Top20 Peruvian Companies 2011

Peruvian Companies
Top 20
October 2011
Introduction
Dear reader, Standard & Poors Ratings Services is pleased to present TOP 20 Peruvian Companies a report focusing on a selected group of Peruvian entities which we consider to be among those with the best credit quality in the country. Within the next pages, there is a detailed section on the methodology applied to determine the selected list of companies. Over the last five years, Perus creditworthiness has steadily improved with rising terms of trade and stable macroeconomic policies and higher levels of investment that supported growth. Low fiscal deficits or surpluses, proactive debt management, an autonomous central bank with an inflation-targeting regime, a floating exchange rate, strengthening bank supervision, and numerous free trade agreements are some of the key macroeconomic factors that underpinned the countrys economic performance over the last decade. Perus economic performance has shaped the countrys corporate sector during the last decade. As the countrys economy, the fate of many of the major corporations is tied to the swings of the global economy, especially the evolution of commodities in general and metals and minerals in particular. However, prudent financial policies and cash management have allowed most players to grow and withstand external shocks improving their creditworthiness through the cycle. These characteristics will emerge from the individual analyses included in this publication. We have also included commentaries on the sovereign rating of Peru, the financial system, as well as information on Latin America and criteria and methodology to provide a broader analytical framework. We trust that the investor community, both in Peru and overseas, will find this report an important reference tool that will facilitate investment decisions. Pablo F. Lutereau Senior Director Analytical Manager, Corporate Ratings Standard & Poors
October 2011
Top 20: Peruvian Companies
The analyses in this publication are Standard & Poors opinions based on limited publicly available information, do not constitute Standard & Poors ratings or definitive indications of what ratings Standard & Poors would assign, and are not recommendations to purchase, hold or sell any securities or make any investment decision. Standard & Poors will not update, modify or surveil these analyses.
Table of Contents
Introduction Selection Criteria and Methodology Commentaries
Republic of Peru 8 Latin Americas Resilience, Recovery, And Consolidation 18 How Vulnerable Are Latin American Corporates To Commodity Prices? A Sensitivity Analysis 25 Latin America Is Seeing a Rise in Privately Financed Infrastructure Projects 32 South American Banks Should Support Rapid Credit Growth 35 Will Future Flow Securitizations Help Fund Perus Growing Mining Export Industry? 40
Selected Financial Data and Credit Statistics

Peer comparison 46
Credit Reports
Alicorp S.A.A. 50 Compaa de Minas Buenaventura S.A.A. 52 Corporacin Lindley S.A. 54 Edegel S.A.A. 56 Empresa de Distribucin Elctrica de Lima Norte S.A.A. - EDELNOR 58 EnerSur S.A. 60 Gloria S.A. 62 Luz del Sur S.A.A. 64 Minera Barrick Misquichilca S.A. 66 Minera Yanacocha S.R.L. 68 Minsur S.A. 70 Petrleos del Per Petroper S.A. 72 Saga Falabella S.A. 74 Shoughang Hierro Per S.A.A. 76 Sociedad Minera Cerro Verde S.A.A. 78 Supermercados Peruanos S.A. 80 Telefnica del Per S.A.A. 82 Telefnica Mviles S.A. 84 Unin de Cerveceras Peruanas Backus y Johnston S.A.A. 86 Volcn Compaa Minera S.A.A. 88
Understanding Ratings and Definitions

Guide To Credit Rating Essentials 92 Glossary Of Financial Ratio Definitions 95 Incorporating Adjustments Into The Analytical Process 96 Standard & Poors Rating Definitions 98
Contact List
October 2011
Copyright 2011 by Standard & Poors Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an as is basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENTS FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&Ps opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&Ps public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Selection Criteria and Methodology

Our selection process encompassed different stages aimed at building a short list of 20 Peruvian companies with superior credit quality. For that, we scrutinized the key sectors of the Peruvian economy, identifying those elements that help companies achieve strong business risk profiles, such as size, cost efficiency, management experience, degree of business integration, geographic and product diversity, etc. Having identified those companies with good business risk profiles, we centered our analysis on those that make public disclosure of its financial statements. Among those, we searched for the ones with healthy financial risk profiles, evidenced by cash flow stability, conservative debt leverage, prudent financial policies, adequate liquidity and financial flexibility and good access to debt markets.
October 2011
Commentaries
October 2011
Republic of Peru
Richard Francis, New York (1) 212-438-7348; richard_francis@standardandpoors.com; Sebastin Briozzo, Buenos Aires (54) 11-4891-2125; sebastian_briozzo@standardandpoors.com
Current Rating
Sovereign Credit Rating Foreign Currency BBB/Stable/A-3 Local Currency BBB+/Stable/A-2
Major Rating Factors

Strengths: High real GDP growth, supported by a significant rise in investment. A low and declining general government debt burden. Weaknesses: Still-evolving political institutions in the context of significant economic, social, and ethnic fragmentation as well as high poverty levels. A significant (albeit declining) level of financial dollarization, with 45% of bank claims on residents in U.S. dollars as of June 2011.
GDP likely will continue to decline gradually over the next three years. Although raising taxes on mining will be a policy priority, Mr. Humala has stated that keeping the sector reasonably attractive to investors is critical to economic growth and tax collection. The governments commitment to economic stability and a positive investment climate support the ratings on Peru. We believe that these factors likely will underpin solid growth through 2013 despite global uncertainties. Perus still-evolving political institutions in the context of significant economic, social, and ethnic fragmentationas well as high poverty levelscontinue to constrain the ratings. The countrys monetary vulnerability is also a constraint. Peru has a significant (albeit declining) level of financial dollarization, with 45% of bank claims on residents in U.S. dollars as of June 2011. Perus diversifying economic structure and high levels of investment, including foreign direct investment (FDI), should support the countrys robust growth prospects over the next three to five years. Although the countrys net external liability position was 86% of current account receipts at year-end 2010, close to 40% of the gross liability is FDI. Standard & Poors Ratings Services expects that Perus net inward FDI will continue to exceed the current deficit, which we estimate to be 2%-3% of GDP from 2011-2013. Our local-currency rating on Peru is one notch higher than the foreign-currency rating because in our opinion, the combination of monetary flexibility and the growing local-currency debt market provide slightly better capacity to service nuevos soles-denominated debt issued in the domestic market. Our A- transfer and convertibility (T&C) assessment reflects our opinion that the likelihood of
Rationale
The ratings on the Republic of Peru reflect our expectation that broad fiscal and monetary policy continuity under Ollanta Humalas new government will support stronger economic policy flexibility and growth. In July 2011, Mr. HumalaPresidentElect at the timesignaled macroeconomic policy continuity by reappointing the respected president of the central bank, Julio Velarde, and appointing another respected technocrat, Luis Miguel Castilla, to head the finance ministry. Since taking office on July 28, the government has emphasized its goal to promote social inclusion and has laid out plans to increase social and infrastructure spending as well as boost public-sector wages. However, the government has also signaled its intent to implement these priorities gradually and within the limits of a prudent fiscal approach by tying expenditures to increased revenues, partly from the mining sector. Therefore, assuming a fairly steady currency, net general government debt to
the sovereign restricting access to foreign exchange that Peru-based nonsovereign issuers need for debt service is moderately lower than the likelihood of the sovereign defaulting on its foreign-currency obligations. Although the government has some foreign-exchange restrictions, they are on the capital account, and the economy is open to trade.
outside sectors related to energy and mining accelerates, dollarization diminishes significantly, and fiscal performance does not fall victim to potential political rifts. Conversely, we could lower the ratings if political pressures arising fr om the large informal economy, widespread poverty, and significant income disparities make the country susceptible to populism. In our opinion, the governments ability to address the underlying causes of its populations discontent will be key to the continued improvement of the governments creditworthiness.
Outlook
The stable outlook balances Perus ongoing success in attracting gas and mining investment with the countrys political and external vulnerabilities. We likely would upgrade Peru if economic growth
Table 1 | Perus Summary Statistics
Year ended Dec. 31
2005 2006
GDP per capita (US$) Real GDP per capita growth (%) Narrow net external debt/current account receipts (%) Gross external financing needs/current account receipts + usable reserves Change in general government debt/GDP (%) Net general government debt/GDP (%) General government interest paid/general government revenues (%) Domestic claims private nonfinancial public enterprises/ GDP (%) CPI growth (%) eEstimate. fForecast. 2,848 5.5 61.1 85.5 (3.9) 32.4 10.3 19.4 1.6 3,276 6.4 32.9 78.2 (1.8) 25.5 9.3 17.8 2.0
2007
3,763 7.6 11.6 89.5 (0.9) 19.8 8.5 21.0 1.8
2008
4,400 8.6 (0.1) 85.4 2.2 17.9 7.4 25.5 5.8
2009 2010
4,352 (0.3) (9.0) 72.5 3.6 20.4 6.8 25.0 2.9 5,215 7.6 (15.5) 76.7 (1.5) 15.5 5.7 25.1 1.5
2011e 2012f
5,596 5.3 (27.7) 72.9 (1.0) 13.1 5.1 27.4 3.0 5,939 4.8 (31.1) 72.7 (0.5) 11.6 4.4 27.4 2.5
2013f
6,454 4.8 (34.4) 72.8 (0.5) 10.3 3.8 27.4 2.0
2014f
6,966 4.8 (39.2) 70.7 (0.5) 9.0 3.3 27.4 2.0
Political Environment: Broad Consensus On Macroeconomic Policy Amid A Still-Fragile Political Environment
Maintaining and enhancing stability In July 2011, Ollanta Humala, President-Elect at the time, signaled macroeconomic continuity by reappointing the respected president of the central bank, Julio Velarde, to his post and appointing another respected technocrat, Luis Miguel Castilla, to head the finance ministry. On the fiscal front, the government has emphasized its goal of promoting social inclusion while reaffirming its commitment to keep spending within the limits of a prudent fiscal policy. The government has laid out plans to increase social and infrastructure spending as well as boost public-sector wages, but it has signaled its intent to implement these initiatives gradually and tie them to increased revenues, partly from the mining sector. Although raising taxes on the mining
sector will be a policy priority, President Humala would like to keep the sector reasonably attractive to investors, as this is critical for future economic growth and tax collection. Growing consensus on the macroeconomic front, but a lack of debate on reform There is a stronger consensus on sound macroeconomic policies across Perus political class than ever before. Most of the political parties in Congress, including Mr. Humalas Nationalist Party, approved a bill strengthening the old Fiscal Responsibility Law. More than in the past, the political class in Peru seems to accept the restrictions that a sound macroeconomic framework imposes on other areas of public policy. However, the debate has yet to touch on more fundamental issues, namely, how to improve the countrys still-weak political and economic institutions. Social issues such as education, health, and justicehave only
October 2011
recently gained priority in the governments political agenda in the aftermath of the presidential victory of President Humala. He will seek to balance his keeping his campaign promises to increase social spending with maintaining sound macroeconomic policies and a good investment climate that supports growth. There are risks ahead A decade of high GDP growth has led to higher employment and purchasing power. Rapidly increasing levels of consumption in middle-income areas of Lima further demonstrate this trend. If it continues, it is likely that economic growth and social cohesion will sustain each other. However, despite the governments intention to boost social spending, its ability to implement social programs to date has proven weak, given institutional capacity constraints. For example, although the government has sought to reduce income inequalities through substantial revenue transfers to the poorest regions, weak local institutions have made it difficult to increase infrastructure and social spending. Large transfers of mining revenue to municipalities and regions have also shown that many of these entities do not have sufficient expertise to evaluate or implement projects. In fact, some municipalities in Peru have high levels of liquid funds that they are unable to spend. Social conflict in mining areas has proven difficult to manage and could be a significant challenge to the new administration.
private consumption will likely rise by more than 5.5% over the next three years, further underpinning growth prospects.
Economic Prospects: Expectations Are For Solid Growth Over Next Three Years
Economic structure: diversification is underway Perus GDP per capita, expected at $5,596 in 2011, is nearly double the level in 2005 (the year before President Alan Garcia came to power). Economic growth will likely reach 6.5% in 2011 and will likely remain at more than 5.5% from 2012-2014. Continued high levels of investment, especially in the mining sector, will largely fuel this growth. FDI is expected to top $35 billion over the next four years. As a result of the high level of investment, we expect that exports will rise by more than 8% in 2012. Perus extended growth trajectory started with the boost stemming from investment in largescale projects (gas development by Camisea and other mining projects, for example) and the rise in commodity prices in late 2002. However, todays sources of growth are more diversified. Because of rising levels of employment and disposable income,
Investment is a key driver of economic growth Over the past two years, there has been a strong resurgence of domestic investment, particularly private investment, after a decline in 2009 as a result of global economic uncertainties. Investment has rebounded strongly and should reach 28% of GDP in 2012. A continued high level of investment is crucial to achieving growth rates higher than 6%, allowing Peru to reduce poverty, which affects about 30% of its population. Maintaining economic growth and social stability will depend on rising employment. Another positive development is that employment levels, which lagged the economic expansion at the beginning of the cycle, have grown more rapidly since mid-2005, in tandem with increasing domestic demand. Total FDI was $7.3 billion in 2010. While the mining and hydrocarbons sectors continue to draw the largest share of private investment, it has become more broad based. A number of large private investments continueincluding the second phase of Camisea, a liquefied natural gas project. Large mining investments continue as well, including Southern Peru Coppers projects such as Ta Mara and the expansions of the Toquepala and Cuajone mines. Investments are also funding the expansion of mines and concentration plants at Yanacocha, Shougang, and Milpo. There are several large oil and gas projects underway. In addition to more broadbased sectoral investment, there has been increased FDI from Asia, especially China, South Korea, and Japan. Peru has signed free trade agreements with each over the past three years.
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Top 20 Peruvian Companies
October 2011
Despite the increase in investment, various bottlenecks remain. Although Peru is rich in resources, improving human capital (and, therefore, productivity) is still a major challenge for the countrys medium- and long-term economic development. School attendance is not low by Latin American standards, but the poor quality of public education is a major weakness; a comprehensive reform in this sector is still pending. One of biggest constraints for growth is infrastructure.
However, over the longer term, education will likely be a bigger factor. The government would need to reduce high labor market informality and improve the quality of public investment and social spending across all levels of government to alleviate infrastructure and social gaps, supporting ongoing export diversification and poverty alleviation. Strengthening public institutions, advancing administrative simplification, and promoting education attainment would boost human capital and entrench high productivity growth.
Table 2 | Perus Economic Indicators

