Latin Finance - May/June 2009 - 14

corporate distress explain most of the bloodletting. April that that 39% of the companies The Bad and Ugly In Brazil, weak fundamentals for beef whose financial metrics it tracks face Distress has largely been concentrated in troubling prospects with regards to a handful of sectors in Mexico and Brazil. and ethanol producers have been contaminated by poor credit metrics, like debt. The ratio is calculated by adding a A toxic blend of falling exports and overleveraged balance company’s cash and sheets and lack of access to Ebitda, and dividing that refinancing. High profile by short term debt plus meat names like the interest expense. Independência and “Anything below 2 is Arantes – both of which in challenged, and have dollar bonds anything below 1 is in bad outstanding – along with shape,” explains smaller producers like Nicholson, providing a Quatro Marcos, Estrela, deliberately vague Margen, International approach to reading the Food Company and figures. Redenção, all filed for Among red flags are bankruptcy protection in Cemex, Commex, Desmet the past two quarters in an and Durango, all of which effort to buy time and have a liquidity ratio of attempt a restructuring. below one, with the latter Meanwhile, in betting two sporting an interest Sun goes down on Cemex: former Mexican blue chip collapses under weight of short-term debt on a prolonged boom in coverage ratio of less which massive expansion than 1x. In Brazil, could be executed, the ethanol sector Arantes, Bertin, Sadia, Vigor, Cosan and slumping commodity prices, as well as Gol are also under 1 in liquidity ratio, currency mismatches – amplified in many overindulged in debt. Bullish predictions turned out to be wrong and once says Credit Suisse. cases by leveraged derivative bets – Bang You’re Dead C orporate LatAm has seen its share of busts. The main novelty this time round is the billions of dollars in derivatives losses that ripped through Brazilian and Mexican balance sheets. “This is the first time these types of instruments have caused a tidal wave of financial problems at big companies [in the region,]” says James Harper, director of corporate research at BCP Securities. Sadia and Aracruz posted a combined loss of around $2.5 billion in October 2008, though both avoided default or closing their businesses. In Mexico, the derivatives liabilities at GISSA, Gruma, Cemex, Comerci, Nemak and Vitro came close to $3.5 billion. In Mexico, industrials as a whole have suffered, with autoparts maker Nemak, glassmaker Vitro, paper producer and perennial defaulter Durango, tilemaker Lamosa and Cemex all running into trouble including covenant renegotiation and outright default. Tortilla maker Gruma, retailer Comerci, and wireless provider Iusacell are among those posting substantial derivatives losses, which in the case of the latter led to partial default. Retailer Comerci sought protection with a bankruptcy filing. With most of the wild currency swings seemingly behind them and a likely strong resolve by CFOs region-wide to avoid placing more currency bets, analysts say the problem is contained. It is hoped that the experience will lead to tougher regulation of sellers of derivatives, as well as tighter governance at the corporate level. “There was a very intense marketing effort for these products on the part of various banks,” Carlos García Moreno, CFO of América Móvil, speaking of the investment banks that sold derivatives. “It just didn’t make any sense for us, conceptually, to take those kinds of positions. We thought it was just plain speculation, so we didn’t.” “The banks have not done a good job of controlling themselves, in terms of what product they should market,” says García, a widely respected regional finance manager. “You need to rethink the whole issue, from the point of view of the banks themselves – how they should behave with the client, for their own best long term interests – and then at the level of the company, how they need to improve their governance,” he adds. Meanwhile, Gruma’s $668 million settlement with derivative counterparties Credit Suisse, Deutsche Bank and JPMorgan over a derivative liability provides a positive example of how derivative losses can be resolved. It involved a 13% haircut on the total size of the derivative liability, and a terming out of the liability in the form of a seven-year loan. The $668 million facility’s pricing for the first three years is Libor plus 287.5 basis points. “This provides an example of how a company can work with the lenders to restructure their debt, and an example for other companies,” says Gabriel Bresler, senior MD at FTI Consulting, which focuses on LatAm restructurings. Gruma’s case is probably analogous to many of the other derivatives situations, especially Comerci, which is was also recently investment grade, says Harper. As such, it gives hope that other similar resolutions could follow. — Dan Shirai 14 LATINFINANCE May/June 2009

Latin Finance - May/June 2009

Table of Contents for the Digital Edition of Latin Finance - May/June 2009