Transcript Document Title

Lower for Longer . . .
Latin American Credit Perspectives
PALOMA SAN VALENTIN, Group Managing Director – US and Americas Corporate Finance
September, 2016
Lower for Longer: Latin American Credit Perspectives
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Global Macroeconomic Headwinds Continue
2
Credit Conditions – Outlook Overview
3
Lower For Longer…
Lower for Longer: Latin American Credit Perspectives, September 2016
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1
Global Macroeconomic Headwinds
Continue
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Continued Influence From Key Global Macro Parameters
Key Influences

Muted Global
Growth
Slowing Chinese
Economic Growth
Tightening US
Monetary Policy
The European
Circumstance
Downside
Risks
Dynamic Environment
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
No Help From the Global Economy
Real GDP Growth (%) – Muted Expectations
Emerging Markets (Latin America)
G-20 (Europe)
China
G-20 (all)
Annual Real GDP Growth
15%
10%
5%
0%
-5%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015 2016F 2017F 2018F
Source: Moody’s Investors Service as of August 2016
» Future growth lower than historic experience – for a prolonged period
» No “pull” from the outside to benefit Latin America: headwinds abating, but risks remain
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
The Age of Diminished Expectations
Successive Forecasts Show Lower Growth for Longer Periods
2012
2013
2014
2015
2016
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Source: International Monetary Fund (World Economic Outlook), Average of historic 5-yr Forecasts of real GDP growth for selected large LatAm economies
» Expectations continually revised downwards: deeper trough / weaker recovery
» Future growth much lower than historic norms
» Expected GDP trajectory will influence LatAm credit conditions, no sharp recovery
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Global Trade Flows: Also Lower for Longer
Declining Trade Growth Constrains GDP Expansion
G-20 Real GDP Y-o-Y % change (LH-S)
Productivity Y-o-Y % change (LHS)
6
Trade Growth Y-o-Y % change (RH-S)
20
4
10
2
0
0
-2
-10
-4
-6
-20
Source: Central Planning Bureau World Trade Monitor
» Slowing global growth: end of the commodities super cycle, China’s own trade slowdown
» Slowing integration of global supply chains
» Diminishing returns from international trade agreements
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Commodity-Based Sectors to Remain Weak
Industry Sector Outlooks – Global Industries Only
Positive
Stable
Negative
2009
2010
2011
2012
2013
2014
2015
2016
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
SECTOR
Beverages (Global)
Pharmaceutical (Global)
Consumer Products (Global)
HEALTHCARE / P HARMACEUTICAL / CO NS UMER P RO DUCTS AND S ERV ICES
METALS / MINING / CHEMICALS / P ACKAG ING / P AP ER AND FO RES T P RO DUCTS
Base Metals (Global)
Paper and Forest Products
O IL AND NATURAL G AS
Integrated Oil (Global)
Oilfield Services and Drilling
Exploration and Production
TELECO MMUNICATIO NS / MEDIA / TECHNO LO G Y
Diversified IT (Global)
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
0
0
0
0
0
0
0
0
TRANS P O RTATIO N / AERO S P ACE / AUTO MO BILES / MANUFACTURING
Aerospace and Defense
Shipping (Global)
Automotive Manufacturers
Airlines (Global)
Source: Moody’s Investors Service as of 23 September 2016
» Oil/Gas and Metals/Mining sectors grappling with excess supply
» More “Longer for Lower”:
– Prolonged adjustment process
– Potential contagion effects weigh on credit conditions
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Globally Traded Commodities – Excess Supply
Globally Traded Commodities Searching for Equilibrium
WTI - Moody's
Brent
Brent - Moody's
Henry Hub
Henry Hub - Moody's
$7
$120
$6
$100
$5
$80
$4
$60
$2.25
$2.50
$40
$45
$2.75
$50
$40
$20
$0
Jan 2011
$3
$2
USD/MMBtu, Henry Hub
USD/bbl, WTI and Brent
WTI
$140
$1
$0
Jan 2012
Jan 2013
Jan 2014
Jan 2015
Jan 2016
Jan 2017
Jan 2018
Source: US Energy Information Administration, Moody’s Investors Service
» Performance reflects over-supply rather than suppressed demand
» While stronger global growth would help, supply adjustment is necessary
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Inertia: Restructuring an Entire Economy is Difficult
Chile and Peru have largest trade exposures to China
Mexico
Chile
Peru
Brazil
Venezuela
Argentina
40%
35%
30%
33.6%
27.6%
26.4%
25%
20%
21.3%
18.8%
17.4%
14.8%
15%
11.0%
12.3%
10.2%
10%
7.9%
7.3%
3.7%
5%
1.3%
0.4%
2.1% 1.8%
0.8%
0%
Total Exports as a Proportion of GDP
Proportion of Total Exports Destined for China
Chinese Exports as a Proportion of GDP
Source: Haver Analytics, FactSet and Moody’s Investors Service as of November 2015
» Very difficult to re-orient what is traded: volume and price adjust, rather than the asset
» China’s ongoing slowdown continues to affect mainly Chile and Peru
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Downside Risks: Higher for Longer
China’s
Trilemma
» Potential incompatibility of goals
» Risk of sudden growth deterioration
» Effectiveness of policy stimulus may
wane over time
Source: Moody’s Investors Service
(Geo-) Political
» Rising nationalist/protectionist pressures