Year ended Dec. 31
2005
GDP per capita (US$) Real GDP per capita growth (% change) Investment/GDP (%) Net foreign direct investment/GDP (%) Depository corporation claims on the resident nongovernment sector/GDP (%) eEstimate. fForecast. 2,848 5.5 17.9 3.3 19.4
2006
3,276 6.4 20.0 3.8 17.8
2007
3,763 7.6 22.8 5.1 21.0
2008
4,400 8.6 26.9 4.9 25.5
2009
4,352 (0.3) 20.7 4.1 25.0
2010
5,215 7.6 25.0 4.6 25.1
2011e
5,596 5.3 26.9 4.9 27.4
2012f 2013f
5,939 4.8 27.9 4.3 27.4 6,454 4.8 27.7 4.2 27.4
2014f
6,966 4.8 27.1 3.8 27.4
External Finances: Moderate Current Account Deficits Going Forward
Peru has had significantly favorable terms of trade in 2011, as expectations are for the price of metals especially copperto rise by 18% after increasing by nearly 38% in 2010. Despite these improved terms of trade, the current account deficit will likely deteriorate to 2.7% of GDP in 2011-2012 as imports grow even more rapidly than exports, partly because of FDI. It is important to note that after two years of stagnation, the volume of traditional exports will likely expand by more than 8% per annum in 2012-2013 as a number of large mining projects begin. Higher levels of international reserves and current account receipts have kept the countrys external liquidityas measured by its gross external financing needs to current account receipts plus usable reservesrelatively stable at an estimated 72.9% despite a larger current account deficit (see Chart 2). Favorable terms of trade, coupled with rising export volumes, have led to continued improvement in Perus external accounts. Perus narrow net external position (net of liquid assets only) is at an expected 27% of current account receipts in 2011.
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Mining exports changing the scales As noted, strong mineral pricescombined with significant volume expansionwill lead to continued improvement in Perus external indicators. The dynamism of traditional exports, which account for 79% of total exports, support the strong performance of exports in 2011. However, we expect that nontraditional exports will rise by nearly 21% in 2011. Although 21% is relatively a small portion of total exports, this figure is still significant, particularly because nontraditional exports have more of an impact on employment than traditional exports. Some of these latest developments were supported by access to the U.S. market through the free trade agreement with the U.S. that went into effect on Feb. 1, 2009. Furthermore, Peru has signed a number of other free trade agreements, including those with Canada, Singapore, Mexico, Chile, China, South Korea, and Japan. Mineral exports account for roughly 60% of Perus total exports, with copper alone constituting 24% and gold 18%. Oil and gas exports are growing as a
share of total exports as well. They now account for nearly 10% of the total. Perus external position should improve further over the next five years. It is important to note that this is not solely based on higher commodity prices. In addition, we expect that export volumes will increase substantially for many of Perus key mining sector exports. However, higher levels of imports stemming partly from FDIwill likely lead to current account deficits of 2%-3% in 2011-2013. In addition, the central banks international reserves have increased significantly over the last two years, growing by nearly $15 billion (nearly 50%) to reach $48 billion in 2011 compared with $33 billion in 2009. Standard & Poors expects that the combination of good fiscal management, volume growth of exports, and high FDI levels will continue to underpin Perus external accounts over the medium term. In the future, the governments fiscal consolidation strategy and successful financing through the domestic market using local-currency-denominated debt will constrain the growth of the stock of external debt.
Table 3 I Perus External Indicators

Year ended Dec. 31
2005
Gross external financing needs/current account receipts plus usable reserves Narrow net external debt/current account receipts Current account receipts/GDP Net foreign direct investment/GDP Current account balance/GDP Current account balance/current account receipts Net external liabilities/current account receipts Usable reserves/current account payments (months) Usable reserves (Mil. US$) eEstimate. fForecast. 85.5 61.1 27.8 3.3 1.4 5.2 111.2 5.6 11,002
2006
78.2 32.9 32.2 3.8 3.1 9.7 74.1 4.9 14,006
2007
89.5 11.6 32.9 5.1 1.4 4.1 92.0 5.0 23,555
2008
85.4 (0.1) 31.1 4.9 (4.2) (13.5) 75.2 6.3
2009
72.5 (9.0) 27.5 4.1 0.2 0.6 83.6 8.8
2010
76.7 (15.5) 28.4 4.6 (1.5) (5.3) 85.6 7.1
2011e 2012f
72.9 (27.7) 30.5 4.9 (2.7) (8.9) 63.9 8.2 40,230 72.7 (31.1) 30.7 4.3 (2.7) (8.7) 56.1 8.1 42,484
2013f
72.8 (34.4) 30.7 4.2 (2.6) (8.4) 47.5 7.8 45,176
2014f
70.7 (39.2) 30.8 3.8 (1.4) (4.5) 36.6 7.8 49,911
25,347 27,331 38,041
Fiscal Policy: Higher Revenues Will Finance The Governments Social Programs
In the midst of an election year, with buoyant revenues and restrained government spending, the government ran a large fiscal surplus of 5% of GDP in the first half of 2011. However, an increase in spending in the second half of the year will likely
lead to an overall fiscal surplus for the year of 1% of GDP in 2011. Tax revenues should rise by 13% in 2011 to reach 20.5% of GDP, up from 19.8% in 2010. Spending, which was subdued in the first half of 2011, will likely rise significantly over the second half of the year to reach 19.5% of GDP, but this is still down from 20.4% in 2010.
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points of the total 19% VAT from the current two percentage points as well as their take of various mining revenue sharing funds to 20% of the total from 10%. Perus still-high dependence on the commodity sector highlights the importance of developing stronger countercyclical economic policies. Because dollarization and low levels of financial intermediation still constrain monetary policy, fiscal policy must play a dominant role. The Fiscal Responsibility Law incorporated a countercyclical fiscal fund into Perus government structure. That fund totaled only about 2% of GDP at year-end 2010. The government introduced multiannual budgeting in 2010 to move toward a medium-term expenditure framework. Debt and interest burdens One of Perus major accomplishments was debt reduction and improved debt structure. Standard & Poors expects the governments debt to reach 13% of GDP (in net terms) in 2011 compared with nearly 20% in 2009. (Government depositsboth at the central bank and the local banking systemwill likely total 8% of GDP at year-end 2011).
There is a growing consensus on the importance of fiscal responsibility in Peru. Fiscal rationalization became easier when relatively high economic growth allowed the government to make some expenditure concessions without damaging the final-balance target. Continuing fiscal consolidation under a less-favorable international economic environment will still be a risk. The Fiscal Responsibility Law established a ceiling of 1% of GDP for government deficits in periods of economic expansion. Despite recent improvements, expanding the countrys still-relatively-low tax burden will be an ongoing challenge, especially given its high dependence on mining-related revenue (accounting for nearly a quarter of total central-government revenue). Tax rates are already high, and the problem has its origins in high levels of informality and tax evasion. In addition to windfall taxes on the mining sector, expanding the tax base would likely be more fundamental to increasing the tax burden without damaging the formal economy. Enhanced tax administration at SUNAT, the Superintendency of Tax Administration, could also expand tax revenues. As noted, on the expenditure side, President Humala has made explicit his major objective of boosting social expenditure as well as improving public infrastructure. The decentralization process, initiated in 2002, continues to transfer functions to local and regional governments. Some decentralization of health and primary education has begun as well. The various levels of government still need to clarify responsibilities to avoid duplication. Under President Garcias administration, transfers to the local and regional governments doubled by increasing their take of the value added tax (VAT) to four percentage
Active debt management has recently gradually reduced interest- and exchange-rate vulnerability and postponed major amortization over the next four years (in particular, after the Paris Club debt buyback operations). The government has also been working extensively to deepen the domestic capital market for issuances in Peruvian nuevo sols, allowing the country to replace foreigncurrency-denominated debt with its local-currency counterpart. Significantly, Peru issued a 30-year bond denominated in local currency in the Peruvian market at a fixed interest rate in 2007. More than 46% of Perus total debt is now denominated in
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local currency, having increased very rapidly from 18% at year-end 2006. Also, exposure to variable interest rates declined to about 12% of debt in March 2011 from 55% in 2002. Furthermore, the duration of Perus total debt is now nearly eight years, diminishing the burden of servicing the debt and rollover risk.
Contingent liabilities Domestic credit to GDP is 25%. However, the high level of dollarization poses some additional risks.
Table 4 I Perus Fiscal Indicators

Year ended Dec. 31
2005
Change in general government debt/GDP General government balance/GDP General government primary balance/GDP General government revenue/GDP General government expenditure/GDP General government interest paid/general government revenues Net general government debt/GDP General government debt/GDP eEstimate. fForecast. (3.9) (0.5) 1.4 18.4 18.9 10.3 32.4 36.9
2006
(1.8) 1.8 3.7 20.0 18.2 9.3 25.5 30.1
2007
(0.9) 3.1 4.8 20.8 17.7 8.5 19.8 26.2
2008 2009
2.2 2.4 3.9 21.1 18.7 7.4 17.9 25.9 3.6 (1.9) (0.6) 18.9 20.7 6.8 20.4 28.8
2010
(1.5) (0.4) 0.8 20.0 20.4 5.7 15.5 23.8
2011e
(1.0) 1.0 2.0 20.5 19.5 5.1 13.1 20.7
2012f
(0.5) 0.5 1.4 21.0 20.5 4.4 11.6 18.6
2013f
(0.5) 0.5 1.3 22.0 21.5 3.8 10.3 16.7
2014f
(0.5) 0.5 1.2 22.5 22.0 3.3 9.0 15.0
Monetary Policy: Further Institutionalization Of Monetary Policy

