Moody's: Strong macroeconomic environment offsets liquidity risk for Chilean corporates

Among Moody's-rated Chilean non-financial, non-utility companies, most have little liquidity cushion to address their upcoming cash needs, but also strong credit quality, Moody's Investors Service says in a new report. The companies benefit from Chile's solid macroeconomic environment, as well as good access to local bank funding.

Moody's new report, "Companies' Strong Overall Credit Quality Reduces Urgency of Liquidity," looks at the liquidity risk of the 10 non-financial, non-utility Chilean corporate issuers rated B3 and above as of December 2014.

"Of the 10 Chilean companies we looked at, six have little liquidity cushion to meet their impending cash needs, while eight have solid, investment-grade credit profiles," says Vice President -- Senior Analyst, Veronica Amendola. "Chilean companies benefit from the country's solid macroeconomic fundamentals and exemplary macroeconomic management, and will continue to do so in the coming year, despite weaker investment due to low commodity prices and increased business uncertainty amid government reforms."

Financial institutions will remain the major source of funding for Chile's non-financial corporates, Amendola says. Most companies obtain funding through local banks, followed by offshore banks or the international capital markets. Access to international markets offers longer debt maturities, benefiting companies' financing and liquidity diversification.

"Chilean companies' expansion into neighboring countries and the US improves their access to international funds and helps hedge foreign-currency risk, but also increases their exposure to lower-rated Latin American countries," Amendola says. "Challenges facing Argentina, Brazil, Peru and Colombia, including low commodity prices and currency depreciation, could negatively affect Chilean retailer Cencosud, for example, and pulp producers Arauco and CMPC."

Most Chilean companies have significant levels of debt denominated in foreign currencies, but also generate US dollar-linked revenues or use hedging instruments to reduce devaluation risk Moody's new report says. While weak currencies benefit export-oriented companies such as Arauco, Codelco and CMPC, the Chilean peso's declining value raises costs for companies including Cencosud and Automotores Gildemeister.