fiscal year ended Dec. 31, 2010, the company
consolidated its market presence even more, by
selling more than 10 million hectoliters, reaching
a solid 90.8% market share or 3% market gain
compared with the same period of 2009.
To continue growing in a mature and relatively
stable market, the company focused its 2010
commercial strategies in volume, price, customer
86
discounts, and brand innovations. More than 63%
of Backus’s volume sold in 2010 was through
distribution centers that represented a more efficient
platform to gain the point of sale and reach the mom
and pops shops.
From a financial perspective, Backus’s risk profile
is characterized by a conservative financial policy
a relatively stable EBITDA margin, a strong ability
to generate free operating cash flow, and a low and
well structured financial leverage.
During the past four years and in spite of the
financial crises, the company’s EBITDA margin
has remained above 32%, reflecting its effective
cost structure and its approach to commodity price
variations. In 2010, Backus’s EBITDA reached $367
million or 8.2% higher than $340 million in 2009.
It thereby generated operating cash flow of $337
million, which it used to fund $96 million of capitalexpenditure requirements and pay $186 million of
dividends to SABMiller PLC.
As of June 30, 2011, Backus’s adjusted debt reached
$75.8 million comprising financial obligations with
two major banks due in September and October
2011, and $800.000 of the last installment of an
operational lease due in 2012.
On the other hand, the combination of the
company’s performance and low leverage resulted
in debt to EBITDA and debt to total capital of 0.2x
and 10.4%, respectively.
Even though as of June 2011 we consider liquidity
somewhat tight, we believe Backus’s strong ability to
generate free operating cash flow (FOCF) combined
with its relatively good access to the domestic
banking system and debt market enhanced its
financial flexibility. As of June 2011, the company
held cash and short term investments of $32 million
while short term financial obligations reached $75
million.
Backus is 99.2% indirectly owned by SABMiller
PLC (BBB+/Stable/A-2), the U.K.-based brewing
company. SABMiller is the world’s second-largest
brewer by volume with sales exceeding $15 billion,
supported by a diversified geographic presence and a
strong brand portfolio.
October 2011
Union de Cervecerias Peruanas Backus Y Johnston S.A.A.
2010
2009
2008
2007
1,141.6
963.5
853.1
781.6
EBITDA
367.0
339.9
290.4
242.4
184.4
170.1
126.7
101.2
281.9
262.9
199.9
195.6
336.6
337.0
227.1
162.1
96.2
99.2
143.3
133.2
240.5
237.8
83.8
28.9
53.7
(2.4)
(99.9)
(83.2)
87.5
94.5
30.5
89.2
Debt
82.9
102.8
49.4
9.0
Equity
656.7
630.0
625.3
731.0
Debt and equity
739.6
732.8
674.6
740.1
EBITDA margin (%)
32.1
35.3
34.0
31.0
67.3
37.8
7.9
7.4
34.8
32.8
30.7
23.9
FFO/debt (%)
340.1
255.8
404.8
2,163.0
290.2
231.6
169.7
319.4
0.2
0.3
0.2
0.0
11.2
14.0
7.3
1.2
(Mil. $)
Revenues
Adjusted ratios
Debt/EBITDA (x)
October 2011
87
Volcán Compañía Minera S.A.A.
Candela Macchi
Not Rated
Industry Sector
Metals & Mining
Main shareholder
Greenville Overseas
Investments (52.6%)
Fair
Intermediate
Main Credit Factors
Strengths:
• Good positioning as a silver and zinc producer
• Reduced debt levels and comfortable maturity
profile
• Relatively long reserves with an average life of
18 years
Weaknesses:
• Highly volatile cash flow in the cyclical industry
exposed to mineral and metals price fluctuations,
partly mitigated by product diversification.
• Low geographic diversification
Rationale
of Peruvian-based mining Volcán Compañía
Minera S.A.A (Volcan) reflects the combination
of what we consider to be a fair business-risk
profile and intermediate financial-risk profile. The
assessment also reflects the company’s relatively
good competitive position as a global silver and
zinc producer; it’s increasing reserves base; adequate
liquidity; and strong credit metrics. The volatility
of its cash-flow generation--which is subject to
commodity price fluctuations--and the lack of
geographic diversification partially, offset the
strengths.
