Moody's Investors Service placed a number of Latin American structured finance transaction on review for an upgrade following the agency's implementation of a new methodology for rating government-related issuers (GRIs). The approach has already led to the corporate upgrades of two Latin American issuers, Companhia Vale do Rio Doce (CVRD) and Petroleo Brasileiro (Petrobras), which have future-flow and political risk insurance deals outstanding. It has also put into relief differences between Moody's approach and that of its competitors.
"Our ratings try to be opinions of relative credit risk and we hold as an objective the comparability in meaning of a rating across sectors and regions," said Jerome Fons, managing director of credit policy at Moody's.
While Moody's always incorporated the likelihood of support from a state shareholder to individual GRIs, the new methodology formally disaggregates the ratings of GRIs into four components, according to a report on this approach. The components are the GRI's baseline credit risk; the risk of the supporting government; the default dependence between the GRI and the government; and the likelihood of government support to the GRI. The baseline risk is not merely a standalone rating, the report said, but "measures the likelihood that the issuer will require an extraordinary bailout. It takes into account all aspects of the entity's existing (or anticipated) business model, including the benefits and/or drags associated with the government relationship."
Prior to the new methodology, analysts would develop a standalone rating for a company and then "notch" for any support from the government, according to Fons. "It was relatively ad-hoc," he added.
Following the change, the agency upgraded ratings for both CVRD and Petrobras. While the foreign currency rating on Petrobras held at Ba1', its local currency rating jumped two notches to A2' from Baa1'. Meanwhile, Moody's bumped up CVRD's foreign currency rating to an investment-grade Baa3' from Ba1.' Its local currency rating climbed to Baa1' from Baa2.' The agency also put the Ba2' local currency rating on electricity producer Furnas Centrais Eletricas on upgrade review. That prompted upgrade reviews for two receivable investment funds that Furnas has issued in the domestic market.
For CVRD and Petrobras, the changes could lift ratings on structured deals, but there is not an automatic pass-through, according to Maria Muller, senior vice president at Moody's. Absent other structural features, the global currency rating on a corporate tends to be a cap on most future flow securitizations, she said, but it is only one ingredient.
"In general, when you look at a future flow deal, the rating is not just a pass-through of the local currency rating of the originator, you also have to look at the sufficiency of the cash flows and the ability of the entity to continue generating the receivables," Muller said. "We'll analyze those aspects and make the decision."
She pointed out that in the case of the outstanding export securitization issued under Petrobras' Export Receivables Master Trust, the Baa2' rating was already below the corporate's local currency, showing that the local-currency strength was not automatically passed through to the deal ratings.
As for the political risk insurance (PRI)-backed deals placed by both Petrobras and CVRD, the ratings will be reviewed "on a case-by-case basis," Muller added.
Among the transactions on review are $175 million in two tranches of an export-backed transaction issued by CVRD in 2000 via sole lead Banc of America Securities, according to source; a five-year $300 million PRI-backed deal by CVRD led by JPMorgan Securities in 2002; the unwrapped $550 million tranche of a 12-year bond issued by Petrobras via BBVA and Citigroup Global Markets in 2003; and a handful of Petrobras deals backed by PRI.
In what might seem a counterintuitive move, the new GRI approach has actually widened the gap between some ratings on CVRD and Petrobras and those of the Brazilian government, rated B1' foreign-currency and Ba3' local-currency. Fons said that the matter of piercing the sovereign ceiling and the new GRI methodology are separate issues.
In addition, in the case of CVRD, the support and dependence ratings from the government under the new methodology were actually low. "As part of the GRI review process, we saw an improvement in the general operating profile and credit matrix of the company," said Carol Cowan, vice president and senior analyst at Moody's. In relation to the government, the agency gave CVRD low dependence because of the company's earnings generated outside Brazil, according to Cowan. She added that CVRD was assigned a low support level because of the Brazilian government's small shareholding in the company and the fact that the government's influence doesn't cover "substantive issues" in the direction of corporate strategy.
Fons also noted that even a weaker entity could provide credit support to a stronger entity.
In the case of Fitch Ratings, a company that is sovereign-related or can be easily impacted by its government - such as a regulated entity or bank - tends to have a local currency rating closely linked to the local currency rating of the sovereign, said Gregory Kabance, managing director of Latin American structured finance at Fitch. "Depending on the credit quality of the specific sovereign or company, the sovereign relationship could act as a benefit or as a drag," he added. In Brazil's case, the sovereign typically acts as a net drag on government-related companies. For a company like Petrobras, the government's credit quality would have a negative impact on the company's local currency rating. "It has the ability to potentially draw resources from the company either through higher taxes or changes in subsidies," Kabance said.
Fitch rates Petrobras foreign currency BB-' and does not have a rating for Petrobras' local currency. Fitch rates the company's export-backed deal BBB-'. CVRD, meanwhile, has respective ratings of BB' and BBB,' the latter matching the ratings on the asset-backed deal. Fitch rates Brazil's foreign currency and local currency BB-'.
Standard and Poor's, for its part, generally sees a high default correlation between a government-owned entity and a government. "For a long time, we've factored government support into ratings of what we've called government-supported entities," said Laura Feinland Katz, chief regional credit officer for Latin America at S&P.
The agency generally categorizes these entities into three types, ranging from those highly integrated with the government to those with less certainty of receiving government support. In the first category are entities that clearly benefit from a good deal of government support and, as such, have ratings equal to the government's; in the second are those that feature strong reasons why a government would add support and, therefore, have ratings linked to the government's; and in the third are entities where the incentives to support exist but may not be as compelling. In the last category, ratings may or may not experience an uplift from the standalone rating.
Feinland Katz cited the example of Petroleos Mexicanos (Pemex) as a state-owned entity that has suffered from its tight links to the government. "The standalone credit worthiness of Pemex has deteriorated over the last few years, precisely because of government tax policies" and government-imposed restrictions on exploring private-sector opportunities, she added.
As for CVRD and Petrobras, S&P has CVRD's 2000 future flows deal at BBB' and Petrobras' 2003 future flow deal at BBB-'. The agency has no plans to introduce a new methodology for government-supported entities.
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