Fitch: High FX Mismatch Risk for Latin America Corporates

There is a high foreign exchange (FX) mismatch risk for companies in five Latin American countries, according to FitchRatings. We have released our 2015 "Latin America Corporates FX Sensitivity Analysis, which examined the impact from local currency (LC) depreciation for Fitch-rated Latin American (LatAm) corporates' capital structure and cash flow generation. The analysis data has been grouped by country and also includes individual company's FX risk exposure.

LatAm corporates exhibit a high level of foreign currency (FC) denominated debt reliance, representing 62% of the total outstanding debt on an aggregate basis as of September 2014. The high cost and limited availability of hedge instruments, as well as restrictive domestic capital market conditions, have led to high FC mismatch risks for some issuers, especially high-yield credits. Positively, this risk is alleviated to an extent by the issuers' FC-based EBITDA generation and an insignificant short-term FC debt amortization schedule during 2015.

In the region, corporates in Argentina, Mexico and Peru have the highest currency mismatch risks. In Argentina, over 80% of the total debt of Fitch-rated issuers was based in FC. Mexicanhigh-yield issuers, which account for about 55% of the total number of rated corporates, have had limited access to the domestic capital market, resulting in an overwhelming proportion of FC debt. Peru's banking system is highly dollarized and hedging is almost non-existent. About 90% of the debt of rated corporates in this country is denominated in a FC. Positively, about half of the issuers in Peru are exporters or sell commodity products that are priced in U.S. dollars.

The FC debt exposure for Chile is also high, but the risk is manageable. Exporters comprise about one-quarter of the rated corporates in the country, resulting in an estimated FC EBITDA proportion of about 62% on a median basis, which enables the issuers to cope with FX risks. The median proportion of the FC-denominated net debt was 78%.

Brazil and Colombia had relatively comfortable FC debt exposure. Net debt denominated in a FC as proportion of total debt after hedging in these countries was about 30% on a median basis. Brazil corporates tend to hedge only part of their FC exposure, unlike financial institutions, despite a relatively sophisticated financial market. Colombian corporates, excluding big oil producers, do not have a high portion of FC cash flow generation, but the local banks and capital markets continue to provide ample liquidity and long-term funding options, which help corporates better manage the refinancing activities.

Based on a sensitivity test that resulted in a 20% depreciation of their respective LCs, 17 out of the 178 issuers analyzed were found to be more vulnerable to FX risk than others, as their leverage ratio deteriorated by more than 1.0x. While some of these companies have mitigating factors, such as solid operation and balance sheet or a linkage to strong parent or the sovereign, Fitch's ratings have incorporated their higher level of FX vulnerability into the ratings. No ratings changes have occurred from the analysis.