Since December 2010, the central bank has raised the policy rate by a cumulative 300 basis points (bps) from a historical low of 1.25%. The Central Bank raised the benchmark policy rate 25 bps in its May monetary policy meeting. We expect that the inflation rate will remain at the upper target of its 1%-3% band in 2011, in large part because of an increase in food and oil prices. Furthermore, inflation should stay within this range over the medium term.
The current administration reappointed Julio Velarde, a well-respected economist, as Central Bank president at the beginning of its term. However, there is room for greater institutionalization of the monetary authority by a constitutional amendment delinking the appointment of the central bank president and board members from the presidential cycle.
A still-high, though declining, level of financial dollarization, the still-low level of financial intermediation, and the continuing process of greater monetary institutionalization continue to constrain monetary policy flexibility. The central bank has implemented a system of inflation targeting and formally liberalized the exchange rate. The central bank also began to put in place higher reserve requirements over the course of 2010. It is doing this to deter short-term capital inflows to buffer the inflation targeting framework and the risks posed to financial stability posed by large short-term capital inflows.
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Gradualism is a key notion in monetary policy strengthening Although there is more transparency in the implementation of monetary policy and the government is deepening the local capital market, major obstacles remain to fully develop monetary policy into a stronger anchor with a countercyclical role. Among the challenges are the still-high level of dollarization and low financial intermediation. The governments strategy of increasing the use of domestic currency began to yield favorable results. The share of foreign-currency participation to total loans decreased significantly to 45% as of June 2011 from 63% at year-end 2006.
Financial intermediation will have to increase if Peru is to achieve more freedom to pursue a more active and effective monetary policy. In tandem with dynamic consumption and domestic investment, lending is growing at higher rates than nominal GDP, showing variations of slightly more than 20% year-over-year. As a result of the high credit growth, the central bank began to implement policy measures in an effort to slow growth by tightening prudential regulations on consumer loan and implementation of new pro-cyclical provisioning rules. Furthermore, reforms to enhance the bank surveillance and intervention regimes and implement enhanced capitalization requirements in line with Basel II are being undertaken. Domestic credit to GDP will likely reach 26% at year-end 2011, recovering from a record low of 17.7% in 2006.
Table 5 I Perus Monetary Indicators

Year ended Dec. 31
2005
CPI growth Effective general overnment interest rate (interest/debt) eEstimate. fForecast. 1.6 4.7
2006
2.0 5.8
2007
1.8 6.5
2008 2009
5.8 6.5 2.9 5.1
2010
1.5 4.5
2011e 2012f
3.0 4.8 2.5 4.9
2013f
2.0 4.9
2014f
2.0 4.8
Comparative Analysis: Better Economic Indicators And A Weaker Political Stance
Perus regional peers in Latin America are Brazil (BBB-/Positive/A-3), Panama (BBB-/Positive/A-3), and Mexico (BBB/Stable/A-3). (All ratings are longterm foreign currency sovereign credit ratings as of Sept. 15, 2011.) Extra-regional peers include Russia (BBB/Stable/A-3), Thailand (BBB+/Stable/A-2), and India (BBB-/Stable/A-3). Growing consensus on macroeconomics balanced by still-weak social stability Although consensus on the direction of macroeconomic policies is deepening, Perus social and ethnic divisions still resemble those of its Andean neighbors, Bolivia (B+/Positive/B) and Ecuador (B-/Positive/C). However, the divisions in Peruvian society are narrower than those of its neighbors. Political instability in the other Andean countries continues to impede economic policy despite the regions overall strong economic performance. Peru is thus situated between the rest of the region and higher-rated countries, an unusual position where the risk of economic policy reversal diminishes as the entire political class backs the general direction of current economic policies. In Peru, as in other Andean nations, consensus on
the economic policy might weaken if the population does not believe that economic growth is reaching them. A lack of social progress over time might erode the political sustainability of current policies, making them more vulnerable to adverse shocks, whether domestic or external. More diversified sources of growth have moderated this risk over the past three years by reducing GDP dependence on the export of primary products. Therefore, the more diverse economic growth pattern since 2005 has led to higher employment, helping distribute the benefits more widely and evenly. The dynamism of domestic consumption is another indication of this trend. Although there are similar patterns in other Latin American countries, Perus extraordinarily high GDP growth rates reflect the importance of such developments in a country that has long been poor and politically unstable. Greater overall satisfaction with the current economic model, if confirmed, is a key positive credit factor because it provides additional political stability.
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Relatively high and sustained economic growth, but from still-low per capita income Perus GDP has grown higher than the BBB median in real terms over the last five years. We expect it to continue to perform at levels significantly higher than those of the BBB median for the next three years. However, Perus GDP per capita of $5,596 is still well below the BBB medians $10,860 and all of its peers, with the exceptions of India ($1,618) and Thailand ($5,243). A broader indicator of human development is the UNDP Human Development Index. Peru is 63rd on the list, which is better than most of its key peers with the exceptions of Panama (54th) and Mexico (56th).
Solid budget performance compensates for Perus stilllimited fiscal revenues The fiscal consolidation strategy implemented by the last two administrations and expected to continue under the Humala administration has led to a sharp improvement in the level of general government debt. Perus fiscal performance has improved markedly over the last five years, with a surplus of 1.0% of GDP expected in 2011, significantly outperforming the BBB medians 2.8% deficit. In fact, Peru will likely maintain a small surplus over the next two years compared with deficits of 2%2.5% of GDP for the BBB median. Consequently, Perus net general government debt at 14% of GDP in 2011has fallen well below the BBB medians 35% and well below Brazils 42% and Mexicos 35%. We expect that Perus net general government debt to GDP will gradually decline further over the next three years, while the BBB medians should rise marginally.
Notwithstanding these achievements, Perus fiscal flexibility remains limited. On the revenue side, its fiscal revenue to GDP is still low for an economy at this stage of development, given the high levels of poverty and infrastructure needs. Perus general government revenue, at about 20.5% of GDP, is much lower than that of the BBB median (34%).

Mexico is the only country with a lower level of revenues at 18.3%, though Indias 21.2% is low as well. Despite the low level of government revenue, Perus debt level in terms of revenues is now lower than the BBB median and that of all of its peers. Perus debt to revenues ratio lies at the BBB median of 107%. Perus ratio has improved markedly over the last three years.
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As in other Latin American countries, favorable international conditions led to a strong positive adjustment in Perus external accounts. The strong accumulation of international reserves and higher levels of current account receipts have led to improvements in its external liquidity, as measured by the gross financing requirement over current account receipts and usable reserves. The ratio has improved to 73% in 2011 from 85% in 2008 versus the 106% for the BBB median. Of its peers, only Thailands at 68% and Brazils at 73% are similar to Perus. In addition to a dynamic export sector, the lower government borrowing requirements resulting from fiscal consolidation and the replacement of external debt by domestic indebtedness also played a significant role in the adjustment. Therefore, Perus narrow net external position has improved to a creditor position of 27.4% of current account receipts. Again, only Thailand and Russia have similarly strong positions, with 43.6% for Thailand and 38.8% for Russia.
Related Criteria And Research
Sovereign Government Rating Methodology and Assumptions, June 30, 2011 Rating history Sovereign Rating And Country T&C Assessment Histories Default history Sovereign Defaults And Rating Transition Data, 2010 Update
Ratings Detail (As Of 15-Sep-2011)* Republic of Peru

Sovereign Credit Rating Foreign Currency Local Currency Certificate Of Deposit Local Currency Senior Unsecured (14 Issues) Senior Unsecured (23 Issues) Sovereign Credit Ratings History 30-Aug-2011 23-Aug-2010 14-Jul-2008 23-Jul-2007 20-Nov-2006 14-Jul-2008 23-Jul-2007 20-Nov-2006 Current Government Ollanta Humala of the Peruvian Nationalist Party Election Schedule Next Presidential elections: April 2016 *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poors credit ratings on the global scale are comparable across countries. Standard & Poors credit ratings on a national scale are relative to obligors or obligations within that specific country. Local Currency Foreign Currency BBB/Stable/A-3 BBB-/Positive/A-3 BBB-/Stable/A-3 BB+/Positive/B BB+/Stable/B BBB+/Stable/A-2 BBB-/Positive/A-3 BBB-/Stable/A-3 A-2 BBB BBB+ BBB/Stable/A-3 BBB+/Stable/A-2
October 2011
17
Latin Americas Resilience, Recovery, And Consolidation

Lisa M Schineller, New York (1) 212-438-7352; lisa_schineller@standardandpoors.com
During the recent global recession, Latin America showed unprecedented resilience and recovered quickly. On a weighted average, real GDP for the region climbed 6.5% in 2010 after a decline of only 1.9% in 2009 (see table 1). Standard & Poors Ratings Services expects a combination of domestic and external demand to continue to support the regions economic growth, with real GDP rising by 4.5% in 2011 and 4.2% in 2012. (Listen to the related podcast titled, Latin America: Credit Quality Improves As The Region Rebounds From Global Recession, dated June 17, 2011.) To be sure, the pace of growth differs somewhat within the region. Economies in South America have expanded faster than those in Central America, and we expect that to continue because of South Americas high share of commodity exports, especially to fast-growing emerging countries in Asia. Mexico and Central America have recovered more slowly because of their closer economic links with the U.S. Nonetheless, we expect remaining output gaps to close during 2011 and economic activity to moderate going into 2012, consolidating at a pace consistent with trend rates of growth. The recovery in domestic demand and narrowing (or already closed) output gaps, coupled with high commodity prices for both food and energy, have contributed to an uptick in inflation. Current inflation for the region is about 7.4%, which is generally several percentage points higher than at the beginning of 2010. Two exceptions are Mexico and Venezuela, though the latter still with inflation of more than 20%. However, inflation is still quite low relative to the regions inflationary past, and to date is still below 2008s uptick. The medium-term foundation for domestic demand has never been stronger given a broadening of the middle class, formalization of labor markets, and deeper credit markets. But external links have propelled economic growth as well. Supportive terms of trade for commodity exporters and capital inflows in 2010-2011 have contributed to strong domestic demand in many countries. A decline in commodity prices or a sharp slowing in capital inflows presents downside risk for the region. The stronger macroeconomic foundation that helped Latin America withstand the 2008-2009 recession should help mitigate future economic shocks. The buoyancy of external and domestic demand, however, poses
risks. One is the potential build-up of excesses, or bubbles, which could make an eventual economic slowdown a hard landing. In fact, some governments are taking pre-emptive steps to avert these risks, including managing currency appreciation, capital inflows, and growth in domestic credit, and to a lesser extent, tightening fiscal spending.
Table 1
Latin America---Growth And Inflation Outlook

