Fitch sees risk to Brazilian infra corporates

Macroeconomic challenges are pushing a number of companies to seek short-term financing solutions, raising questions about their ability to service debt.

The credit quality of several Brazilian infrastructure corporates is threatened due to the “higher cost of long-term financing”, according to fresh analysis by Fitch.

The rating agency noted in a statement that the infrastructure sector has for a while been facing challenges financing large capex projects. This scenario, it said, “has pressured infrastructure companies' debt service coverage and their ability to pay down these lines”, ultimately increasing refinancing risks.

Factors including the skyrocketing Selic benchmark interest rate – which has jumped 525 basis points since September 2013 to its current shelf of 14.25 percent – and dearer treasure notes have impacted financing costs for sponsors of infrastructure projects, the agency said.

Partly to blame was the tendency of Brazilian infrastructure corporates to issue short-term debt in order to scrape together the funding they need to finance new projects.

“Infrastructure debentures issued under Law 12.431, created to finance infrastructure projects, are not allowed to be prepaid or refinanced,” the agency said. “The high interest rate environment has resulted in companies opting to issue short-term debt to finance its projects, in order to avoid the higher financing costs associated with long-term financing.”

“However, these shorter term credit lines are expected to challenge the industry's cash flow as projects mature and the credit lines come due.”

Holdings of “more insipient groups”, including Invepar, which was directly mentioned in the report, were deemed most vulnerable to negative ratings actions if alternate funding sources are not raised. More mature groups such as CCR and Triunfo, meanwhile, were seen as better insulated against increasing debt service outflows given their more robust operating cash flows and dividends. 

“Alternative capital sources at the holding level, such as asset sales or equity injections from shareholders, aiming to support projects' additional needs and reduce the holding debt level, are key for the holding's liquidity and reducing refinancing risks.” Fitch said.” This is expected to be positive from a ratings perspective.”