Brazilian iron ore producer Compania de Vale do Rio Doce (CVRD) has scaled one step closer to the A-list. Shortly after Standard & Poor's assigned BBB' for both the local and foreign currency ratings on the corporate last week, the agency upgraded CVRD's unwrapped securitizations to BBB+' from BBB'. The move benefits a $25 million 8.682% bond due 2007 and a $150 million 8.926% bond due 2010, both issued in October 2000 via arranger Banc of America Securities. The amount outstanding of these bonds is $12.6 million and $120.7 million, respectively.
S&P's upgrade follows a parallel move by Moody's Investors Service, which boosted the 2007 and 2010 to Baa1' from Baa2' on Sept. 26. Moody's decision came after CVRD's corporate ratings were upgraded in July 2005, when the agency implemented a new rating methodology for government-related issuers (see ASR 7/18/05).
"When the global local currency - a proxy for the likelihood of the company going into bankruptcy - was raised, then we had the ability to take the structured finance rating to that level [Baa1]," said Maria Muller, senior vice president at Moody's. Once that possibility was opened, the agency had to ensure that the performance of the structure was consistent with the new credit standing, she added. It turned out that it was.
More room at MBIA?
The upgrades might create more room for Brazilian risk at insurer MBIA, according to an industry source. The monoline insurer has $400 million worth of CVRD exposure in two bonds that now have underlying ratings of Baa1' and BBB+' from Moody's and S&P, respectively. While the upgrades will not ease the capital charges that MBIA assesses on the bonds - the ratings would have to shift into an entirely different category for that - they can "impact the monoline's appetite favorably," the source said.
In the primary market, MBIA has insured $125 million of notes due 2007 arranged by Banc of America in October 2000 and $250 million of notes due 2013 led by JPMorgan Securities in 2003.
CVRD's securitizations are backed by U.S. dollar-denominated existing and future receivables generated from export sales of iron ore and pellets to designated customers in the U.S., Germany, Spain, Italy, and South Korea.
S&P's new foreign currency rating on CVRD, the corporate, sits at an unusually wide four notches above the sovereign, which has a foreign currency rating of BB-'. It is the highest notch discrepancy for a Brazilian issuer, according to Laura Feinland Katz, chief regional credit officer at S&P. "The company shows substantial ability to mitigate Brazilian risk," she said. "They own and control their own logistics and are very externally focused." CVRD enjoys substantial offshore liquidity, committed medium term credit lines, and a growing international presence, she added.
Recently heady export prices for CVRD's products, Feinland Katz said, aren't a prime mover of the corporate rating. "We don't rate to the strong part of the commodity cycle, but it doesn't hurt that they'll continue to see the benefits through the next year or so," she said.
Moody's foreign currency rating on CVRD is Baa3', three notches above the sovereign, which was lifted to Ba3' only last week.
Moody's and S&P's take on the ability of an exporter to distance itself from its host country is apparently not shared by Fitch Ratings. The latter agency, for instance, rates CVRD's foreign currency at BB', a mere single notch above the sovereign. "Sovereign risk is there," said Gregory Kabance, director of Latin American structured finance ratings at Fitch. "There's potential to wield some kind of the influence over the company." Capital controls are probably the most egregious mechanism through which a government can trip up an exporter's performance, but other dangers, such as steeper taxes and regulatory interference, exist as well. Kabance said that currently the one-notch differential is the highest for any Brazilian company without foreign ownership.
While, in the case of CVRD's foreign currency ratings, there exists a stark gap between Moody's and S&P on one side, and Fitch on the other, the agencies are like-minded when it comes to the structured deals. Fitch's BBB' rating on the securitizations is only a single notch below that of its peers, as it strongly reflects the issuer's local currency rating, also a BBB'.
For both Moody's and S&P, the unprecedented cash flows in the structure played a role in the upgrades of CVRD's securitizations. According to Moody's, the debt service coverage ratio topped 11 times in June, sharply higher than the 7.43 times posted in June 2004 and well above the 3 times trigger. Receivables generated during the second quarter of 2005 hit $350 million, an 83% jump from the same quarter last year. Driving this performance is a coupling of record sales volume and high prices. The agreements that that company reached with leading steel makers for 2005 established a 71.5% hike in iron ore prices and 86.7% increase in pellet prices, Moody's said.
Based in Rio de Janeiro, CVRD is the world's largest iron ore producer.
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