– Pending US election outcome
– Fragmentation of Europe (Brexit-plus)
» South China Sea sovereignty disputes,
Syrian conflict, refugee crisis
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Global Macroeconomic Headwinds Continue
Downside Risks: Higher for Longer
Central Bank Policy Rates are Near Zero
» Risk to global financial system
» Synchronous re-pricing of assets
» With Longer For Lower rates
Main central bank policy rates
ECB
Annual Percentage
Interest Rates
Volatility
Fed
BoE
BoJ
7
6
5
4
3
2
1
0
– Central banks have fewer options
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Source: Moody’s Investors Service
Increasing External Debt: Increasing Risk
External debt/GDP for selected countries
Vulnerability
Argentina
Brazil
Colombia
Mexico
Venezuela
80
70
Percentage
60
» Reversals of capital flows as US
interest rates rise
» EMs with external imbalances or
US dollar-denominated debts
50
40
30
20
10
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Moody’s Investors Service
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2
Credit Conditions: Outlook Overview
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Macroeconomic Forces Buffeting LatAm Credit Conditions
» Transmitted by trade and capital flows
» Credit conditions constantly adjusting
Transmission Channels
Dynamic Environment
Credit Supply / Demand
Portfolios Shift:
Higher Risk/Return
Thresholds
Capital Flows;
Exchange Rate
Adjustments; External
Financing
External
Macroeconomic
Influences
Credit Conditions
Weakening
Economic Activity
Exports Slow
Confidence
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Lower External Capital Flows Into LatAm
Net Capital Flows – Neutral after Post-“Taper Tantrum” Volatility
Latin America
Emerging Asia
Emerging Europe
50.0
May 2013 Taper Tantrum
Estimates
40.0
30.0
20.0
10.0
0.0
-10.0
Source: Institute of International Finance (3-month moving average (October 2010 to August 2016)), and Moody’s Investors Service as of September 2016
» Capital flows have been volatile since the May 2013 “Taper Tantrum”
» Slower LatAm growth dampens investors’ interest
» Prospect of higher yields in the US diverts capital flows
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Debt Capital Markets: Tentative Signs of Renewal
Latin American Issuance: Tentative Recovery After Weak 2015
Corporate IG
HY
% In't
140
100%
120
80%
$ Billions
100
60%
80
60
40%
40
20%
20
0
0%
2010
2011
2012
2013
2014
2015
2016 YTD
Source: DeaLogic up to 31 August 2016 (non-financial corporate issuers)
» Selective supply returning in search of yield:
– LatAm issuance remains light, but pace picking up
– Stabilizing commodity prices cause improved receptivity
– Early to see pricing and tenors re-adjusted
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Default Rates Peaking
LatAm Spec-Grade Default Rate Improving But Still Elevated Through 2017
Global
Latam
6%
5%
4%
3%
2%
1%
0%
Source: Moody’s Investors Service (non-financial corporates; actuals through August 2016)
» Global speculative-grade default rate reached 4.8% in August 2016, up from 2.7% a year ago
» LatAm rate reached 5.5% in August vs. 2.7% a year ago
» Both LatAm and Global speculative-grade default rates expected to improve in 2017
» However, despite improving commodities’ outlook, default rates will remain above post-financial crisis
experience
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Debt Capital Markets: Darwinian Refinancing Profile
Latin American Refinance Risks: Limited Near-Term Exposure
Refinance risk requirements by year and rating
Ba1
Ba2
Ba2-Petrobras
Ba3
B1
B2
B3
B3-Petrobras
Caa1 and below
Totals
$30
New HY Bond Issuance
Debt Maturities
$24.9
$25
USD billions
$20
$15
$18.4
$17.4
$13.9
$13.9
$12.6
$12.0
$11.2
$11.2
$10
$8.0
$6.5
$2.9
$5
$0
2011
2012
2013
2014
2015
1H16
2H16
2017
2018
2019
2020
2021
Source: Moody’s Investors Service, debt maturities as of June 2016
» Aggregate near term exposure is low
» But significant future refinancing needs for some low rated companies
» Lower rated entities are more prone to encounter execution risk
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Growth Needed to Drive Improved Conditions
A Recovery in Growth Would Stimulate New Issuance and Investment Activity
Major LatAm Economies (L-H)
Asiain Emerging Markets ex China (L-H)
$140
8%
$120
6%
$100
4%
$80
2%
$60
0%
$40
-2%
$20
-4%
Annual Value of LatAm Bond Issuance
Annual Percentage Change in Real GDP
Dollar Value of LatAm Bond Issuance (R-H)
10%
$0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 Fct
2017 Fct
2018 Fct
Source: DeaLogic (bond issuance), IMF (historic actual GDP growth), and Moody’s Investors Service (Forecasted GDP growth as of August 2016)
» The commodities super cycle fuelled debt issuance for investment needs and capacity expansions
» But excess supply will adjust slowly
» Refinancing needs will need to be accommodated
» Growth would be most welcome at this juncture, but it will be… lower for longer
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Lower For Longer – Latin American Credit Perspectives| Credit Conditions - Outlook Overview
Signs of Recovery Remain Vulnerable
2017 Outlook:
Strong
Selective
Recovery
Weak
»
»
»
»
»
»
Weak/trough conditions: bottom reached?