(Year-over-year % change) 2006 Latin American Weighted Average Consumer Prices Argentina* Real GDP Consumer Prices* Brazil Real GDP Consumer Prices Chile Real GDP Consumer Prices Colombia Real GDP Consumer Prices Mexico Real GDP Consumer Prices Panama Real GDP Consumer Prices Peru Real GDP Consumer Prices Venezuela** Real GDP Consumer Prices** 4.7 8.5 5.4 4.0 4.1 4.6 3.4 6.7 4.3 5.2 3.6 8.5 2.5 7.7 2.0 9.9 13.6 5.5 8.7 8.8 6.1 3.7 4.6 4.4 6.9 5.6 3.3 4.0 12.1 4.3 8.9 1.8 8.2 18.7 8.3 6.8 8.6 5.1 5.8 3.7 8.8 3.5 7.0 1.5 5.1 10.8 8.7 9.8 5.8 4.8 31.0 6.5 0.9 6.3 (0.6) 4.3 (1.7) 1.4 0.4 4.2 (6.1) 5.3 3.2 2.4 0.9 2.9 (3.3) 26.9 6.6 9.1 10.0 7.5 5.8 5.2 2.7 4.3 3.3 5.5 4.2 7.5 3.0 8.8 1.5 (1.4) 28.5 7.4 6.5 28.0 4.0 6.3 6.0 4.0 5.4 3.8 4.5 3.8 7.5 7.5 6.0 2.5 1.5 30.0 6.6 4.0 30.0 4.3 4.9 5.0 2.9 4.8 3.7 3.5 3.6 5.5 5.0 6.5 2.0 3.5 30.0 Real GDP 5.6 2007 5.8 2008 4.4 2009 (1.9) 2010 6.5 2011f 4.5 2012f 4.2
*Historical figures are based on official data, and forecasts are market estimations. **Venezuela CPI is national. f--forecast.
A Greater Resiliency To External Shocks Over the last decade, Latin America governments implemented various policies that have strengthened
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their underlying economic fundamentals. The regions external position improved, including a decline in net debt and financing needs (see charts 1 and 2). The accumulation of international reserves to more than US$620 billion in 2010 from about US$150 billion in 2002 played an important role in the improvement of these external indicators. This much lower external vulnerability was a key component enabling governments to secure financing from official and multilateral creditors during the global crisis until capital markets reopened. Healthier fiscal positions include lower debt and deficits (see charts 3 and 4). In addition, better terms for government borrowing, such as the ability to issue local currency debt in domestic markets at fixed rates, and with longer maturities, further reduces fiscal vulnerability. Flexible monetary and exchange rate regimes and a successful track record of containing inflation enabled central banks to cut interest rates during the crisis in contrast with previous crises. Latin Americas banking systems, whose strength improved significantly as a result of more conservative policies following the regions own banking crises in the 1980s, 1990s, and early 2000s, also provided a foundation to weather the global recession. Comparatively high capitalization levels above the minimum Basle standards, predominantly domestic currency, local deposit financing, stronger regulation, and consolidated supervision characterize the prominent banking systems in the region. Deeper local capital markets that developed alongside these sounder fundamentals provide more flexibility for companies to fund themselves locally and in domestic currency. In our view, these factors should also help the region manage future negative global shocks.
Chart 1
Chart 2
Chart 3
Chart 4
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19
Strong Domestic And External Demand Stronger economies in the region have created higher, and healthy, domestic demand growth. We believe that robust labor and credit markets will continue to support demand growth in the next several years. In fact, the regions resilience during the recession and its quick recovery reflect this stronger dynamic (see chart 5). This is true even though policy distortions in some countries, such as Argentina and Venezuela, undermine the mediumterm domestic investment outlook, in our view.
Chart 5
Chart 6
Greater macroeconomic stability and lower inflation, in particular, have supported expansion of the middle class and reduced poverty. Approximately one-third of the regions population, on average, lived in poverty in 2010, down from more than 40% in 2002--and from approximately 50% in 1990. This improved standard of living for a larger segment of the population translates into stronger local consumption as well as investments in products and services to attend to those consumers needs. The combination of low inflation, better growth prospects, and well-capitalized banking systems that rely primarily on local funding led to the deepening of Latin Americas credit markets, namely more lending to consumers and businesses. This in turn also supports more solid domestic demand. The ratio of (weighted) average domestic credit to GDP rose to 38% in 2010 from 22% in 2004 (see chart 6). Although this is a significant increase for the region, financial sector intermediation is still lower than that in Asian emerging markets (with domestic credit to GDP of about 80% on average) and the advanced economies (more than 100%). Growing global demand for commodities, largely from Asia, has also supported growth in Latin
America, and in South American countries in particular. Commodities account for 60% to 90% of South Americas total exports, in contrast with Mexico where manufactured goods represent 80% of total exports. South America has established trade links with fast growing Asian countries, in particular China (see chart 7). As a result, commodities or raw materials as a share of total exports rose 10 percentage points over the past 10 years, according to data from the Economic Commission for Latin America and the Caribbean (CEPAL). China is now the single-largest export market for Brazil (15.2% of total exports in 2010) and Chile (23.8%), and the second largest for Peru (18.3%). The growth trajectory and demographics in emerging Asia should continue to generate strong medium-term demand and prices for commodities, in our opinion, including food, metals, and oil, all of which South America produces on a globally competitive basis. Favorable terms of trade for commodity exporters implies that a given basket of exports buys more imports, in turn strengthening local purchasing power and domestic demand (see chart 8).
Chart 7
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October 2011
Chart 8
Chart 9
Another external factor supporting domestic demand is the robust recovery in foreign capital inflows after a retrenchment in 2008-2009. Non-residents have increased their investments in local capital markets, and Latin America issuance in foreign markets has also risen. For example, in 2010, foreign direct investment (FDI) and portfolio inflows totaled US$230 billion for Argentina, Brazil, Colombia, Chile, Mexico, and Peru, up from US$136 billion in 2009 and US$111 million in 2008 (see chart 9). The rise in portfolio inflows alone to this group of Latin American countries is even more impressive. It almost doubled to an estimated US$128.1 billion in 2010 from US$66.1 billion in 2009. Portfolio inflows began to recover in the second half of 2009, after outflows of US$2.4 billion in 2008. The three-largest recipients were Brazil, Mexico, and Chile. Brazil received US$67.8 billion, split almost evenly between debt and equity. Mexico received US$37.1 billion, consisting mostly of purchases of government securities. Chile received US$9.3 billion of portfolio inflows, with more than 50% going to the nonbank private sector. Peru and Colombia received much smaller amounts, about US$3.3 billion each in 2010. And Argentina received US$7.4 billion, after several years of outflows. Since 2009, net portfolio inflows have represented a larger share of total net foreign investment (48%) in Latin America compared with FDI and other/bank financing than in previous cycles of strong capital inflows. During the 1990s and 2000s, the share of net portfolio flows was 30%-40%, according to the IMF. Moreover, much of the growth in portfolio flows has been in the form of debt, or fixed-income securities, rather than in equity. Increased reliance on fixed-income portfolio investment is somewhat more risky than FDI, with a greater potential to reverse, for example, when returns in advanced economies become more favorable as monetary conditions return to normal.
Credit And More Credit Buoyant capital flows and high rates of growth in domestic credit have contributed to worries that a credit bubble could be emerging in Latin America. Despite a general slowdown in credit growth by the end of 2008 and in 2009, annual credit growth still averaged about 20% in the region during 20042010. Much of this reflects a healthy, deepening of credit markets: growth from a small base in the ratio of domestic credit to GDP amid low inflation and prospering economies. It also reflects better access to collateral thanks to revised legislation and bankruptcy codes since 2000 in a number of countries. The growth in mortgage lending, in Brazil for example, reflects this combination of macroeconomic and microeconomic factors that facilitated increased lending after 2003. Although mortgage lending accounts for less than 4% of GDP, growth rates of 40% to 50% during the past several years have fueled discussion of a possible credit and real estate bubble. In our view, the growth in consumer credit, albeit much of it with better access to collateral, warrants scrutiny more so than the housing market. In Brazil, for example, a large portion of financing is in the form of cash, and there are limits on the size of mortgages that banks will finance via directed lending (which comprises the market). A rapid growth in consumer credit has occurred not just in Brazil, but elsewhere, including Colombia and Peru. Much of the increased lending is to new borrowers who dont have any established credit track record, which would include one of making their payments during a prolonged economic downturn. The use of positive credit bureaus such as in Mexico and Brazil (legislation pending in Congress), is important, but their credibility must be proven over time.
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When considering the possibility of a Latin America bubble in credit or capital markets, it is important to analyze the differences between the region and more advanced economies. We need to consider the real growth in mortgage credit, which has averaged some 15% during 2007-2010 for key Latin American economies, in a broader context. Total mortgage and household debt in Latin America is a fraction of that in advanced economies--as is overall credit to GDP. Mortgages account for less than 5% of GDP in Brazil, Colombia, and Peru; and about 10% of GDP in Mexico, 20% in Chile, and 25% in Panama. Total household indebtedness (consumer and mortgage) is 21% of GDP in Brazil, 13% in Mexico, and about 8% in Colombia and Peru. As a percent of household disposable income, it is 41% in Brazil and 19% in Mexico. The corresponding figures for advanced economies are 80% and above. As to the risk to the capital markets, the use of securitizations to finance the mortgage sector ranges from nonexistent (such as in Brazil) to limited (as in Mexico, where it took a hit in 2008-2009 and has not recovered). In Brazil and Panama, there are limits on the size of the mortgage that banks can finance with lower cost funding (directed credit or subsidies), and via government funded programs in Mexico. These programs are key for granting mortgages. Despite the benign comparison with other regions, growth in overall consumer lending, which has ranged from 8% to 24% in Latin America, bears monitoring. Debt service burdens have risen along with the increase in debt. In Brazil, debt service consumes 25% of household disposable income, up from 21% in mid-2006. These figures do not include rent; mortgages are only 17% of total consumer debt. The rise in the debt service burden has been at a much slower pace than the accumulation of debt because of lengthening loan maturities and lower interest rates. In Colombia, debt service is about 17% of wages, up from 12% in 2005, but still well below the 25% peak in 1995 before Colombias banking crisis. In comparison, the debt- servicing ratio for U.S. households has ranged between 15% and 17% of personal disposable income during 1995-2010. Although debt-servicing data for Mexico are unavailable, the majority would be for mortgages, which account for 70% of household debt. Credit to Mexican households increased 14% (on a nominal basis) annually from 2003-2010 with mortgages rising 12% and other credit 23%. In Mexico, the rapid expansion of credit card lending that began in 2005 and peaked in mid 2008 is an example of excesses--fast growth from a low base, lending to new (riskier) borrowers, and weak origination
practices (multiple cards to the same household). Nonperforming loans (NPLs) for consumer credit rose markedly, peaking at almost 10% in the first quarter 2009. Now theyre a little more than 4%. Consumer credit contracted (in nominal terms) from mid-2008 through the first quarter of 2010. This experience provides a warning for fast growth of credit elsewhere. The use of automatic payroll deductions (as in Brazil and Mexico) and leasing mechanisms somewhat mitigates lenders risk of access to collateral. Barring a change in the rules-ofthe-game amid a stress scenario (i.e., courts limiting bank access to collateral), the key risks stem from prolonged unemployment or high inflation that erodes real incomes and implies higher interest rates. Some of the risks inherent in the regions credit growth relate to the resurgence of capital inflows to Latin America (and emerging markets). Although the regions banking systems rely predominately on local funding, there has been a slight rise in the share of foreign funding to 10% in 2010, from 6% of bank liabilities in mid2009, according to IMF calculations. Smaller, or niche, banks in the region tend to rely more on wholesale or external funding, rendering them more vulnerable. Typically, they arent as systemically important, but small banks with signs of distress could foretell emerging weakness. Some Policy Makers Are Taking Proactive Measures A reversal of fortunes, such as a deterioration in the favorable terms of trade or a reversal of capital inflows, in our view, would likely slow domestic demand in Latin America. Indeed, when global conditions reversed most recently in 20082009, retrenchment followed. It is important, in our view, that Latin American policies are not complacent in the face of such risks. This entails timely withdrawal of the countercyclical fiscal, monetary, and credit policies that limited the depth of economic contraction and provided an important foundation for rebound in 2010. This shift to greater flexibility in setting policy during a global crisis is new to Latin policy makers; the region hadnt executed countercyclical policy ever before during a recession. Another challenge includes combating rising inflation and avoiding overheating while simultaneously managing currency appreciation and capital inflows. In effect, this implies achieving competing policy objectives. Persistent, fast credit growth in a number of countries and the possible emergence of excesses or bubbles heighten the potential for an even harder landing following an external shock.
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Policy makers in Brazil, Chile, Colombia, Mexico, and Peru are aware of the risks associated with fast-growing credit, even from a low base, and how the persistent capital inflows to Latin America may exacerbate a credit bubble. To varying degrees, they are taking steps to moderate this risk. Their actions include modest fiscal tightening, more restrictive monetary policy, and direct efforts to manage capital inflows and slow domestic credit growth. The latter are generally considered part of the so-called macro-prudential toolkit. Following the strong recovery in 2010, many governments are in the process of withdrawing countercyclical policy stimulus. As such, we expect fiscal deficits to decline again to an average of 1.9% this year, from 3.2% and 2.2% in 2009 and 2010 respectively (see chart 4). Government budget plans in Latin America generally call for slower growth in spending. Chile, for example, announced cuts this
Chart 10
year that reduce growth in spending to take pressure off domestic demand. Brazil also made spending adjustments this year. Mexicos budget trajectory already included a phasing out of policy stimulus over several years (and Mexico does not have an overheated economy). Governments have also been tightening their monetary policies since the second quarter of 2010. Initially, this was undertaken to normalize the loose monetary conditions put in place in 2008-2009 (see chart 10). Central banks also raised reserve requirements, reversing the cuts done during the crisis. During 2010, monetary policy decisions transitioned to combating rising inflation and engineering a slowdown in activity amid signs of buoyant domestic demand and closing output gaps (see table 2). The Central Bank of Chile has raised policy rates a total of 450 basis points (bps) since last year. In Brazil, the increase has been 325 bps, in Peru 300 bps, and Colombia 100 bps. The Mexican central bank is the only central bank that has not raised interest rates. This is not a surprise since the countrys estimated output gap is still negative. While we expect Mexicos inflation to slow in 2011, the central bank of Mexico is likely to act quickly should food and energy prices push up the inflation rate. In general, we expect that central banks will raise interest rates in 2011, as needed, to limit the inflation effects of food and energy price increases. While higher, inflation is still broadly consistent with inflation targets in these economies. Central banks and governments are also taking preventive macro-prudential measures, since raising interest rates to slow the economy and inflation potentially attracts further capital inflows. This is