$398 million, from $280 million and $270 million,
respectively, in 2009. This strong cash generation
allowed the company to continue reducing its debt
levels and make dividend payments of $76 million in
2010.
As of June 2011 Volcan’s debt stood at only $102
million, which allowed the company to post
conservative credit metrics, as evidenced by rolling
twelve months adjusted debt-to-EBITDA of 0.2x.
We consider such a prudent approach to leverage
as a key factor from a credit perspective, given the
inherent volatility affecting the cash flows.
We assessed Volcan’s liquidity position as adequate.
As of June 30, 2011 cash balances stood at $99
million, well above short term financial obligations.
Its strong cash generation, manageable debt maturity
schedule and historically flexible dividends and
capital expenditures also enhance the company’s
With outputs levels of 19 million ounces of silver
and 655 metric tons of zinc in 2010, Volcan ranks
among the top 10 global producers of both metals.
The company also produces copper and lead in its
five operating mines: Cerro Pasco, Yauli, Chungar,
Vinchos, and Alpamarca located in the departments
of Pasco and Junin, and is currently undergoing
power generation projects in Peru. The company’s
majority shareholder is Greenville Overseas
Investments with a stake of 52.6%.
During fiscal 2010, Volcan’s revenues grew
47% compared with 2009, mainly due to higher
international prices for zinc, silver, and lead (that
represented almost 97% of its consolidated income).
Costs increased about 27% during the mentioned
period, fueled by higher fixed costs in Cerro del
Pasco (which has been engaged in an optimization
program that temporarily decreased its production)
and increased costs of material and power.
Nevertheless, adjusted EBITDA generation increased
to $496 million and funds from operations (FFO) to
88
October 2011
Volcán Compañía Minera S.A.A. -- Financial Summary
2010
2009
2008
2007
Revenues
973.3
662.4
627.1
1,053.9
EBITDA
495.8
280.2
241.0
694.9
272.2
170.2
176.6
396.7
397.8
270.4
231.9
465.2
273.4
158.4
168.3
271.7
93.0
53.9
110.6
94.4
260.9
202.4
64.0
332.0
185.0
146.5
(12.3)
192.9
135.4
124.5
184.6
143.4
42.9
84.7
202.3
3.8
Equity
1,075.6
896.5
889.1
774.2
Debt and equity
1,118.5
981.2
1,091.4
778.0
50.9
42.3
38.4
65.9
349.6
223.4
55.8
136.7
36.3
19.3
18.2
77.6
FFO/debt (%)
927.1
319.3
114.6
12,365.2
260.9
202.4
64.0
322.0
Debt/EBITDA (x)
0.1
0.3
0.8
0.0
3.8
8.6
18.5
0.4
(Mil. $)
Debt
Adjusted ratios
EBITDA margin (%)
October 2011
89
90
October 2011
Understanding Ratings and Definitions
October 2011
91
Guide To Credit Rating Essentials
Standard & Poor’s Ratings Services traces its history
back to 1860, the year that Henry Varnum Poor
published the History of Railroads and Canals of the
United States.
Standard & Poor’s public credit ratings opinions
are also disseminated broadly and free of charge to
recipients all over the world on
www.standardandpoors.com.
Standard & Poor’s has been publishing credit
ratings since 1916, providing investors and market
participants worldwide with independent analysis of
credit risk.
Credit ratings are forward looking
Credit Ratings
Credit ratings are opinions about credit risk.
Standard & Poor’s ratings express the agency’s
opinion about the ability and willingness of
an issuer, such as a corporation or state or city
government, to meet its financial obligations in full
and on time.
Credit ratings can also speak to the credit quality
of an individual debt issue, such as a corporate or
municipal bond, and the relative likelihood that the
issue may default.
Ratings are provided by credit rating agencies which
specialize in evaluating credit risk. In addition to
international credit rating agencies, such as Standard
& Poor’s, there are regional and niche rating
agencies that tend to specialize in a geographical
region or industry.
Each agency applies its own methodology in
measuring creditworthiness and uses a specific
rating scale to publish its ratings opinions. Typically,
ratings are expressed as letter grades that range, for
example, from ‘AAA’ to ‘D’ to communicate the
agency’s opinion of relative level of credit risk.