Still a long way to go: uncertain timetable
Weak GDP and earnings growth
Ongoing political and economic adjustments
Progress can reverse with unexpected events
Fickle confidence and sentiment
2015 looking into 2016
2016 looking into 2017
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3
Lower for Longer…
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Lower for Longer…
Challenging Latin American Credit Conditions
Credit
Conditions
Modified Economic
Growth Prospects
Increase/Decrease in
Investment Pools
Interest Rate
Revisions
Trading Volumes and
Liquidity
Confidence / Risk
Aversion
Supply of
Credit
Demand for
Credit
Supply of Credit:
Demand for Credit:
» Flight to quality
» Involuntary re-levering
» Decreased Trading Liquidity
» Resource rationing
» Variable Capital Availability
» Accessing non-operational
sources of cash
» Opportunistic bargain hunting
» Increased volatility augments
perception of risk
» Weaker Credit Metrics
» Elevated compensation
expectations
» Fewer Viable CapEx Projects
» Increased Operational
Volatility
» Increased Debt Service Cost
» Fewer Funding Alternatives
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Lower for Longer…
Mixed Conditions Across Countries
Legend
Positive
Neutral
Weak
Negative
Lower for
Longer
Lower for
Longer
Mexico
A3 Neg
Brazil
Ba2 Neg
Sovereigns
Weak economic
performance
Improving
economic and
financial
conditions
from low point
Financial
Institutions
Asset risks,
muted GDP
growth
Chile
Aa3 Sta
Peru
A3 Sta
Argentina
B3 Sta
Weak
confidence/
growth
Improving
confidence/
growth
Improving
economic
and financial
conditions
from low
point
Weak
economy, risk
aversion
Commodities
weighing on
activity
Growth
supports
credit
demand
Improved
regulatory
environment,
sentiment
Non-Financial
Corporations
Stable but pull
from US
Pressured
Stable but
confidence
down
Project and
Infrastructure
Finance
Opportunities in
energy sector,
asset sales,
joint ventures
Delays in
execution and
in concession
auctions
Supportive
policy
environment
Structured
Finance
Stable
performance in
mortgage
market
Potential for
higher
delinquencies
-
Stable but
Not
confidence up deteriorating
Positive
momentum
Growing
pipeline in
energy sector
-
Positive
momentum,
but still weak
macro
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Lower for Longer…
Diverse Corporate Sector Dynamics
Global
Metals
Local
Pulp &
Paper
Agriculture
/Sugar
Ethanol
Protein
Oil & Gas
Construction
Telecom
Commodity
Prices
Mixed
Foreign
Exchange
Rates
Mixed
Mixed
Tighter
Funding
Environment
Exposure to
Domestic
Economies
Consumer
Low
Low
Low
Medium
Medium
High
Mixed
Mixed
High
High
Legend
Positive
Neutral
Weak
Negative
Lower for Longer: Latin American Credit Perspectives, September 2016
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Lower For Longer – Latin American Credit Perspectives| Lower for Longer…
Conclusion - Key Takeaways
1
Global Macro Headwinds Continue – Lower for Longer
2
LatAm Credit Conditions Adjusting but Remain Weak
3
Recovery Will be Prolonged and Vulnerable –
Retaining Financial Flexibility Will Remain Critical
Lower for Longer: Latin American Credit Perspectives, September 2016
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Paloma San Valentin
Managing Director – US and Americas Corporate Finance
+1.212.553.4111
[email protected]
See Weak Credit Conditions Will Improve Through 2017, but Gradually and Unevenly, 24 August 2016
Lower for Longer: Latin American Credit Perspectives, September 2016
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