Mexican Corporate Credit: Key Themes and Trends

The overall outlook for the credit quality of Mexican corporations remains cautious, with rating downgrades outpacing upgrades during 2024, as well as significant cash flow pressures due to moderate inflation and interest rates. While some sectors show resilience, the broader challenge lies in navigating the economic and political uncertainties ahead, particularly with upcoming elections in the United States and potential regulatory changes.

The ratings outlook for Mexican non-financial corporates rated by Fitch Ratings is stable as of July 31, 2024, as 82% of the combined international and national ratings portfolio held Stable Outlooks, compared to year-end 2023 when 83% of the portfolio had a stable outlook. Rating outlooks are relatively balanced, with Positive Outlooks at 9% and Negative Outlooks at 6% of the combined portfolio, compared to the values registered at year-end 2023 of 7% Negative and 8% Positive. Two percent of issuers were rated “CCC” or below at the end of July 2024, compared to 1% at YE 2023.

The increase in negative outlooks reflects weakening in individual credit profiles of issuers due to higher leverage than anticipated; the CCC or below increase reflects the Total Play Telecomuncaciones, S.A.P.I de C.V. downgrade in February 2024. Rating actions on the international ratings portfolio of Mexican corporates have been predominantly downgrades. This trend has been particularly noticeable in sectors such as media and entertainment, telecom, retail, metals and mining, and beverages. These downgrades are attributed more to issuer-specific events rather than sector-wide trends. Fitch anticipates an increase in 2024 in the ratio of downgrades to upgrades to around 2x from 0.7x in 2023.

Fitch has revised Mexico's (BBB-/Stable) GDP growth forecast for 2024 downward to 2.0% from 2.2% due to the weaker 1Q24. Potential downward revisions are expected due to weaker agriculture and manufacturing activity amid a resilient service sector and robust domestic consumption. Mexico's GDP growth was 1.4% during 1H24 (compared with 1H23). 

Mexico's central bank rate remains one of the highest in Latin America. Real interest rates are expected to decline gradually, after a first interest rate cut in August 2024 from the Bank of Mexico (Banxico) of 25 bps to 10.75%, but significant relief is not anticipated until more substantial rate cuts occur. Markets expect Banxico could ease its policy rate at least one more time during the remainder of 2024. As of July, core inflation has decreased to 4.1% from 6.6% in July 2023. Banxico remains cautious about core macroeconomic indicators, the exchange rate, and geopolitical tensions.

Exchange rate volatility affected the profitability of the export sector, but resilient demand from the United States and robust sales volumes have limited the impact on Mexican corporate performance. Fitch expects exchange rate volatility to continue for the rest of the year, given potential regulatory changes in Mexico, upcoming elections in the United States, and continued policy rate adjustments by central banks.

Fitch estimates up to a third of high yield issuers' EBITDA is consumed by interest costs. Cash flow pressure will continue for high yield issuers until interest rates decline more sharply. Median interest coverage ratio for issuers in the B category and below is expected to deteriorate to around 1.2x in 2024, from 1.9x in 2023.

Challenges remain for Mexican corporates, as the new government administration inaugurates on Oct. 1, 2024. The proposed judicial reform that is scheduled to be discussed in the new Congress during the first week of September 2024 could negatively impact investment and the business environment if it hinders judicial autonomy. Concerns about judicial impartiality and checks and balances could affect Mexico's institutional profile and investor confidence, leading to market volatility and depreciation of the Mexican peso.

On the positive side, Mexican corporates could benefit from the nearshoring trend in the short to medium term as the benefits from new investments trickle down to other sectors. Foreign direct investment reached US$36.1 billion in 2023 and it is expected to grow to nearly US$39 billion in 2024. Also, the Ministry of Economy has registered 166 public announcements from the private sector for investments of around US$48 billion in the next two or three years.

Several Mexican companies have been successful in extending near-term debt maturities forward, with manageable debt amortizations expected in 2025. Cross-border issuances have shown more dynamism in the period of January to May 2024. General elections in Mexico and the United States have slowed down bond markets. As of July 2024, Mexican non-financial corporates issued around US$3.2 billion of debt in the international market and MX$87.2 billion (US$4.4 billion) in the local market. The local bond market has remained relatively open for high rated issuers but is cautious toward high yield issuers.

Most companies rated by Fitch have healthy capital structures and finances supported by low-to-moderate leverage, with sufficient liquidity to address upcoming maturity walls and refinancing risk. Median net adjusted debt/EBITDAR for publicly rated Mexican corporates was 2.2x in 2023 and is projected to 2.1x in 2024, from 1.8x in 2022. The portfolio’s debt maturities are manageable; however, refinancing challenges may arise in 2026.