What impact will the S&P rating agency's move have on Brazilian debt in the world of corporate bonds? In recent days, the US rating agency has in fact dealt a heavy blow to Brazil by downgrading the country's government bonds to the level "junk", i.e. rubbish. From the BBB- level, the last threshold of investment grade, i.e. when a bond has a credit rating still judged to be "reliable", S&P she cut her rating to BB+. And he kept the negative outlook, which means there could be further downward revisions.
It is probable that the jolt on the Brazilian bond market will not end here. The analysts of Credit Suisse they expect that several Brazilian corporalte stocks may also lose their ratings in the coming days "investment grade" and in a recent note dated September 10 they suggest caution. Even if, they specify, the market is now largely discounting the cut in the sovereign rating and for those with strong nerves, the advice is to maintain their positions in companies with solid fundamentals.
THE MOST AFFECTED COMPANIES
VOLATILITY ON THE RISE
The creditworthiness of a country often influences the judgment also on the bonds issued by private companies of the same nation. The "country risk" is in fact one of the elements that the rating agencies evaluate in assigning their ratings to private groups.
However, it is not automatic that a security must necessarily lose investment grade status if country risk drops to "junk" level. In detail, the analysts explain that, due to how the rating assignment mechanism works and the link with the judgment on country risk, even in the case of a possible BB rating for Brazil's foreign currency debt, individual corporate bonds could still have a BBB- rating, therefore staying in the investment grade area.
“The companies likely to be most likely to be impacted by the S&P downgrade – analysts say – will not only be para-state groups but also companies that have been heavily impacted by Brazil's sovereign rating and those that have been impacted by previous revisions. For example, we expect government-related companies (such as the petrochemical company Braskem), banks (such as Banco Bradesco e Itau Uni-bench but also potentially Bank of Brazil)”, companies that already have a negative outlook such as Klabin, Brazil's largest paper producer, exporter and recycler, or as Petrobras, the Brazilian oil giant. Instead, companies such as the food giant Brf Sa and the cellulose group could get away with it, and not be impacted by the downgrade Fibria.
Losing the "investment grade" rating for a bond does not mean, however, only being more "unreliable" but also automatically excluded from the investment policies of numerous institutional investors who establish the criteria for the securities in which to invest in their policies. Or being excluded from "investment grade" indices, such as, for example, points out Credit Suisse, the Barclays Global Aggregate Index, "adding further pressure to bond prices".
QUOTES ALREADY REFLECT THE DOWNGRADE
BUT FOR INVESTORS BETTER TO STAY AT THE WINDOW
On the other hand, the performance of Brazilian bonds has been particularly weak recently (as opposed to the first part of the year, when they significantly outperformed government bonds). “The current broad spread of Brazilian stocks (667 basis points against 607 of the Latin America area and 450 of the historical average) – the analysts explain – already reflects the downgrade. In any case, we believe it is likely that we will see a increased bond volatility in foreign currency over the next few months until the market has begun to distinguish between companies most impacted by the downgrade and those with stronger fundamentals or that are less impacted by the downgrade."
Looking at the evolution of spreads in recent months, points out Credit Suisse, it is clear that the market had already begun to price a possible downgrade already last July, when S&P only lowered the outlook to negative. ”In any case – adds Credit Suisse – now that S&P has effectively downgraded the rating below investment grade, maintaining the negative outlook will weigh heavily on corporate bonds in the coming days and weeks. Furthermore, we believe that S&P will downgrade the ratings of several corporate bonds in the coming days, generating an increase in volatility”.
The result is that several Brazilian companies rated BBB trade at the same spreads as emerging market companies at the BB level, and in some cases even more at a discount, making these bonds attractive from a valuation point of view. However, analysts in light of the expected high volatility advise caution on this front. “Investors not yet invested in Brazilian corporate bonds – they suggest – should stand apart for the moment. Investors already invested and able to withstand the volatility of bond prices they should maintain their investments in companies with the strongest fundamentals. We also remain very cautious on those companies heavily involved in the convenience sector or focused on the home economy”.