Standard & Poor’s ratings opinions are based on
analysis by experienced professionals who evaluate
and interpret information received from issuers
and other available sources to form a considered
opinion.
Unlike other types of opinions, such as, for
example, those provided by doctors or lawyers,
credit ratings opinions are not intended to be a
prognosis or recommendation. Instead, they are
primarily intended to provide investors and market
participants with information about the relative
credit risk of issuers and individual debt issues that
the agency rates.
92
As part of its ratings analysis, Standard &
Poor’s evaluates available current and historical
information and assesses the potential impact of
foreseeable future events. For example, in rating
a corporation as an issuer of debt, the agency
may factor in anticipated ups and downs in the
business cycle that may affect the corporation’s
creditworthiness.
While the forward looking opinions of rating
agencies can be of use to investors and market
participants who are making long- or short-term
investment and business decisions, credit ratings are
not a guarantee that an investment will pay out or
that it will not default.
Credit ratings do not indicate investment merit
While investors may use credit ratings in making
investment decisions, Standard & Poor’s ratings
are not indications of investment merit. In other
words, the ratings are not buy, sell, or hold
recommendations, or a measure of asset value.
Nor are they intended to signal the suitability of
an investment. They speak to one aspect of an
investment decision— credit quality—and, in some
cases, may also address what investors can expect to
recover in the event of default.
In evaluating an investment, investors should
consider, in addition to credit quality, the current
make-up of their portfolios, their investment
strategy and time horizon, their tolerance for risk,
and an estimation of the security’s relative value in
comparison to other securities they might choose. By
way of analogy, while reputation for dependability
may be an important consideration in buying a car,
it is not the sole criterion on which drivers normally
base their purchase decisions.
Credit ratings are not absolute measures of
default probability
Since there are future events and developments that
cannot be foreseen, the assignment of credit ratings
is not an exact science. For this reason, Standard
& Poor’s ratings opinions are not intended as
October 2011
guarantees of credit quality or as exact measures of
the probability that a particular issuer or particular
debt issue will default.
Instead, ratings express relative opinions about the
creditworthiness of an issuer or credit quality of an
individual debt issue, from strongest to weakest,
within a universe of credit risk.
For example, a corporate bond that is rated ‘AA’ is
viewed by the rating agency as having a higher credit
quality than a corporate bond with a ‘BBB’ rating.
But the ‘AA’ rating isn’t a guarantee that it will not
default, only that, in the agency’s opinion, it is less
likely to default than the ‘BBB’ bond.
the issuer and other sources to evaluate the credit
quality of the issue and the likelihood of default.
In the case of bonds issued by corporations or
municipalities, rating agencies typically begin with
an evaluation of the creditworthiness of the issuer
before assessing the credit quality of a specific debt
issue.
In analyzing debt issues, for example, Standard &
Poor’s analysts evaluate, among other things:
Credit rating agencies assign ratings to issuers, such
as corporations and governments, as well as to
specific debt issues, such as bonds, notes, and other
debt securities.
• The terms and conditions of the debt security and,
if relevant, its legal structure.
• The relative seniority of the issue with regard
to the issuer’s other debt issues and priority of
repayment in the event of default.
• The existence of external support or credit
enhancements, such as letters of credit, guarantees,
insurance, and collateral. These protections can
provide a cushion that limits the potential credit
risks associated with a particular issue.
Rating an issuer
Surveillance: Tracking credit quality
Rating issuers and issues
To assess the creditworthiness of an issuer, Standard
& Poor’s evaluates the issuer’s ability and willingness
to repay its obligations in accordance with the terms
of those obligations.
To form its ratings opinions, Standard & Poor’s
reviews a broad range of financial and business
attributes that may influence the issuer’s prompt
repayment. The specific risk factors that are
analyzed depend in part on the type of issuer. For
example, the credit analysis of a corporate issuer
typically considers many financial and non-financial
factors, including key performance indicators,
economic, regulatory, and geopolitical influences,
management and corporate governance attributes,
and competitive position. In rating a sovereign, or
national government, the analysis may concentrate
on political risk, monetary stability, and overall debt
burden.
