By Luciana Magalhaes
Eike Batista’s OGX is seen as a candidate for default.
 
Reuters
Defaults among below investment-grade rated companies in Latin America should fall over the next 12 months, in spite of disappointing economic growth in the region, according to a study released Tuesday by Moody’s Investors Service.
Moody’s expects 3.3% of low-rated Latin American companies with debt outstanding to default over the next year, compared with 4.2% in the past year, which was the highest since mid-2010, said Steffen Sorensen, Moody’s senior analyst, who wrote the report, which covered the period from 1990 to July 2013.
Still, default rates are likely to be higher than the global average of 2.5% in the next 12 months, according to Moody’s.
Over the last year, rating downgrades in Latin America have been more numerous than upgrades, according to Moody’s, which had rated debt of 336 companies in the region at the end of July.
Seven Latin American companies rated by Moody’s defaulted over the last year on combined debts of $3.05 billion, he said. Five companies in Mexico defaulted, three of them home builders, while in Brazil, two banks defaulted, he said.
Some of these defaults came as a surprise, Mr. Sorensen said. Mexican home builders were hurt by delayed subsidy payments from the Mexican government, while in Brazil, the defaults were because of “reporting irregularities.”
In the cases of Banco Cruzeiro do Sul and Banco BVA, Brazilian authorities intervened after discovering accounting irregularities and the banks were liquidated. Cruzeiro do Sul defaulted on $1.58 billion of debts, the largest corporate default by volume since 2002, Mr. Sorensen noted.
Investors believe a possible candidate for default is Brazil’s oil firm OGX Petroleo e Gas Participacoes S.A., controlled by embattled entrepreneur Eike Batista, and which has some $3.6 billion in bonds outstanding. Mr. Sorensen noted the study didn’t look at the specific case of OGX.
But from the report’s numbers, if OGX were to go into default it would be the largest ever by a Latin American firm. That record is currently held by Argentina’s Banco de Galicia y Buenos Aires S.A., which defaulted on $1.899 billion in 2002.
Last month, Moody’s downgraded OGX rating to Ca from Caa2, with a negative outlook on high financial leverage relative to production and weak liquidity. A Ca rating implies “highly speculative and likely in or very near default, with some prospect for recovery of principal and interest.
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