The telecommunications sector drags down the debt profile of Latin American companies

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The debt of Latin American corporations has deteriorated and has a lot to do with the poor management of finances in two telecommunications companies: the Chilean WOM and the Mexican Total Play. According to a report from the credit risk firm Fitch Ratings, rating downgrades on Latin American corporate debt bonds exceeded improvements by more than four times during the first quarter of the year. Among the corporate bonds in the region that Fitch rates, the ratio between downgrades and upgrades was 4.3 times, while in its global portfolio it was 1.4 times. This is not the worst time that Latin American corporates have gone through , assures Carla Taylor, head of corporate analysis for the firm in New York, but it is particular that the deterioration in the credit profile is concentrated in a few sectors. 90% of the reductions so far this year are in technology, media and telecommunications, natural resources and industrial. “It is not totally unusual for the reductions to exceed the improvements, but the biggest problem here is the concentration that we saw last quarter in sales in the telecommunications technology and media space in Latin America,” Taylor said in a video call. Latin American debt, both sovereign and corporate, tends to be bought in packages or indices by global investors, so a downgrade of one company could sometimes impact others. In April, the third-largest telecommunications company in Chile, WOM, filed for bankruptcy when it failed to refinance a $348 million debt that was due in November. Its bonds went from being considered high risk with a rating of B- to “speculative” with CCC- to, finally, D default in the first months of the year. WOM, and other telecommunications companies are going through what their peers in developed economies have already gone through: an inability to adapt quickly to technologies. “As technology has become obsolete much faster, the time between moving from 2G to 3G, then to 4G and so on has been shortened. Therefore, these companies actually have to invest and obtain a return on that investment much faster, which has already changed the way the industry operates,” explains María Pía Medrano, analyst for the Latin American region at Fitch. case of WOM could go down in history as a lesson in margin management. The company burst into the market in 2015 with an aggressive advertising campaign and offering much lower prices than competitors. This created “an environment where everyone has to invest and no one can cash out because prices have dropped significantly. The entire industry went down and had to lower prices to continue competing because they need to make sure there are people using their network. It was simply a bad dynamic,” explains Medrano. Fitch considers that this deteriorated the credit profile of the majority of telecommunications companies in Chile and points out that companies went from having margins of 30% a few years ago to only having 10% currently0In another corner of this story is Total Play, company of the third richest man in Mexico, Ricardo Salinas Pliego. In February, Fitch cut the rating on $213.5 million of the company's corporate bonds from B- to CCC+, moving it from being considered «highly speculative» to «substantial credit risk.» The cut was made after Grupo Salinas, the parent company, announced that it had reached an agreement to refinance part of the debt with an exclusive group of bondholders. What is interesting about the case of Total Play is that it is not typical of everything the sector in Mexico, but rather it is something idiosyncratic, says Martha Rocha, analyst of the telecommunications sector in Latin America at Fitch, from Mexico City. In fact, Fitch recently improved its outlook on the bonds of magnate Carlos Slim's competitor, América Móvil. And the market has become more competitive since Televisa has entered the telephony market with greater force. “The question for the Mexican telecommunications market is whether it will follow the Chilean model or whether it will be disciplined as it has been until now,” concludes Rocha. Follow all the information about Economy and Business on Facebook and xor in our weekly newsletter

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