For high-grade credit ratings, Standard & Poor’s
considers the anticipated ups and downs of the
business cycle, including industry-specific and broad
economic factors. The length and effects of business
cycles can vary greatly, however, making their
impact on credit quality difficult to predict with
precision. In the case of higher risk, more volatile
speculativegrade ratings, Standard & Poor’s factors
in greater vulnerability to down business cycles.
Rating an issue
In rating an individual debt issue, such as a
corporate or municipal bond, Standard & Poor’s
typically uses, among other things, information from
October 2011
Agencies typically track developments that might
affect the credit risk of an issuer or individual debt
issue for which an agency has provided a ratings
opinion. In the case of Standard & Poor’s, the goal
of this surveillance is to keep the rating current
by identifying issues that may result in either an
upgrade or a downgrade.
In conducting its surveillance, Standard & Poor’s
may consider many factors, including, for example,
changes in the business climate or credit markets,
new technology or competition that may hurt
an issuer’s earnings or projected revenues, issuer
performance, and regulatory changes.
The frequency and extent of surveillance typically
depends on specific risk considerations for an
individual issuer or issue, or an entire group of
rated entities or debt issues. In its surveillance of
a corporate issuer’s ratings, for example, Standard
& Poor’s may schedule periodic meetings with a
company to allow management to:
• Apprise agency analysts of any changes in the
company’s plans.
• Discuss new developments that may affect prior
expectations of credit risk.
• Identify and evaluate other factors or assumptions
that may affect the agency’s opinion of the issuer’s
creditworthiness.
As a result of its surveillance analysis, an agency
may adjust the credit rating of an issuer or issue to
signify its view of a higher or lower level of relative
credit risk.
93
94
October 2011
Glossary Of Financial Ratio Definitions
Ratios are helpful in broadly defining a company’s
position relative to its rating category.
However, caution should be exercised when using
ratios for comparisons because of differences in
business environments and financial practices. While
the absolute levels of ratios are important, it is
equally important to focus on trends. Below are the
definitions for some of Standard & Poor’s key financial
ratios.
Total debt includes current and non-current debt,
secured and unsecured debt, subordinated debt,
bank overdrafts, loans, finance lease liabilities,
redeemable preference shares, debenture stock,
promissory notes, convertible notes, and bills
payable (non-trade). Off-balance-sheet items
sometimes factored into leverage calculations include
guarantees, contingent liabilities, non-recourse debt,
debt of joint ventures, and operating leases.
Equity consists of paid-up capital, capital reserves,
unappropriated profits and minority interests, less
treasury shares. Subordinated convertible notes and
bonds are excluded from equity.
Funds from operations (FFO) is defined as operating
profit before taxes, plus dividends from associates,
and depreciation and amortization less income tax
paid, and is adjusted for non-cash items.
Free operating cash flow is defined as FFO adjusted for
working capital movements and capital expenditure.
Operating lease adjustment is performed on
financial ratios where applicable. Standard & Poor’s
operating lease model improves the comparability
of financial ratios by considering de facto assets and
liabilities, whether they are accounted for on or off
the balance sheet.
In capitalizing non-cancelable operating lease
commitments, a present value is calculated by
discounting future lease commitments at the
company’s prevailing average interest rate. This
method converts a stream of payments tied to
temporary assets to a debt-financed purchase of
property, plant, and equipment. Standard & Poor’s
reallocates the average of the current and previous
year’s minimum first-year lease commitment to
interest and depreciation.
Total capital is total debt plus equity.
Permanent capital is equity, adjusted for provisions
for deferred tax and future tax benefits (where
appropriate), plus total debt. Sometimes Standard &
Poor’s excludes the asset revaluation reserves figure
from permanent capital so as to arrive at a different
leverage comparison.
Earnings before interest, tax, depreciation, and
amortization (EBITDA) is operating income (before
depreciation and amortization) or revenue less
cost of goods sold (excluding depreciation and
amortization), selling, general, and administrative
expenses, and other operating expenses.
Earnings before interest and tax (EBIT) is operating
income (before depreciation and amortization)
or EBITDA less depreciation and amortization,
adjusted for equity income, interest income, and
other non-operating items. Gross interest expense is
interest expenses plus capitalized interest.