Table 2 Monthly Inflation Year-over-year change (%) 2010 Nov. 2011 Dec. Jan.
Feb.
March
April
Inflation Target
Current Policy Rate -12 5 3.75 4.5 -4.25 --
Argentina (official) Brazil Chile Colombia Mexico Panama Peru Venezuela (Caracas)
11.0 5.6 2.5 2.6 4.3 4.3 2.2 26.9
10.9 5.9 3.0 3.2 4.4 4.9 2.1 27.4
10.6 6.0 2.7 3.4 3.8 4.8 2.2 28.9
10.0 6.0 2.7 3.2 3.6 5.0 2.2 29.8
9.7 6.3 3.4 3.2 3.0 5.5 2.7 28.7
9.7 6.5 3.2 2.8 3.4 6.3 3.3 24.0
-4.5 (+/-2) 3 (+/-1) 3 (+/-1) 3 (+/-1) -2 (+/-1) --
Sources: Central Banks of Brazil, Chile, Colombia, Mexico, and Peru, respectively, and INDEC (Argentina). Data as of June 1, 2011.
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especially true because of the low policy rates in advanced economies. To manage capital inflows and currency appreciation, central banks in Brazil, Chile, Colombia, Mexico, and Peru are accumulating international reserves. The banks methods vary from discretionary purchases in the spot and derivatives foreign exchange markets (Brazil and Peru) to more rules-based mechanisms via monthly or daily preannounced spot or options purchases (Chile, Colombia, and Mexico). In addition, in late 2010, Peru eased limits on pension funds investing abroad, while Colombia lowered the amount of foreign currency the Ministry of Finance and the state-owned oil company Ecopetrol could bring into the country. Peru and Brazil have also taken more direct and aggressive steps to discourage short-term inflows. Peru increased the reserve requirements on nonresidents deposits and holdings of central bank certificates of deposit and limited financial institutions foreign currency derivative positions. In early 2011, the Brazilian central bank limited the size of any banks short foreign exchange position that is not subject to unremunerated reserve requirements. Brazil took its most noteworthy action in October 2010, when, in the span of weeks, the government raised the financial transaction (IOF) tax on nonresidents fixed income portfolios twice to 6%. As a result, theres intermittent recurrent market concern that the government could raise the IOF tax yet again or extend it to cover nonresident equity investments. The government also applied the IOF to external debt issued for less than two years. Brazil has also been the most active in deploying macro-prudential measures aimed specifically at slowing credit growth via tighter lending standards. In December 2010, for example, the Brazilian central bank raised reserve requirements, imposed higher capital requirements on longer-term consumer and auto loans, and raised the minimum required payment on credit cards. In 2011, it increased the IOF tax on consumer credit to 3% from 1.5%. These measures have not been aimed at, and havent slowed, the pace of lending from state-owned banks, whose lending has grown at a faster rate than lending from private banks. Latin America Could Likely Withstand Another Global Crisis The economic outlook for Latin America includes both risks and opportunities. In terms of external or global risks, oil price volatility amid political instability in the Middle East risks increasing Latin Americas inflation rates and, depending on the severity of a price shock, could hurt the regions economic growth. In general, a downside scenario
for the region includes reversal of capital inflows amid higher risk aversion, with a detrimental impact on the cost and the availability of funding for the public and private sectors. In a more benign scenario, this could stem from central banks in advanced economies returning monetary policies to normal. A more severe scenario is one of sovereign fiscal distress in Europe or market concern over future U.S. fiscal policy, which could raise long-term bond yields. Growth dynamics in China also play an important role in commodity prices and exports from many countries in Latin America. The region faces downside risk from a fall in commodity prices and an economic slowdown in China. Strong global commodity demand and prices are helping to moderate deterioration in the regions current account deficits. Current account surpluses during 2003-2007 moved into deficit in 2008, owing to strong domestic demand-led growth of imports. After moderating in 2009 as GDP slowed or declined, current account deficits are widening once again, albeit modestly. We expect the average current account deficit (weighted average) to increase to 1.5% of GDP in 2011 and 2012 from 1.1% in 2010. The IMF has underscored the fact that based on 2005 terms of trade, these deficits would be much larger--possibly by four-percentage points for some countries--highlighting the risk for adjustment should commodity prices fall. Latin Americas current ability to manage these global downside risks is similar to its ability during the recent global recession, though perhaps somewhat weaker until governments fully withdraw their policy stimulus. The failure to withdraw the stimulus at a sufficiently rapid pace presents risk of overheating, resulting in even higher inflation and eventually, perhaps, a hard landing. In our view, Latin American governments should continue to monitor the evolution of their local financial markets to mitigate the possibility of asset or credit bubbles, since any persistent and fast rate of credit growth warrants caution. Kelli Bissett and Matthew Walter provided research assistance to this report.
Related Research Special Report: Latin America Capitalizes On Its
Resistance, June 13, 2011
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October 2011
How Vulnerable Are Latin American Corporates To Commodity Prices? A Sensitivity Analysis
Reginaldo Takara, Sao Paulo (55) 11 3039-9740; reginaldo_takara@standardandpoors.com
The global downturn of 2008-2009 had a significant effect in commodities markets. As demand fell, global commodity prices plummeted, suddenly and steeply. As a result, credit quality for commoditieslinked companies in Latin America also declined. Although prices have since recovered along with the global economy, these companies remain vulnerable to another steep drop. The fluctuation of commodity prices affect, to varying degrees, many Latin American companies that Standard & Poors Ratings Services rates, either because theyre large exporters of primary products or because they sell their products in domestic markets at prices pegged to international ones. We ran sensitivity tests on the operating margins and financial leverage of these companies to extrapolate how they would likely perform should commodity prices decline, all else being equal. In general, higher-rated entities are less exposed to a commodity price decline because of strong business fundamentals (in the form of cost advantages) or sound financial profiles (i.e., lower leverage and strong liquidity). Lower-rated entities, on the other hand, experience the effects of price declines more severely through both loss of operating profitability and deterioration of financial leverage. For every 10% price drop, we estimate EBITDA margins would decline, on average, about 10% to 30% relative to our 2011 base-case projections, with total debt to EBITDA ratio increasing by an average of 20% to 50%. We dont necessarily expect commodity prices to tumble in the next few years. However, we do see many possible scenarios in which this might happen, and if it does, it would weaken the credit quality of rated entities in Latin America. And given Chinas increasing relevance as a major end-market for commodity products exported from Latin America, an economic slowdown in that country could plausibly be a reason for a commodity price plunge. Commodity prices are inescapably volatile. Following the trend of the broader global economy, they climbed in 2004-2007, then flew up in 20072008 with skyrocketing demand in Asia (mainly China) before heading into free fall with the abrupt shift in expectations and the global crisis late in 2008 and early 2009 (see chart 1). Prices started recovering by mid-2009, and continued to do so through 2010, subsiding modestly in the past months.
October 2011
Although timing and amplitude may vary, major commodities have moved in tandem across the board--agricultural, metals, chemicals, crude oil, etc. (see chart 2). After the global recession-related drop in 2008-2009, some metal commodities took longer to recover, as was the case with aluminum and steel, mainly because of still-significant idle capacity.
Chart 1
Agricultural commodities such as sugar skyrocketed in 2010 because of strong demand globally; the same happened later with soybeans. Iron ore and copper ramped up in 2010, boosting producers cash flows. Although pulp prices have flattened in 2011 from their significant improvement last year, theyre still quite high and contributed to cash windfalls for companies in the sector. In contrast, global trends do not affect cement as much, particularly because overseas transportation is nonexistent (except for semi-finished clinker)-prices are more affected by regional economic trends. However, cement volumes have also been volatile because of weaker demand in some markets in North America (to which some Latin American producers have exposure). Thus, testing sensitivity to lower prices can also assess these cement producers resilience to generally less-favorable revenues. The 2008-2009 Crisis Can Provide Lessons For The Future Although Latin Americas local markets were resilient during the recent recession, commodityoriented companies in the region struggled. The 2008-2009 crisis tested these companies not only with price declines--average prices in 2009 were 30%-35% lower than the averages in 2008--but
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Chart 2
strong pre-crisis capital structures. We downgraded pulp producers Arauco and CMPC by one notch each in 2009, but the main reason was their aggressive debt-funded capacity expansion projects and mergers and acquisitions (M&A). Their profitability weakened in the period but remained high compared with global peers, and their credit profiles remained strong enough in our view to preserve their investment-grade status. Two characteristics were common among issuers whose credit weakened more steeply in 2009. The first was a bet on market growth using heavy capital expenditures, M&A, or working capital build-up financed with debt. The second was significant leverage, either with debt or derivatives. When market conditions reversed course, companies in these situations found it much more difficult to generate enough cash to service debt while facing a virtual shutdown in refinancing. Indeed, some rated entities in the region went through financial trouble as the 2008-2009 crisis unfolded, including (but not limited to) meat producer Independencia S.A. and soybean producer Imcopa Importacao, Exportacao e Industria de Oleos S.A., both of which defaulted in 2009. Similarly, Bracol Holding Ltda. (the holding company of Bertin Group, now part of JBS) also faced a strong deterioration of its credit profile while burning cash reserves very quickly. The crisis also caught poultry company Sadia S.A. (now part of BRF Brasil Foods) and pulp company Aracruz Celulose S.A. (now part of Fibria), but less so because of the cash flow deterioration than because of their bets on leveraged derivatives that triggered giant losses when the Brazilian real weakened by the end of 2008. The sudden and steep decline in prices also caused some companies to face price and cost mismatches that were difficult to handle. Chiles Empresa Nacional de Petroleo S.A. (ENAP), for instance, reported large losses (actually negative EBITDA) in 2008 because it had to refine very expensive imported crude oil and sell it at much lower prices. Although the 2008-2009 crisis did not cause many defaults in our universe of rated entities, even the companies that came through relatively unscathed might not fare so well when facing a more severe stress environment. Commodity prices recovered quickly after their trough in 2010, and they never hit record lows, even in 2009. This made it possible for companies to return to reporting strong cash flows very fast, but that might not be the case if prices tumble again in the future.
also with significant volume declines. Domestic demand did not fall as steeply as it did in other parts of the world, but a complete freeze of international credit and trade put commodity exports at a virtual standstill late in 2008 and most of 2009. With export customers in Asia or Western Europe and elsewhere unable to finance their own working capital, commodity demand and prices tumbled. Financial prudence paid off during the crisis. After a big initial hit to their operating margins, most companies survived (with some notable exceptions) because of their ability to quickly cut fixed costs, improve productivity, and aggressively adjust working capital needs. The sectors that suffered the most during the 20082009 commodity crisis, relative to EBITDA margin declines, were agricultural commodities, metals and mining (with steel suffering the most because of significant demand slowdown), and forest products companies (also because of volume declines); building materials performance was close to neutral, and chemicals and oil and gas companies actually improved. The average EBITDA margin expansion of oil companies in 2008-2009 reflected resilience for the exploration and production (E&P) business in the region and some margin expansion for Petrobras. That companys profitability is strongly influenced by its domestic fuel realization price policy, which does not correlate with volatile, shortterm oil prices. Companies that fared well during the downturn were the ones that had either secured liquidity by building cash reserves and refinancing before credit froze or expanded more cautiously. Steelmakers Usiminas, CSN, Gerdau, and CAP, for example, faced steep margin declines in 2008-2009 but managed through the downcycle because of their
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Operating Profitability And Financial Leverage Are Key Variables In Our Sensitivity Analysis Standard & Poors sensitivity analysis focused on companies operating profitability (measured by EBITDA margin) and financial leverage (measured by total debt to EBITDA). We estimated the level of commodity reliance and the percentage of costs that moves in tandem with commodity prices (for instance, feedstock and energy), based on our views of each sector and entity. We used our 2011 basecase projections for revenues, EBITDA, and total debt, as our reference to compute how much these indicators would weaken if commodity prices fell. Companies with more-rigid cost structures--high fixed costs or an inability to raise prices in response to variable-cost increases--generally take a harder hit when commodity prices decline. Companies with low operating profitability also suffer because they have limited ability to deal with unexpected events. Higher financial leverage makes the effect of profitability variability on credit quality even more severe. On the other hand, companies that trade commodities (buy and sell them with a spread, as in the case of Ceagro, or fuel distribution businesses such as Cosans, Ultrapars, and Copecs) basically pass through costs and are almost commodity-price neutral (We assume spreads compress when pricing weakens, though.) Similarly, for companies that have high variable feedstock costs (the case of BRF Brasil Foods, Camil, Braskem, and Petrotemex), we assumed some cost reduction in tandem with endproduct price declines. Operating margin is another important consideration because it defines how much room a company has to absorb the commodity price shock. Typically, capital-intensive sectors such as metals and mining, forest products, and oil and gas are the ones with stronger EBITDA margins (in excess of 35%-40%; see chart 3). The recent crisis hit companies in the metals and forest products sectors with a steep decline in margins in 2009, but they quickly recovered in 2010. Others that report a heavy component of feedstock costs and are heavily invested in working capital, such as petrochemicals and agricultural commodities, report lower profitability (EBITDA margins of 10%-15%, and sometimes less.) Agricultural commodities and forest products companies, meanwhile, have the highest leverage (total debt to EBITDA; see chart 4). The latter was strongly affected by both financing for heavy capital expenditures in 2007 and 2008 and leading pulp
producer Fibrias huge derivatives losses. Oil and gas and metals and mining companies came in at the lower end of the leverage range, reflecting generally conservative financial policies and deleveraging undertaken thanks to their cash windfalls in previous years.
Chart 3
Higher-Rated Companies Have Been More Resilient Most companies report margin deterioration in the 10%-30% range for every 10% price decline (see chart 5). Generally speaking, companies with higher ratings benefit from lower sensitivity in both their profitability and leverage due to a change in their end-product commodity prices. Despite their heavy dependence on low value-added commodities, Codelco, Vale, and Minera Escondida should be, in our opinion, among the least sensitive to price declines because of their world-class cost position and very high profitability. We also consider CSN, Grupo Mexico, and Fibria to be in this category because of their stronger cost positions
Chart 4
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and low margin volatility relative to our base-case projections. Companies whose feedstock makes up the bulk of their costs and is correlated with end-products are not that sensitive to weaker commodity prices (Camil, Copec, Braskem, and Petrotemex fall in that category), but they are affected by our assumption of lower spreads (see chart 5). Indeed, these companies typically report tight EBITDA margins, which make them vulnerable to spread revenue-cost compression (Ceagro, for example).
Chart 5
If commodity prices were to drop, we would expect the agricultural products sector to perform the weakest, followed by metals and mining and chemicals. Oil and gas and forest products are less sensitive, on average, to price changes, in our sensitivity analysis. The 2008-2009 experience shows a similar picture, with forest products struggling more because of volume effects in 2009 (see chart 7). During the crisis, the performance of the oil and gas industry was distorted by Petrobras EBITDA margin improvement due to its local fuel realization price policies, which is barely correlated with short-term oil prices.
Chart 7
As can be expected, the percent weakening of the leverage ratio is more severe in the lower rating categories, if we exclude Usiminas as an investmentgrade outlier. That company stands out because it wasnt able to recover as quickly as did other steelmakers, who streamlined their operations in response to the 2008-2009 crisis. Most companies leverage weakens by 20% to 50% for every 10% price decline in commodity prices (see chart 6). The larger dispersion among the speculative-grade ranks may stem from the myriad other factors that affect such companies, such as concentration, size, low market share, externalities and diseconomies of scale and scope, and sovereign risks.
Chart 6
The differences between our sensitivity analysis and actual 2008-2009 results are greater when considering the percent change in total debt to EBITDA. Thats because our test only takes into account additional debt emerging from EBITDA loss while each companys capital strategy affected its historical leverage. For example, many investmentgrade companies in cash-rich sectors, such as Vale, Petrobras, Copec, Arauco, and CMPC, increased their debt (worsening their debt ratio) even during the 2008-2009 crisis to fund increasing capital expenditures in capacity expansion or acquisitions. On the other hand, most companies in the B rating category actually reduced their debt position and improved their debt leverage ratios during the 20082009 credit crunch--Marfrig was an exception with its many acquisitions in the period. The increase in leverage in the 2008-2009 period, in the case of agricultural commodity companies, came from both additional debt to finance acquisitions and capital expenditures (such as in the case of JBS and Marfrig, two of the largest companies analyzed), as well as from weakening cash flows. The improvement in the leverage ratio for building material companies in 2008-2009 come from deleveraging initiatives

