World's Highest Rate Fuels Argentine Corporate Debt Distress

(Bloomberg) -- Count Argentina’s smaller companies among the victims of the three surprise interest-rate increases that are rippling through the economy, according to Federico Mac Dougall of First Corporate Finance Advisors SA.

Mac Dougall, the Buenos Aires-based firm’s head of restructuring, said the number of distressed companies seeking his advice has tripled this year, pushing it to levels he hasn’t seen since 2003 following Argentina’s sovereign default. And the worst is yet to come after the central bank lifted the key rate to a global high of 40 percent over three interventions in 10 days to limit a selloff in the peso.

“Such level of interest rates may stop the dollar strength momentarily but severely hits small and medium-size companies, destroying their ability to operate,” Mac Dougall said by phone. “This rate is unbearable for more than a month.”

The impact of higher rates is felt immediately by companies which rely on credit to pay monthly salaries and other expenses. Many of them will have to pursue a quick debt restructuring to survive, said Mac Dougall, who identified the most affected sectors as textiles, consumer staples, industrial production and transportation.

World's Highest Rate Fuels Argentine Corporate Debt Distress

First Corporate Finance Advisors has received 18 requests to advise struggling companies this year and they are working on 10 restructurings, he said. The companies they help reorganize have average borrowings of 1 billion pesos ($45.8 million). However, that amount may grow as they’re receiving inquires from retail companies with larger debt burdens, according to Mac Dougall.

The firm worked on the $900 million restructuring of media and oil company Grupo Indalo SA in 2015. It was also involved with drugmaker Sidus SA in 2013 and the local operations of Yves Saint Laurent in 2012.

The travails of Argentina’s smaller companies stem back to 2013 when the Badlar benchmark deposit rate moved above 15 percent and has been stuck there since, according to Mac Dougall.

“Companies have burned through their working capital since then as they can’t get rational financing,” he said. “Big corporates with access to international financing are in a better position, but medium and small companies are in trouble.”

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