October 2011
95
Incorporating Adjustments Into The Analytical Process
Our analysis of financial statements begins with a
review of accounting characteristics to determine
whether ratios and statistics derived from the
statements adequately measure a company’s
performance and position relative to both its direct
peer group and the larger universe of industrial
companies. To the extent possible, our analytical
adjustments are made to better reflect reality and to
minimize differences among companies.
We recognize that the use of nonstandard
adjustments involves an inherent risk of
inconsistency. Also, some of our constituencies want
to be able to easily replicate and even anticipate our
analysis--and nonstandard adjustments may frustrate
that ability. However, for us, the paramount
consideration is producing the best possible quality
analysis. Sometimes, one must accept the tradeoffs
that may be involved in its pursuit.
Our approach to adjustments is meant to modify
measures used in the analysis, rather than fully
recast the entire set of financial statements. Further,
it often may be preferable or more practical to adjust
separate parts of the financial statements in different
ways. For example, while stock-options expense
represents a cost of doing business that must be
considered as part of our profitability analysis, fully
recasting the cash implications associated with their
grant on operating cash flows is neither practical
nor feasible, given repurchases and complexities
associated with tax laws driving the deduction
timing. Similarly, the analyst may prefer to derive
profitability measures from LIFO-based inventory
accounting--while retaining FIFO-based measures
when looking at the valuation of balance sheet
assets.
In many instances, sensitivity analyses and range
estimates are more informative than choosing a
single number. Accordingly, our analysis at times
is expressed in terms of numerical ranges, multiple
scenarios, or tolerance levels. Such an approach
is critical when evaluating highly discretionary or
potentially varied outcomes, where using exact
measurement is often impossible, impractical, or
even imprudent (e.g., adjusting for a major litigation
where there is an equal probability of an adverse or
a favorable outcome).
Certain adjustments are routine, as they apply
to many of our issuers for all periods (e.g.,
operating lease, securitizations, and pension-related
adjustments). Other adjustments are made on a
specific industry basis (e.g., adjustments made to
reflect asset retirement obligations of regulated
utilities and volumetric production payments of oil
and gas producing companies).
Beyond that, we encourage use of nonstandard
adjustments that promote the objectives outlined
above. Individual situations require creative
application of analytical techniques--including
adjustments--to capture the specific fact pattern
and its nuances. For example, retail dealer stock
sometimes has the characteristics of manufacturer
inventory--notwithstanding its legal sale to the
dealer. Subtle differences or changes in the fact
pattern (such as financing terms, level of inventory
relative to sales, and seasonal variations) would
influence the analytical perspective.
96
Similarly, in some cases, the analyst must evaluate
financial information on an adjusted and an
unadjusted basis. For example, most hybrid equity
securities fall in a grey area that is hard to appreciate
merely by making numerical adjustments. So, while
we do employ a standard adjustment that splits the
amounts in two, we also prefer that our analysts
look at measures that treat these instruments entirely
as debt--and entirely as equity.
In any event, adjustments do not always neatly
allow one to gain full appreciation of financial
risks and rewards. For example, a company that
elects to use operating leases for its core assets must
be compared with peers that purchase the same
assets (e.g., retail stores), and our lease adjustment
helps in this respect. But we also recognize the
flexibility associated with the leases in the event
of potential downsizing, and would not treat the
company identically with peers that exhibit identical
numbers. Likewise, in a receivable securitization,
while the sale of the receivables to the securitization
vehicle generally shifts some of the risks, often the
predominant share remains with the issuer. Beyond
adjusting to incorporate the assets and related
debt of the securitization vehicles, analysts must
appreciate the funding flexibility and efficiencies
related to these vehicles and the limited risk
transference that may pertain.
October 2011
Apart from their importance to the quantitative
aspects of the financial analysis, qualitative
conclusions regarding the company’s financial data
can also influence other aspects of the analysis-including the assessment of management, financial
policy, and internal controls.