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by virtually most companies in the sector, especially Votorantim and Cimento Tupi.
Chart 8
for companies whose cost structures are primarily in local currency, such as mining and forest products companies (and steelmakers, to a lesser extent, depending on the level of integration with feedstock). On the other hand, currency effects are less relevant for companies that sell a lot in the domestic market (in these cases, a depreciation of the currency is also typically associated with a slowdown of the domestic demand) or in cases where the difference between feedstock cost and endproduct prices (for instance, petrochemical spreads) tightens as a result of weaker domestic demand. Many of these factors played a role in causing the distinction between our sensitivity analysis and actual results. Several companies in the B rating category, for instance, performed better because they were efficient in dealing with the weak operating environment, while others benefited from the local market. On the other hand, some companies in higher rating categories took severe hits both in prices and volumes. Between 2008 and 2009, some lower-rated entities improved leverage ratios. However, the fact that investment-grade companies significantly increased their total debt to EBITDA ratios during 2008-2009 did not necessarily leave them with worse credit metrics than those lower-rated entities that improved that ratio because they started from stronger levels. Investment-grade companies faced relatively modest credit deterioration, with one-notch downgrades or negative outlook revisions. Ratings on companies with more aggressive financial profiles performed rather differently, sometimes with multiple-notch downgrades, and some entities defaulted on their debt. Again, conservative financial policies helped.
Chart 9
Many Other Factors Influence Actual Results Our sensitivity analysis does not take into account all the factors that can affect the performance of Latin American corporate issuers during a period of commodity price declines. First, as mentioned above, companies in Latin America rapidly adapted to the new, weaker operating environment in 2008-2009 by adjusting for the new volume-price level. This allowed them to resume better operating margins and profitability, which further improved once demand recovered. Although some companies may not have much left to cut, this ability could help companies again in the future. We also used a simplistic and generic estimate of commodity dependence and cost flexibility in our sensitivity analysis, which ignores the specificities of each entity. (However, we do fully factor these specificities into our individual rating analyses.) Many companies in the region are able to sustain prices for some time after a price drop in international markets because of their domestic market power or because their products are somewhat differentiated. Although working capital needs can become a significant burden soon after a price decline, companies may also reduce them gradually when volumes and feedstock costs are declining, which could produce some cash inflows that would help them withstand the slowdown. Finally, commodity prices (quoted in U.S. dollars) historically have shown a strong negative correlation with foreign exchange rates in the region, such that a wide fluctuation of commodity prices has typically been offset by an opposite move in the exchange rate. This helps preserve cash flows when denominated in local currencies, a benefit
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This is indeed our most relevant conclusion: Because price declines hurt operating profitability for all entities (at about 10% to 30% for every 10% price decline, though at the lower end of this range in the case of higher-rated entities), a strong financial profile will make the difference for credit quality if commodity markets suddenly weaken. The 20082009 global slowdown gives us a glimpse of what could happen again with Latin American companies in these sectors, because the price and volume change then was abrupt and intense. However, prices recovered just as quickly in the second half of 2009 for most sectors. Therefore, the effects of a potential commodity price drop may be much harsher if the trough were to last longer.
Chart 10
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Issuer Ratings
Latin American Commodities Companies
Company name Corporacion Nacional del Cobre de Chile Vale S.A. Compania de Petroleos de Chile COPEC S.A. Empresas CMPC S.A. Minera Escondida Ltda. Votorantim Participacoes S.A. Celulosa Arauco y Constitucion, S.A. (ARAUCO) Sociedad Quimica y Minera de Chile, S.A. Petroleos Mexicanos (PEMEX) Companhia Siderurgica Nacional (CSN) Braskem S.A. Ultrapar Participacoes S.A. Petroleo Brasileiro S.A. - Petrobras CAP S.A. Grupo Mexico, S.A.B. de C.V. Industrias Peoles, S. A. B. de C. V. Ecopetrol S.A. Usinas Siderurgicas de Minas Gerais S.A. (Usiminas) Gerdau S.A. BRF Brasil Foods S.A. Klabin S.A. Suzano Papel e Celulose S.A. Fibria Celulose S.A. JBS S.A. Cosan S.A. Industria e Comercio Grupo Petrotemex S.A. de C.V. Alto Parana S.A. Camil Alimentos S.A. Magnesita Refratarios S.A. Petrobras Argentina S.A. Marfrig Alimentos S.A. Loma Negra C.I.A.S.A. Cimento Tupi S.A. Virgolino de Oliveira S.A. - Acucar e Alcool Minerva S.A. Ceagro Agricola Grupo Fertinal, S.A. de C.V. Cemex S.A.B. de C.V. Siderurgica del Turbio S.A. Sector Metals Metals Oil Forest Metals Building Forest Chemicals Oil Metals Chemicals Chemicals Oil Metals Metals Metals Oil Metals Metals Agro Forest Forest Forest Agro Agro Chemicals Forest Agro Metals Oil Agro Building Building Agro Agro Agro Chemicals Building Metals Country Chile Brazil Chile Chile Chile Brazil Chile Chile Mexico Brazil Brazil Brazil Brazil Chile Mexico Mexico Colombia Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Mexico Argentina Brazil Brazil Argentina Brazil Argentina Brazil Brazil Brazil Brazil Mexico Mexico Venezuela Foreign currency rating A BBB+ BBB+ BBB+ BBB+ BBB BBB BBB BBB BBBBBBBBBBBBBBBBBBBBB BBBBBBBBBBB+ BB+ BB+ BB BB BB BB BBBBBBBBB+ B+ B B B B B+ B B Outlook/CreditWatch Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Positive Stable Positive Stable Stable Negative Negative Positive Stable Stable Positive Positive Stable CreditWatch Neg Stable Stable Positive Stable Stable Stable Stable Stable Positive Stable Stable CreditWatch Neg CreditWatch Neg
Related Criteria And Research Special Report: Latin America Capitalizes On Its Resistance, June 13, 2011 The Potential Risk Of Chinas Large And Growing Presence In Commodities Markets, June 1, 2011 Latin America Is Enjoying A Strong Economic Recovery, But Inflation Is Rising, March 2, 2011
Assumptions: Revised Oil and Natural Gas Price Assumption For 2011, 2012, and 2013, Feb. 25, 2011 Standard & Poors Raises Its Aluminum And Copper Price Assumptions For 2011-2013 And Those For Gold For 2012-2014, Leaving Other Metal Price Assumptions Unchanged, Jan. 17, 2011
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Latin America Is Seeing A Rise In Privately Financed Infrastructure Projects

