Empresa Distribuidora y Comercializadora Norte SA’s bonds are tumbling at a record pace on speculation the depreciation of the Argentine peso will quicken after Oct. 23 presidential elections, threatening the utility’s ability to meet dollar-denominated obligations.
Prices of the company’s securities due in 2022 fell 8.97 cents to 74.27 cents on the dollar in the past week, the biggest five-day drop ever, while yields increased 189 basis points to 14.49 percent. The bonds have lost 17.1 percent in a month, compared with a 4 percent average slump on Latin American utility debt, according to Credit Suisse Group indexes.
The debt burden of the company, known as Edenor, will rise as the peso, the only Latin American currency forecast to weaken in 2012, drops 15 percent by the end of next year, according to the median estimate of 11 economists surveyed by Bloomberg. Capital outflows, a narrowing trade surplus and the use of reserves to pay government debt will limit the central bank’s ability to defend the currency, said Francisco Velasco, an analyst at Buenos Aires investment bank Exotix Ltd.
“The post-election outlook for the peso is that it will depreciate at a much faster rate than 2011,” said Velasco. “Edenor is one of the companies that is most exposed to currency mismatching. All of its revenue is in pesos and its debt is almost entirely in dollars.”
Edenor spokesman Alberto Lippi declined to comment.
The company, Argentina’s biggest power distributor, has $325 million in outstanding dollar-denominated debt. Edenor had second-quarter earnings of $14.5 million, before interest, taxes, depreciation and amortization, down from $21.6 million the same quarter last year.
Cash Flow
A weaker peso is “probably not enough to push Edenor over the edge,” said Bevan Rosenbloom, a credit strategist with Citigroup Inc. in New York. “Looking at the credit metrics, companies like Edenor end up being marginally cash flow positive.”
The central bank became a net seller of dollars in August for the first time since February 2010, offering $928 million to support the peso, which has weakened 5.5 percent this year. Investors pulled $9.8 billion from the economy in the first half of the year, compared with $11.4 billion in all of 2010, central bank data show.
The government aims to use $5.7 billion in reserves to make debt payments in 2012, down from $7.5 billion this year, according to next year’s budget bill.
Defending the peso and paying debt has contributed to an 8.2 percent drop in reserves to $48.3 billion from a record $52.6 billion in January, according to bank data.
Trade Surplus
The 15 percent drop in the Brazilian real in September is fueling speculation Argentina’s trade surplus will continue to narrow after declining to $572 million in July from $861 million a year earlier.
In September, Argentine vehicle exports, most of which go to Brazil, fell 19 percent from the same 2010 month, the first decline this year, according to the Argentine Automakers Association.
The government expects the peso will weaken to 4.4 per dollar in 2012, according to the budget draft, which was posted on congress’s website. The peso fell 0.05 percent yesterday to 4.2095 per dollar.
Argentina’s five-year credit-default swaps fell 21 basis points to 1,134, according to data compiled by CMA, which is owned by CME Group Inc. and compiles price quotes by dealers in the privately negotiated market.
Yields on Argentina’s government dollar bonds due in 2017 fell 41 basis points to 13.095.
Warrants
Warrants linked to growth in South America’s second-biggest economy rose 0.30 cent to 14.41 cents, according to data compiled by Bloomberg.
Local energy companies Capex SA and Transener SA also underperformed regional peers in the past month, with their notes losing 13.74 percent and 12.52 percent, respectively.
The yield on Capex’s debt maturing in 2018 rose the most among Argentine corporate bonds this week, increasing 249 basis points to 16.5 percent.
“These are companies whose metrics are already deteriorating because of high inflation; they can’t increase their prices; and now they’ll have the aggravating circumstance that the peso will depreciate at a much faster rate than the last few years,” Velasco said. “When you have debt in dollars and revenue in pesos, that factor is going to impact your debt metrics.”
Tariff Restrictions
Tariff increases for electricity, natural gas and oil companies have been restricted since 2002 as part of government efforts to keep prices stable.
The 2.5 U.S. cents per kilowatt per hour rate charged by Edenor compares with 25 cents in Chile and 25.1 cents in Brazil, the Buenos Aires-based company’s 2010 annual report shows.
El Cronista Comercial reported this week that Argentina’s Planning Ministry is working on a proposal to cut electricity subsidies by as much as 70 percent over the next five years. The plan would be presented to President Cristina Fernandez de Kirchner by year-end, and would increase tariffs gradually along a sliding scale, the Argentine newspaper reported.
The Planning Ministry, which oversees the industry, said in an e-mailed statement “under no circumstances is it contemplating changes to electricity tariff policies.”
Planning Ministry spokesman Horacio Mizrahi didn’t return messages left at his office and on his cell phone seeking comment.
“Utility ratings will be under pressure if regulations limiting price increases aren’t changed,” said Daniela Cuan, an analyst with Moody’s Investors Service Inc. in Buenos Aires.
While Edenor maintains a stable cash flow, rising labor and other costs are making these regulations unsustainable, said Cuan. Moody’s rates Edenor B2.
“The company is clearly well managed, but it’s unfortunate that it’s in such a difficult environment,” said Citigroup’s Rosenbloom.
–With assistance from Camila Russo in Buenos Aires. Editors: Richard Jarvie, Glenn J. Kalinoski
To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Drew Benson in New York at abenson9@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
Source: businessweek.com