Escaping Default Via Venezuela Proves Painful: Argentina Credit

Sept. 11 (Bloomberg) — Enrique Pescarmona, chairman of Argentina’s biggest renewable energy company, is discovering that distancing himself from the economic and political turmoil at home is no guarantee of success.

Pescarmona is struggling to get Venezuela’s state-run power company to pay its bills as he runs short of cash to make a $20 million interest payment at the end of the month. As a result, $390 million of bonds backed by his holding company Venti SA have lost more than two-thirds of their value in the past three months, plunging to a record low of 19 cents on the dollar. That’s the lowest price for any dollar-denominated company bond in emerging markets that isn’t already in default.

Venti’s efforts to shield itself from Argentina, which included corporate reorganization last year, are backfiring because its customers in Venezuela and Brazil have been unable to make timely payments. With only enough cash to cover about 17 percent of its short-term debt, Pescarmona’s company now faces the prospect of becoming the first Argentine company to default since 2010.

“It is ironic that it’s not the Argentine business that’s causing the difficulties of the company but the lower-credit- quality customers it has,” Xavier Olave, an analyst at Fitch Ratings Ltd, said in a telephone interview from New York. “Relying on getting cash from Venezuela in order to make your financial obligations, that’s a huge issue.”

Venezuela Arrears

Ismael Jadur, a spokesman for Pescarmona, didn’t return e- mails and telephone calls seeking comment on the company’s finances. Venti’s Argentine subsidiary Industrias Metalurgicas Pescarmona SA said on Sept. 9 it hired financial advisers to help it extract payment from its customers and assist in the sale of some Brazilian assets.

The Mendoza, Argentina-based subsidiary, known as Impsa, transferred ownership of the Brazilian unit, Wind Power Energia SA, known as WPE, to Venti in the reorganization. The companies now jointly guarantee the bonds, which mature in 2020.

Last year, Chief Operating Officer Lucas Pescarmona told investors Impsa would relocate headquarters to Luxembourg to portray the company as a global firm, helping remove the perceived risks associated with Argentina. After her October 2011 re-election, President Cristina Fernandez de Kirchner tightened capital controls and nationalized oil producer YPF SA.

Brazilian Business

Venezuela, which Morgan Stanley estimates has about $13 billion in arrears with importers and service providers, makes up 76 percent of Impsa’s trade receivables, the company said in a June 30 earnings report. The oil producer has grappled with shortages amid 63 percent annual inflation, raising questions over its ability to pay its foreign debt.

Venezuela’s Corpoelec SA owes Venti about $500 million and agreed to pay $60 million in three tranches due in July, August and September, according to John Haugh, a corporate analyst at Mizuho Securities Co.

Corpoelec was late in making the first payment, causing Impsa to delay a $7 million payment on local bonds issued in Argentina that was due June 26, according to Fitch’s Olave. The company is relying on the September payment to meet its obligations due this month, he said.

In Brazil, a unit of WPE sued state-owned Centrais Eletricas Brasileiras SA for unpaid services. Eletrobras finally agreed to pay $136 million in December.

The delays from Eletrobras caused WPE to hold off paying Brazilian conglomerate Grupo Libra, which stores wind towers for WPE, according to an Aug. 15 report by Banco Mariva SA. Libra sued for 10.6 million reais ($4.6 million) of unpaid debt. A Brazilian judge on July 30 declared WPE in bankruptcy.

‘Need Liquidity’

While the bankruptcy was lifted about a week later, once the companies came to an agreement, it’s probably hurt WPE’s ability to sell assets in Brazil, said Fitch’s Olave. The company, which wants to use money from the sale of wind farms to reduce indebtedness and develop projects, said on Aug. 20 that it hired Brazilian investment bank G5 Evercore in Brazil to help find investors.

“Liquidity is tight, case closed,” Mizuho’s Haugh said by phone from New York. “It’s a construction company — you need liquidity, you need working capital, you need decent cash balances so you can move ahead with projects.”

Impsa reported that it had about 66 million pesos ($7.9 million) in cash as of the end of the second quarter, which covers about 5 percent of short-term debt, according to Olave. Venti, which hasn’t reported second-quarter earnings, said it had $50 million in cash as of March 31, he said.

Venti faces $41 million of debt payments through December and owes more than $10 million to multilateral organizations in that period that can’t be refinanced, according to Banco Mariva.

Avoid ‘Restructuring’

The group could still seek bank financing or loans to meet its obligations, the Buenos Aires based bank said in the report.

“It’s difficult to see how they can avoid a restructuring,” Ian McCall, who oversees 100 million Swiss francs ($106.8 million) at Geneva-based Quesnell Capital SA, said by e-mail. “Certainly that is what the price of their bonds is implying.”

The dollar securities traded at 98 cents in March 2013 before plans to raise funds in the bond market fell through when Impsa couldn’t drum up enough buyers at an interest rate of 11.25 percent.

Its manufacturing backlog totaled $4.2 billion and will be monetized over the next three to five years, Impsa said in a May 9 earnings presentation. The majority of the backlog is in Brazil, where the company is also being hurt by the nation’s slower growth prospects, said Olave.

Brazil’s economy is expected to grow just 0.8 percent this year, down from 2.5 percent in 2013, according to the median estimate of 35 economists surveyed by Bloomberg.

“The slowdown in Brazil started impacting the company,” said Fitch’s Olave. “The fear now, living paycheck-to-paycheck, is that you can’t really invest in the business.”

–With assistance from Pietro D. Pitts in Caracas and Pablo Gonzalez in Buenos Aires.

To contact the reporter on this story: Katia Porzecanski in New York at [e-mail] To contact the editors responsible for this story: Brendan Walsh at [e-mail]; Michael Tsang at [e-mail] Daniel Cancel, Bradley Keoun