Encyclopedia Of Analytical Adjustments
The list of adjustments we use in analyzing industrial
companies, in alphabetical order, includes:
• Accrued Interest And Dividends
• Asset Retirement Obligations
• Capitalized Development Costs
• Capitalized Interest
• Captive Finance Operations
• Exploration Costs
• Foreign Currency Exchange Gains/Losses
• Guarantees
October 2011
• Hybrid Instruments
• LIFO/FIFO: Inventory Accounting Methods
• Litigation
• Nonrecourse Debt Of Affiliates (Scope Of
Consolidation)
• Nonrecurring Items/Noncore Activities
• Operating Leases
• Postretirement Employee Benefits/Deferred
Compensation
• Power Purchase Agreements
• Share-Based Compensation Expense
• Stranded Costs Securitizations Of Regulated
Utilities
• Surplus Cash
• Trade Receivables Securitizations
• Volumetric Production Payment
• Workers Compensation/Self Insurance
97
Standard & Poor´s Rating Definitions
A Standard & Poor’s issuer credit rating is a
forward-looking opinion about an obligor’s overall
financial capacity (its creditworthiness) to pay
its financial obligations. This opinion focuses on
the obligor’s capacity and willingness to meet its
financial commitments as they come due.
Ratings are based on current information furnished
by the borrower or debt issuer or from data
obtained by Standard & Poor’s from other sources
which it considers reliable. Standard & Poor’s does
not perform an audit in connection with any credit
rating and may, on occasion, rely on unaudited
financial information.
Long-Term Issuer Credit Ratings
AAA
An obligor rated ‘AAA’ has extremely strong
capacity to meet its financial commitments. ‘AAA’ is
the highest issuer credit rating assigned by Standard
& Poor’s.
AA
An obligor rated ‘AA’ has very strong capacity to
meet its financial commitments. It differs from the
highest-rated obligors only to a small degree.
A
An obligor rated ‘A’ has strong capacity to meet
its financial commitments but is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than
obligors in higher-rated categories.
An obligor rated ‘BB’ is less vulnerable in the near
term than other lower-rated obligors. However, it
faces major ongoing uncertainties and exposure to
adverse business, financial, or economic conditions
which could lead to the obligor’s inadequate capacity
to meet its financial commitments.
B
An obligor rated ‘B’ is more vulnerable than the
obligors rated ‘BB’, but the obligor currently has the
capacity to meet its financial commitments. Adverse
business, financial, or economic conditions will
likely impair the obligor’s capacity or willingness to
meet its financial commitments.
CCC
An obligor rated ‘CCC’ is currently vulnerable, and
is dependent upon favorable business, financial,
and economic conditions to meet its financial
commitments.
CC
An obligor rated ‘CC’ is currently highly vulnerable.
Plus (+) or minus (-)
The ratings from ‘AA’ to ‘CCC’ may be modified by
the addition of a plus (+) or minus (-) sign to show
relative standing within the major rating categories.
R
An obligor rated ‘BBB’ has adequate capacity to
meet its financial commitments. However, adverse
economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the
obligor to meet its financial commitments.
An obligor rated ‘R’ is under regulatory supervision
owing to its financial condition. During the
pendency of the regulatory supervision the
regulators may have the power to favor one class of
obligations over others or pay some obligations and
not others. Please see Standard & Poor’s issue credit
ratings for a more detailed description of the effects
of regulatory supervision on specific issues or classes
of obligations.
BB, B, CCC, and CC
SD and D
BBB
Obligors rated ‘BB’, ‘B’, ‘CCC’, and ‘CC’ are
regarded as having significant speculative
characteristics. ‘BB’ indicates the least degree
of speculation and ‘CC’ the highest. While such
obligors will likely have some quality and protective
characteristics, these may be outweighed by
large uncertainties or major exposures to adverse
conditions.
98
BB
An obligor rated ‘SD’ (selective default) or ‘D’ has
failed to pay one or more of its financial obligations
(rated or unrated) when it came due. A ‘D’ rating
is assigned when Standard & Poor’s believes that
the default will be a general default and that the
obligor will fail to pay all or substantially all of its
obligations as they come due. An
‘SD’ rating is assigned when Standard & Poor’s
believes that the obligor has selectively defaulted
October 2011
on a specific issue or class of obligations, excluding
those that qualify as regulatory capital, but it will
continue to meet its payment obligations on other
issues or classes of obligations in a timely manner.