Pablo Lutereau, Buenos Aires (54) 11-4891-2125; pablo_lutereau@standardandpoors.com
In the past several months, government agencies in Latin America have announced intentions to have private investors build or finance more than $170 billion in new infrastructure projects in the region over the next the next few years. (The total varies significantly, depending on the source.) The agencies have earmarked about one-half of that money for transportation and logistics (including ports, airports, roads, and mass transportation), while one-third will go toward the oil and gas sector. Out of the $170 billion, Brazil accounts for the lions share--$130 billion or so, but according to other sources, this figure could easily double, especially when considering some expected projects from Petrobras, the big Brazilian oil company. Other countries that are actively promoting private infrastructure investment are Peru (mainly through its public agency, Proinversion), Chile, and Colombia, which together may account for between 10% and 15% of the total. Many years of steady growth in Latin America, plus its prospects for a sound economic future, have actually created potential bottlenecks in infrastructure: insufficient port handling capacity to deal with higher trade volumes; overcrowded highways, which must be expanded to accommodate increasing traffic volumes and make transportation of certain goods more efficient; inadequate mass transportation systems, which must be built out to improve the quality of life in the cities and reduce travel time between cities. These issues must be resolved to help spur continued growth. So, in theory, at least, the new infrastructure projects will provide attractive opportunities for investors who believe that the regions capital markets are coming of age. Thus, this new round of spending could augur a broader trend in the region in which private parties take on more of the governments traditional role in building infrastructure. Overview Infrastructure spending in Latin America could exceed $170 billion over the next few years. Although the need for large infrastructure financing is increasing, governments ability to finance those projects is weakening because of budgetary demands. This new round of financing is likely to come mostly from the private sector rather than from governments.
Until now, financing by private parties has been cyclical and relatively limited in Latin America. In the past, different countries at different times were able to attract sponsors and investors to develop projects. That was the case in Argentina, Chile, and Mexico in the 1990s, thanks to market-friendly regulatory frameworks and investors perception that those conditions would persist. But regulatory frameworks and macroeconomic conditions in Latin America (except Chile) proved to be volatile and couldnt sustain the appropriate environment for long-term private financing, so the region failed to attract the continuous flow of foreign and domestic private financing needed for large public projects. Things could be changing, however, in part because the size and number of infrastructure projects may reassure investors who might otherwise worry that the new round of private financing could be short-lived. While theres no doubt that some of the proposed projects wont get built, we believe private investors will find many opportunities. Furthermore, we expect that a significantly larger share than in the past will be domestic and regional investors (through pension funds and insurance companies) that traditionally have tended to put their money in banks or in sovereign debt. If this occurs, it would be more evidence that the regions capital markets are continuing to develop. Sound Economic Prospects Should Fuel Investment Latin American economies have been solidly growing for the past decade. In 2010, despite poor economic conditions in Europe and the U.S., the regions real GDP grew 6.5%, whereas from 2002 until 2010, it averaged 3.7% annually. In our view, economic prospects for the region remain sound. We expect GDP to grow 4.6% this year and 4.2% in 2012, and we believe that significant improvements in infrastructure will be a key to sustaining that growth in coming years. The transportation sector (all aspects) and oil and gas are the most ripe for such investments. However, despite the current prosperity in the region overall, prospects for new projects may vary by country, depending on their legal, political, and institutional environments. All of three of these factors are cornerstones for the effective and predictable regulations that are central to attracting sponsors and investors, which in turn will help lower the cost of financing.
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Investors Are Drawn To A Strong Business Framework The cost of financing infrastructure projects in Latin America has historically been higher than in other regions because the risks involved were partly project-specific--e.g., lack of cars for a new toll road, or lower-than-projected traffic for a modernized airport. They were also country-specific, such as currency mismatches between a projects revenues and cost of capital, or the inability to enforce investors property rights. In addition, the track record of private-party investing in infrastructure was unclear. For instance, in Argentina, most utilities have been waiting since the 2001-2002 economic crisis for a full renegotiation of their concession contracts. Investors, both sponsors and creditors, want to see a profitable opportunity, a clear business framework, and financing alternatives (among other things) before they commit capital to infrastructure projects. Also critical is the expected performance of all the players when the economy is not doing well, which will affect whether a project can raise its revenues over time--for instance, by charging higher tolls on road projects. These issues are relevant not only to the equity providers (the sponsors) but also to creditors, because in the end, infrastructure projects rely on rates and tariffs to repay investors. The interrelation of all parties concerned in Latin American infrastructure projects has not been uniform in this regard--and the track record is short for many countries, such as Peru and Colombia. Chile is a positive example, given that economic conditions there for infrastructure projects are fairly predictable; changes to those conditions require agreement with private parties under the terms defined in the concession the government grants, and the government tends to create true partnership structures with the private sector. This is a contrast to the situation in other countries, such as Argentina, where the utilities concession contracts-which regulate and define all future expectations and the companys ability to adapt to changing macroeconomic conditions--have been pending renegotiation for a decade. In evaluating a countrys business framework, we consider, in addition to the institutional, legal, and political environment, the regulatory framework, the sustainability of the local or national economy, and the sophistication and strength of domestic capital markets. There is no easy way to get a clear picture of all this for infrastructure projects. It is clear, however, that many of these factors are usually
beyond the governments direct control. Some investors tend to view the sovereigns credit rating or credit quality as a proxy for the business framework. However, a strong business environment usually involves other factors, including a strong set of written laws, institutions to enforce those laws, and a track record of sustaining such institutions and laws. By these measures, Latin America has significantly improved in recent years, particularly because many countries in the region (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay, among others) have shown stability despite changes in political administrations. In many Latin American countries, such as Peru and Chile, the regulatory environment is designed in a way that does not constrain credit quality. However, such regulatory structures may be relatively untested in a sovereign stress situation--or perhaps the legal and regulatory framework isnt robust enough to guarantee the rights of private parties under government concession contracts or financing documents. In the past 30 years, Latin American countries have developed their infrastructure using a wide range of legal structures. Argentina, Chile, and Peru experimented with privately financed energy projects, and Argentina, Brazil, Chile, Mexico, and Peru tried to build or upgrade toll roads with private funds. Chile used public/private partnerships (PPP) for jails, while Argentina used a licensing mechanism for telecommunications projects. We dont expect to see new private financing in the form of privatizations (i.e., the transfer of assets from the public sector to the private sector). Furthermore, we think that political trends in the region are such that PPP-like mechanisms are more likely, with more intervention by the public sector than in the past. We think the degree of government involvement or intervention will vary from country to country and from sector to sector. Legally, corporations have developed most privately financed infrastructure in Latin America so far, and to a much lesser extent have used project finance techniques. Yet in the past few years, we have seen more use of project finance--e.g., in the energy sector in Chile, for water projects in Peru, and for toll roads in Panama and Brazil. As domestic capital markets evolve, we expect to see more asset-based financing. We think this is particularly likely because asset financing related to infrastructure projects tends to be long-term financing that fits well with the investment strategies of pension funds and insurance companies.
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Global Capital Markets Remain Key To Financing Compared with corporate financing, infrastructure project financing requires long tenors, because they are capital intensive and the debt takes longer to repay. For investors in Latin America, this could mean more exposure to changing environments, so the institutional environment and the legal framework become extremely relevant. The tenor of financing often is shorter in Latin America than in Europe, the U.S., Canada, or Australia; a shorter tenor sometimes means a lot of the debt amortizes in the last years of the financing, and in the case of government concessions or PPPs, this creates credit uncertainty. In addition, although Latin American capital markets have been maturing, the need for infrastructure financing is so significant that domestic financing is still insufficient in most markets (except in Chile and Brazil). This means that Latin America still needs the global capital markets, where financing is likely to create a currency mismatch between revenues and debt, with borrowing in hard currency (most likely, U.S. dollars) and revenues in domestic currency. Even so, the alternatives for financing have improved significantly in recent years. Not only is there plenty of liquidity in the global markets,
but most Latin American countries, such as Brazil, Colombia, Mexico, and Peru, have been growing and expanding their domestic capital markets. The ability to finance in local currency provides a significant strength for infrastructure projects that serve domestic markets. By contrast, projects tend to finance oil, gas, and export-oriented projects in U.S. dollars. As a sign of their increasing sophistication, Latin American capital markets can now provide financing to projects with longer tenors. In the regions most advanced capital markets, 10-year bonds in local currency are increasingly common, and in some markets, such as Chile and Mexico, it is possible to issue bonds in domestic currency of 20 years or longer for infrastructure financing. Private Investment Will Likely Increase In the past, Latin America has experimented with funding infrastructure projects through private financing. Now we believe the time has arrived when investors feel more confident about putting their money into such ventures. This is true even--and maybe especially--for investors in the region whove typically laid their bets elsewhere. Related Research Special Report: Latin America Capitalizes On Its Resistance, June 13, 2011
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South American Banks Resilience Should Support Rapid Credit Growth

Sergio Garibian, Buenos Aires (54) 11-4891-2119, sergio_garibian@standardandpoors.com; Milena Zaniboni, Sao Paulo (55) 11 3039-9739, milena_zaniboni@standardandpoors.com; Sergio Fuentes, Buenos Aires (54) 11-4891-2131, sergio_fuentes@standardandpoors.com; Sebastian Liutvinas, Buenos Aires (54) 11-4891-2109, sebastian_liutvinas@standardandpoors.com; Delfina Cavanagh, Buenos Aires (54) 11-4891-2153, delfina_cavanagh@standardandpoors.com
A favorable economy and solid metrics for the local financial systems have spurred growth in the southernmost Latin American countries since 2009. After a short-lived reduction in credit expansion as banks were trying to assess the impact of the global credit crisis, banks in Argentina, Brazil, Chile, and Peru have credit portfolios that continued to grow at a rapid pace. Recent expansion has led to more banking activities than before the global financial crisis, and we expect continued growth even in Brazil, where the central bank created regulations aimed to contain credit growth and inflation. (Listen to the related podcast titled, Why South American Banks Are Well-Prepared For Credit Growth, dated June 15, 2011.) Overview Banks in Argentina, Brazil, Chile, and Peru have credit portfolios that grew quickly. Consumer lending and corporate sector financing helped increase private sector loans. We believe the South American banks are wellprepared to handle strong credit growth.
Chart 1
inclusion has pushed consumer lending, overall credit penetration in the region is still low, and, except for Chile, mortgage lending is just beginning to grow. Although rapid credit expansion can lead to higher problem loans, the quality of banks credit portfolio improved again in 2010 and 2011 after some deterioration in 2009. We expect credit quality to remain stable at current levels for the majority of South American banking systems with some manageable deterioration in Brazil given banks provisioning and profitability. Even after years of greater volatility and credit growth, banks in the region have maintained adequate capitalization through both internal generation and increasing their capital bases.
Chart 2
We believe the South American banks are wellprepared to deal with strong credit growth and will maintain adequate risk, relatively good capitalization, and a sufficient cushion in net interest margin (NIM) despite strong competition in their markets.

