Default Threatens Argentine Power Sector

According to many emerging market players, the drought-hobbled and economically battered Argentine power industry contains the potential for a domino-style run of defaults.

A combination of poor economic conditions and years of bad weather have wreaked havoc on the health of such power providers as Hidroelectrica Piedra del Aguila S.A. and Central Termica Guemes S.A., both of which have failed to make payments on their outstanding bonds in the last month. Rumors have spread that other utilities may be heading for the same fate.

Hidroelectrica blamed the drought in part for its recent default on nearly $200 million of its corporate debt. Earlier this month, the company brought a restructuring offer to the table, offering to swap about $194.6 million of defaulted bonds for a comparable amount of new 10-year debt. Central Termica, which failed to pay interest on $60 million of bonds last month, is also in the process of putting together a debt restructuring, one source said.

While market sources said that the recovering Latin American economy does provide some ballast against a wave of similar defaults, others argued that a serious meltdown in that sector is still quite possible. One concern is that Argentina is now undergoing a heavy amount of power station and transmission line construction, which could further saturate the local energy market and reduce earnings for energy providers.

Hydroelectric plants in particular are on the ropes, as the last few years have been an environmental disaster for them. "Some electrical generators, in particular the hydroelectric generators, are facing difficult times due to poor conditions," said Dan Kastholm, group vice president and head of the Latin American industrial and utilities group at Duff & Phelps Credit Rating Co.

Seasonal storms like El Nino drowned Argentina in rain last year, which severely depressed power prices, and the knockout blow came with the current drought, which has all but evaporated some Argentine rivers and crippled the capacity of providers to generate energy. For a company like Hidroelectrica Piedra, it has been the worst of both worlds. "These debt maturities are occurring in a volatile market, making for some tough financing," one official said.

Market observers are divided on how widespread or harsh the effects of these adverse conditions will be among the nation's other power producers, though one head of project finance in Latin America said he thought "things were not as bad as they appear." But the rumors of potential defaults keep bubbling up, leaving some Street officials nervous to read the news wires each day.

"I have heard rumors about the defaults and I think between that and the election fever heating up in Argentina, it's very tough at the moment," said one head of emerging markets debt at a New York shop.

The looming October elections are putting a further crunch on these companies, because the potential for a political mess and subsequent market volatility might cause investors to nix the market for much of the fall.

"Because of the upcoming election, many Argentine companies want to get their refinancings done now as opposed to later," Kastholm said. The election looks to be a tightly-fought contest between the ruling Peronist Party's Eduardo Duhalde, the governor of Buenos Aires, and the Alliance's Fernando de la Rua, the mayor of Buenos Aires. With the Y2K crisis also a concern, one source predicted much Latin American investment activity could be over by the late third quarter.

The source said the Argentine energy situation is a perfect example of the one-step-up, three-steps-back scenario that many Latin American markets have been mired in since last year. When one country or sector shows signs of recovery, another collapses, the source said, pointing to the recent cratering of a Brazilian restructuring deal that had hoped to jump-start the Brazilian corporate market. - Christopher O'Leary