A selective default includes the completion of a
distressed exchange offer, whereby one or more
financial obligation is either repurchased for an
amount of cash or replaced by other instruments
having a total value that is less than par.
NR
compared to other speculative-grade obligors.
B-3 Obligors with a ‘B-3’ short-term rating have a
relatively weaker capacity to meet their financial
commitments over the short-term compared to other
speculative-grade obligors.
C
An obligor rated ‘C’ is currently vulnerable to
nonpayment and is dependent upon favorable
business, financial, and economic conditions for it to
An issuer designated NR is not rated.
Short-Term Issuer Credit Ratings
A-1
An obligor rated ‘A-1’ has strong capacity to meet
its financial commitments. It is rated in the highest
category by Standard & Poor’s. Within this category,
certain obligors are designated with a plus sign (+).
This indicates that the obligor’s capacity to meet its
financial commitments is extremely strong.
A-2
An obligor rated ‘A-2’ has satisfactory capacity
to meet its financial commitments. However, it is
somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions
than obligors in the highest rating category.
A-3
An obligor rated ‘A-3’ has adequate capacity to meet
its financial obligations. However, adverse economic
conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to
B
An obligor rated ‘B’ is regarded as vulnerable and
has significant speculative characteristics. Ratings
of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to
indicate finer distinctions within the ‘B’ category.
The obligor currently has the capacity to meet its
financial commitments; however, it faces major
ongoing uncertainties which could lead to the
obligor’s inadequate capacity to meet its financial
commitments.
B-1 Obligors with a ‘B-1’ short-term rating have a
relatively stronger capacity to meet their financial
commitments over the short-term compared to other
speculative-grade obligors.
B-2 Obligors with a ‘B-2’ short-term rating have
an average speculative-grade capacity to meet
their financial commitments over the short-term
October 2011
R
An obligor rated ‘R’ is under regulatory supervision
owing to its financial condition. During the
pendency of the regulatory supervision the
regulators may have the power to favor one class of
obligations over others or pay some obligations and
not others. Please see Standard & Poor’s issue credit
ratings for a more detailed description of the effects
of regulatory supervision on specific issues or classes
of obligations.
SD and D
An obligor rated ‘SD’ (selective default) or ‘D’ has
failed to pay one or more of its financial obligations
(rated or unrated) when it came due. A ‘D’ rating
is assigned when Standard & Poor’s believes that
the default will be a general default and that the
obligor will fail to pay all or substantially all of its
obligations as they come due. An
‘SD’ rating is assigned when Standard & Poor’s
believes that the obligor has selectively defaulted
on a specific issue or class of obligations, excluding
those that qualify as regulatory capital, but it will
continue to meet its payment obligations on other
issues or classes of obligations in a timely manner.
Please see Standard & Poor’s issue credit ratings for
a more detailed description of the effects of a default
on specific issues or classes of obligations.
NR
An issuer designated NR is not rated.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of
Standard & Poor’s analysis for credit ratings on
any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor’s capacity to repay
foreign currency obligations may be lower than its
capacity to repay obligations in its local currency
due to the sovereign government’s own relatively
lower capacity to repay external versus domestic
debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific
99
issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to
identify those instances where sovereign risks make
them different for the same issuer.
CreditWatch Definitions
CreditWatch highlights our opinion regarding the
potential direction of a short-term or long-term
rating. It focuses on identifiable events and shortterm trends that cause ratings to be placed under
special surveillance by Standard &
Poor’s analytical staff. Ratings may be placed on
CreditWatch under the following circumstances:
• When an event has occurred or, in our view, a
deviation from an expected trend has occurred
or is expected and when additional information
is necessary to evaluate the current rating. Events
and short-term trends may include mergers,
recapitalizations, voter referendums, regulatory
actions, performance deterioration of securitized
assets, or anticipated operating developments.
• When we believe there has been a material
change in performance of an issue or issuer, but the
magnitude of the rating impact has not been fully
determined, and we believe that a rating change is
likely in the short-term.
• A change in criteria has been adopted that
necessitates a review of an entire sector or multiple
transactions and we believe that a rating change is
likely in the short-term.
