Standard & Poor’s has begun assigning recovery ratings to the debt of 16 speculative-grade-rated Mexican corporations, as global investors are forced to place more focus on the recovery of principal after a borrower’s potential default.
The new ratings measure the probability of an investor recovering principal and interest after a borrower defaults. S&P has already introduced similar ratings in the US and Europe; Mexico is the first country to receive the ratings in Latin America. Brazil could be next. The ratings are being rolled out globally as investors have become more concerned about the chances of companies defaulting because of the deteriorating state of corporate debt worldwide.
José Coballasi, an analyst at Standard & Poor’s in Mexico, says: "The decision to introduce these ratings precedes the sub-prime crisis. They apply to our global universe of ratings and may be extended to our Mexican national scale ratings in the future.
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"The decision to introduce
these ratings precedes the
sub-prime crisis"
José Coballasi, Standard & Poor’s |
"This project involved considerable research about how the bankruptcy regime in Mexico works. The country made the rules much friendlier for creditors in the year 2000, and I think the law is now better than in Brazil or Chile."
Coballasi adds that most of the companies that S&P assigned recovery ratings to have a probability of 50% to 70% of the repayment of principal and interest in the event of a default. Recoveries gain in importance at lower issuer rating levels, as the likelihood of default in the near to medium term is much higher.
The ratings operate on a scale of one to six (with six being the worst position). Among the 16 Mexican corporations rated, the following four did worst and were assigned four on the scale: Corporación Durango, a paper manufacturer; Corporación Interamericana de Entretenimiento, a live entertainment provider; and Industrias Unidas, a copper tube producer. All the other companies scored three on the scale, including Vitro, a glass producer; Oceanografía, a petroleum maritime engineering company; and Grupo Posadas, a construction firm.
Fitch also assigns recovery ratings to speculative-grade debt of corporations in Mexico. This is carried out on a six-point scale from RR1 to RR6 (RR6 is worst). According to Fitch’s research, San Luis Corporation, an auto parts producer, has the worst recovery rating (at RR5) among the companies Fitch rated. It is an important exporter to the US and its low rating reflects the downturn in the US auto market.
According to Fitch, Corporación Durango, Oceanografía, Grupo Senda Autotransporte, a bus transportation group (all assigned RR4) have below average recovery prospects given default.
Nymia Almeida, an analyst at Moody’s Investors Service in Mexico, says: "Moody’s has not yet introduced recovery ratings in Latam but plans to do so. I do not believe the ratings are as relevant to Latin America as the US because, for example, corporate debt is not as complicated in Mexico as it is the US. Most Mexican companies do not issue structured notes."