Billionaire Retail Titan Can Avert Downgrade: Chile Fixed Income

(Bloomberg) -- Cencosud SA, the South American retail giant founded and led by billionaire Horst Paulmann, has what it takes to avoid a credit downgrade even as Chile’s economy reels from the biggest social unrest in decades.

That’s the message investors got after Cencosud’s dollar bonds due 2023, 2025 and 2027 returned 0.7% last week despite fresh warnings that a credit downgrade to junk is looming. That result beat the average return of all Chilean bonds in the period, as well as that of rival Falabella, whose 2025s returned a mere 0.3%.

“Cencosud has a balance sheet full of attractive assets that it can sell to avoid a downgrade,” said Jorge Garcia, a trader at financial services firm Nevasa. “The market is giving it the benefit of the doubt.”

The South American nation’s worst social unrest in a generation has led to higher uncertainty, shuttered stores and a drastic reduction in business. October retail sales plunged by 16% in Santiago and 12% nationwide compared to a year prior. Policy makers have warned that unemployment and consumer demand are set to worsen as the number of worker dismissals spikes.

Cencosud is currently rated at the lowest investment grade by Fitch Ratings Inc. and Moody’s Investors Services, with negative outlooks. Fitch set the negative outlook on Nov. 21, saying unrest in Chile and a weak economy in Argentina will erode its results. Cencosud declined to comment on this story when contacted via email.

Earlier this year, Cencosud completed the IPO of its shopping malls in efforts to pay down debt. JPMorgan warned last week that the retailer may have to continue with sales of its assets, such as a greater share of its mall unit.

Read more: South America Retail King’s $1 Billion Malls IPO Sets Record

In yet another rebuff, research firm Gimme Credit became the latest to sound the alarm on risks of a downgrade. If Cencosud is cut to junk, “the risk is high of more downside,” analyst Cedric Rimaud wrote in a note last week.

Cencosud’s dollar bonds due 2027 have returned a negative 4.6% since the beginning of the unrest on October 18, while its 2025s have fallen 2.1%, according to data compiled by Bloomberg. Similarly rated Chilean bonds have returned a negative 0.9% in the same period.

Other Chilean retail bonds have also been hit hard. The yield on AD Retail’s 2024 local CPI-linked bonds rose to 19.1% from less than 4% when the unrest began, according to prices from LVA Indices. For Empresas Hites’ 2026s, the yield is up to 6.7% from 2.1% on October 18.

Intervention Bearing Fruit

Two weeks into the central bank’s multi-billion dollar intervention to prop up the peso, it was the best performing currency among emerging markets with a 1.9% gain last week. Accordingly, Chile’s monetary authority has reduced its spot market interventions to $100 million a day, while boosting forwards, as volatility subsides.

Read more: Chile Central Bank to Intervene as the Peso Hits Record Low

Swap yields last week fell more than 30 basis points, signaling views of lower risk. The drop was bolstered by news that President Sebastian Pinera survived an impeachment attempt.

The market will pay attention this week to the Central Bank’s minutes of its Dec. 4 meeting in which it left its key rate unchanged at 1.75%.

THIS WEEK:

• In Chile:
  • Dec. 19: Central Bank minutes
• International:
  • Dec. 16: U.S. manufacturing PMI
  • Dec. 17: U.S. industrial production
  • Dec. 18: U.K. CPI

NEWS:

• Chile’s Volcom Securitizadora Plans to Sell 2 Series of Bonds
• Chile Govt Says Head of Budget Office Rodrigo Cerda Resigns
• Analyst See Chile Economy Posting Sharp Drop in November: Survey
• Chile Economists See Key Rate Left on Hold Next Meeting: Survey
• Cencosud Downgrade to Junk ‘Looming’, Gimme Credit says
• Chilean Peso Leads Global Gains Amid Ongoing Intervention
• Chile’s Pinera Approval Rises After Reaching Record Low: Cadem

BONDS IN PROCESS OF REGISTRATION OR ISSUANCE:

RECENTLY ISSUED BONDS:

To contact the reporters on this story: Eduardo Thomson in Santiago at ethomson1@bloomberg.net;Maria Jose Campano in Santiago at mcampano@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Matthew Malinowski

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