Rating Outlook Definitions
A Standard & Poor’s rating outlook assesses the
potential direction of a long-term credit rating
over the intermediate term (typically six months
to two years). In determining a rating outlook,
consideration is given to any changes in the
economic and/or fundamental business conditions.
An outlook is not necessarily a precursor of a rating
change or future CreditWatch action.
 • Positive means that a rating may be raised.
 • Negative means that a rating may be lowered.
 • Stable means that a rating is not likely to change.
 • Developing means a rating may be raised or
lowered.
 • N.M. means not meaningful.
For a full listing of definitions, visit our website at
www.standardandpoors.com. Select Credit Ratings,
Credit Ratings Criteria, Ratings Denitions.
A CreditWatch listing, however, does not mean a
rating change is inevitable, and when appropriate, a
range of potential alternative ratings will be shown.
CreditWatch is not intended to include all ratings
under review, and rating changes may occur without
the ratings having first appeared on CreditWatch.
The “positive” designation means that a rating
may be raised; “negative” means a rating may be
lowered; and “developing” means that a rating may
be raised, lowered, or affirmed.
100
October 2011
Contact list
October 2011
101
Contacts List
Standard & Poor’s
Jane Eddy, Managing Director – Latin America Region Head
Marta Castelli, Managing Director - Lead Analytical Manager
Corporate Ratings
Pablo Lutereau,
Senior Director & Analytical Manager
54-11-4891-2125
[email protected]
Luciano Gremone,
Director
54-11-4891-2143
[email protected]
Cecilia Fullone,
Associate
54-11-4891-2170
[email protected]
Diego Ocampo,
Associate Director
54-11-4891-2124
[email protected]
Candela Macchi,
Associate
54-11-4891-2110
[email protected]
Patricio Bayona,
Rating Specialist
54-11-4891-2112
[email protected]
Javier Vieiro Cobas,
Associate
54-11-4891-2118
[email protected]
Victoria Lemos,
Rating Specialist
54-11-4891-2117
[email protected]
Luisina Berberian,
Rating Analyst
54-11-4891-2156
[email protected]
Francisco Serra,
Rating Analyst
54-11-4891-2141
[email protected]
Dario López Zadicoff,
Associate
54-11-4891-2142
[email protected]
Guadalupe Merea,
Senior Research Assistant
54-11-4891-2147
[email protected]
102
October 2011
Financial Institutions
Sergio Garibian,
Senior Director & Analytical Manager
54-11-4891-2119
[email protected]
Sergio Fuentes,
Director
54-11-4891-2131
[email protected]
Delfina Cavanagh,
Associate
54-11-4891-2153
[email protected]
Mónica Gavito,
Rating Specialist
54-11-4891-2140
[email protected]
Sebastián Liutvinas,
Associate Director
54-11-4891-2109
[email protected]
Cynthia Cohen Freue,
Associate
54-11-4891-2161
[email protected]
Joaquín Meda,
Rating Analyst
54-11-4891-2136
[email protected]
Sovereign & International Public Finance
Sebastián Briozzo,
Director
54-11-4891-2120
[email protected]
Structured Finance
Juan Pablo De Mollein,
Managing Director
1-212-438-2536
[email protected]
Sol Ventura,
Associate Director
54-11-4891-2114
[email protected]
Ignacio Estruga,
Associate
54-11-4891-2106
[email protected]
Facundo Chiarello,
Associate
54-11-4891-2134
[email protected]
Marketing & Communications
Fernanda Cravero
54-11-4891-2133
[email protected]
María Laura Ingaramo
54-11-4891-2107
[email protected]
Origination
Lorena Rossi
54-11-4891-2135
[email protected]
Quality
Ivana Recalde, Director & Quality Officer
54-11-4891-2127
[email protected]
October 2011
103
Top 20
Peruvian Companies
Standard&&Poor’s
Poor’s
Standard
Av.
L.N.
Alem
855
3er
Piso
Av. L.N. Alem 855 3er Piso
BuenosAires
AiresC1001AAD
C1001AAD
Buenos
Argentina
Argentina
Tel:
+54
11
4891
2100
Tel: +54 11 4891 2100
[email protected]
[email protected]
www.standardandpoors.com.ar
www.standardandpoors.com.pe
October 2011

Top 20

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