Consumer lending and corporate sector financing have driven an increase in private sector loans in the past year. However, the credit-to-GDP ratio is still low compared with the financial systems of most developed economies. Although social
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Key Indicators In 2010 (%) Argentina Gross NPAs/customer loans Loan loss reserves/NPAs Capital ratio Customer loans/Total assets Liquid assets/Total assets Total customer loans growth (2010 vs. 2009) ROA ROE Noninterest expense/revenues 2.1 165.8 17.7 39.0 33.3 37.2 2.8 24.4 55.1 Brazil 3.2 152.6 13.6 41.4 43.7 25.6 1.6 16.8 62.9 Chile 2.7 93.7 13.1 69.3 N/A 8.7 1.5 18.6 45.9 Peru 1.5 245.6 13.7 61.1 20.3 18.7 2.4 24.2 41.4
N/A--Not applicable. Capital Tier 1 level as defined by each countrys regulator.
Argentine Banks Should Stay Stable Despite Risks And Inflation After recovering from the financial crisis of 2002, Argentine banks maintained steep growth in loans to the private sector (of more than 20%) during the past seven years -- except in 2009 (9.3%) because of international turmoil. We expect banks to continue to show enough flexibility and stability to keep delivering high growth, adequate asset quality, and adequate profitability for the next two years. However, the Argentine financial system still suffers from weaknesses such as the lack of development lending, the prevalence of short-term funding, and the risks inherent to the Argentine economy, in which high inflation has made it difficult to plan beyond the short term. Lending to the private sector increased 22.3% on average for the past three years, raising its share of total assets to 39% in December 2010 (13% of the loans-to-GDP ratio). Although consumer and commercial loans increased at almost the same rate as the system, at 30.9% and 25.7%, respectively, for the same period, mortgages grew at a slower rate of 17.2%. As of December 2010, commercial loans represented the largest portion of loans to the private sector at 52%, and consumer loans were 37%. Mortgage loans represented only 11% in 2010, down from 13.7% in 2007. The low longterm funding, high property values compared with salaries, and the absence of individuals who met the banks requirements for loans continue to represent major challenges for mortgage lending. Although the local banking system has grown in the past few years, consistent growth in the private sector and extending credit terms represent the main difficulties for the next three years. Private sector growth is especially important because of the low
13% credit-GDP ratio compared with other Latin American countries and a 24% precrisis level. We also believe that sound economic policies and a predictable legal and regulatory framework remain key factors for the development of the Argentine banking system. The Argentine financial system continues to enjoy a low nonperforming loans (NPLs) ratio of 2.1% and an adequate loan loss reserves ratio of 165.8% as of Dec. 31, 2010. The system continued exhibiting good profitability ratios, recording a 2.8% return on assets (ROA) in 2010 that compares well with an average ROA of 2.2% in the past three years. Capitalization has also remained adequate and stood at 17.7% in 2010, according to local regulator methodology. Although the system has a shortterm funding base, we consider it to have adequate liquidity because of its relatively high liquid assets. Cash, money market instruments, and liquid market securities represented 33.2% of total assets and 45.2% of total deposits as of December 2010. We expect the Argentine banking system to continue growing more than 30% in nominal terms in 2011, enjoying good profitability with ROA at about 2.5%, and posting adequate capitalization. We also believe asset quality will remain stable in the next year, with NPLs at less than 2.5%. Conservative Supervision And Banks Adequate Financial Profiles Should Mitigate Risks In Brazil Macroeconomic stability in Brazil has added nearly 30 million people to the middle class and given them new access to banking services and consumer credit. The volume of credit to both individuals and corporations in Brazil has grown steadily and
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quickly since 2007, reaching 46.6% of GDP in April 2011 from a low 27% just 10 years ago. Although credit to GDP is still low compared with developed economies, we are monitoring the quality of loans closely because, in our view, any fast expansion in credit brings substantial risk to banks portfolios. We believe that banks have maintained adequate origination standards. However, the payment behavior of this class of first-time borrowers hasnt been tested in a down cycle - simply because the country has not faced one recently - and remains our key concern for the Brazilian banking system. Although the NPL-to-total loans ratio has been falling since September 2009, reaching a low of 4.7% for nonearmarked loans (as opposed to directed lending to agribusiness, housing, and BNDES) and 3.3% for total system loans, recent central bank data indicate some increase in early delinquency (NPLs between 15 and 90 days), which could be signs of a worsening loan portfolio. Still, we believe that Brazilian banks are well-prepared to face a potential deterioration in credit quality. However, we dont expect a significant increase in NPLs in the Brazilian banking system. Families leverage -- the ratio of debt to disposable income -- is fairly high, even when compared with developed economies, at approximately 25%. In addition to a relatively high debt burden, we expect families budgets to be tighter given higher inflation and cost of credit, and the shortening of average loan tenor as a consequence of recent policies that the Brazilian central bank implemented, which are intended to contain credit growth and limit risks. However, assets or salaries (auto loans and payroll deductible loans, respectively) secure the types of consumer lending that have grown the most in recent years, mitigating credit risk. These asset classes corresponded to 76% of nonearmarked credit as of April 2011. We believe that Brazilian banks can absorb higher NPLs because: The system is well-provisioned for the aggregate of the system (168% of NPLs as of April 2011) and reported about R$10 billion in excess of the minimum that the Central Bank requires, which provides adequate cushion to face higher delinquencies. Banks can adjust their lending strategy, and therefore their loan portfolios, quickly because average loan tenor is still short (27 months for loans to individuals and 22 months for corporate loans). In the global credit crisis of 2008 and 2009, private
Brazilian banks quickly stopped lending or tightened standards to try to reduce problems. Banks have maintained high risk spreads (27.7% as of April 2011) throughout economic cycles. With NIM of about 6%, the Brazilian financial system can absorb higher losses. Banks are adequately capitalized, and we view the quality of capital as good. Regulatory capital for the consolidated system stayed at 17.1% in 2010 with Tier I at 14% in 2010 (which compares with a minimum Tier I by Basel of 4%). The minimum capital ratio in Brazil is 11% of risk-weighted assets, though Basel would require 8%. We believe that the strength of the system relies on prudent regulation and comprehensive supervision from the Brazilian central bank. With a more consolidated framework for policy making and enforcement, we believe the central bank has the tools to monitor the system and detect early signs of problems in liquidity, capital, or credit quality, and it has the capacity to act swiftly. Measures the central bank took in December 2010 indicated that it is attentive to risks in the credit portfolio, which it demonstrated by acting to reduce the growth in consumer lending. The central bank also raised capital requirements for longer term and riskier (higher loan to value (LTV)) loans and also boosted reserve requirements. Data that the central bank released in May regarding the loan portfolio indicated that such measures have eased the pace but not curtailed credit growth. Nonearmarked credit to consumers grew just 1% in April compared with the previous month, but it is already 18.3% higher than in the same period of 2010. Corporate loans increased by 1.7% in April and 7.2% compared with April 2010. The Brazilian development bank Banco Nacional de Desenvolvimento Economico e Social (BNDES; foreign currency: BBB-/Positive/--, local currency: BBB+/Stable/--), which until 2010 had been a key proponent of countercyclical fiscal policies and credit growth, has eased the pace of disbursements significantly in 2011, and its direct and on-lending credit (loans originated by other banks but funded by BNDES) have grown only 0.3% in April and 2.5% year to date. We expect fewer loans to come from BNDES, which is also part of the governments effort to cool the credit market and ease pressure on inflation. In general, banks expect their credit portfolios to grow 15%-20% in 2011, with a strong focus on
October 2011
37
payroll deductible loans and housing and corporate lending, which tend to have lower NPLs than other consumer financing such as auto and personal loans. We expect the Brazilian banks to face some deterioration in the quality of their loan portfolio in 2011, leading to higher provisioning costs that higher interest margins after the recent monetary tightening should partly mitigate. Low Risk And A Good Economy Support Chilean Banks The Chilean financial system is solid, and we expect the growing economy and relatively low political and regulatory risk to keep it stable. Domestic credit to the private sector represented almost 85% of GDP -- the most of any country in South America -- and its growing quickly at 2x GDP growth. The rate is similar to 2010s but less than the 3.5x rate of 20042008, when the Chilean economy grew about 5% per year because of the favorable global economy. We expect GDP to grow 6%-7% and credit to grow 10%-15% in 2011. The Chilean financial system is highly concentrated with about 25 banks. The largest six in terms of loans enjoy relatively high credit quality and represent about 85% of total domestic credit. The largest player in the Chilean financial system is the Spanish-owned Banco Santander-Chile S.A. (A+/ Positive/A-1), with a 21% share in total loans. However, many local banks are among the top six, including Banco de Chile S.A. (A+/Stable/A-1), although Citibank N.A. (A+/Negative/A-1) owns 50% of the company that controls the bank; Banco de Credito e Inversiones (A-/Positive/A-2); and Corpbanca (BBB+/Positive/A-2). The only stateowned bank is Banco del Estado de Chile (A+/ Positive/A-1), with a 15% share in total loans. Banco del Estado has a large share in retail mortgages, mainly in the lower income segment. Corporate lending accounts for a large proportion of domestic credit and accounts for significantly more residential mortgages than in other South American countries -- about 25%, compared with about 11% in Argentina, less than 15% in Brazil, and 15% in Peru -- partly because of the more stable economy. Domestic credit in Chile is higher than the regional average in retail mortgages, but the system has lower NPLs, adequate provisions, and guarantees from the Chilean government.
Chart 3
To counter the global financial crisis, Chilean banks adopted a more conservative policy, which significantly decelerated credit growth. Consumer loans increased by 15% in 2007, 10% in 2008, and only 1% in 2009 before rebounding to 12% growth in 2010. In general, Chilean banks have healthy asset quality with NPLs reaching 2.7% of the systems loans as of December 2010. The banks are also highly efficient, with nonoperating expenses at 45% of operating revenues, less than the 63% of Brazils and 55% of Argentinas, and in line with 41% for Peru. The banks showed good profitability, with average ROA at about 1.5% as of December 2010, including the low profitability of Banco Estado because of higher income tax than private banks (58% versus 18%). Chilean banks also post adequate RAC at 7%-9%, partly because of strong economic growth in Chile since 2003, except in 2009. Favorable funding with a relatively large deposit base from retail and institutional investors (pension and mutual funds), which represents about 70% of total liabilities, also enhances Chilean banks credit. Deposits come from a well-developed domestic capital market that allows the banks to have access to long-term funding in local currency by placing long-term bonds in inflation-adjusted currency to finance residential mortgages and Chilean corporations with revenues in Chilean pesos. In addition, Chilean banks enjoy good access to credit in the international markets through bonds and foreign bank borrowings, which allow them to improve their corporate lending. Chilean banks also benefit from government support, such as the
38
October 2011
liquidity injection during the 2008-2009 financial crisis, which proved to be an effective way to minimize the impact. We expect the growing economy to boost Chilean banks and the availability of banking services in the country to reach an about 90% domestic credit-toGDP ratio by 2012. The banks should have healthy asset quality with NPLs at less than 3%, good profitability with return on average assets (ROAA) of 1.5%, and adequate capitalization, assuming good internal capital generation with dividend payouts of about 50%. Regulations Helped Enhance Banks In Peru The Peruvian financial system showed resilience during the 2009 global economic downturn. The banking system maintained solid indicators and began to grow again in 2010. The systems recovery has largely resulted from regulations that encouraged transparency and embraced international risk management best practices coupled with conservative underwriting, low leverage from individuals and corporations, and an improvement in the payment culture. The global downturn in 2009 ended four years (2005-2008) of high credit expansion at an annual average rate of 27%. Credit significantly decelerated to 0.6% growth in 2009 but expanded at an 18.7% rate in 2010, in line with local economic growth. The system enjoyed healthy asset quality with a low NPL ratio of 1.5% and a high loan loss reserves ratio of 245.6%, as of December 2010. Asset quality has been steadily improving for the past five years. NPLs reached 5.8% in 2003 and 2.1% in 2005, and slightly increased to 1.6% in 2009. At the same time, the banks showed good liquidity (20% of total assets as of end-December 2010), and profits are relatively high. The banking system exhibited a stable, high ROAA at an average 2.4% for the past five years. Capitalization has also remained sound and stood at 13.7% in 2010, according to Peruvian regulator methodology. Since 2006, total lending has increased at a 21% annual rate. While mortgage and commercial loans increased at a similar annual average rate of 19.6% and 20.4%, respectively, for the same period, consumer loans exhibited higher growth rates of 25.5%. Still, consumer loans represent a minor
share of total loans at 17% in 2010, increasing from 14.4% in 2005. Commercial loans represent the largest proportion, at 68.9%, of total loans in 2010. Mortgages are at only 14.1% of total loans and have remained relatively stable for the past five years. Despite improving, high dollarization -- using foreign currency instead of domestic -- of the economy and banks balance sheets still represents the financial systems main constraint. The system has been steadily declining to 52.4% dollarization in total loans as of December 2010 from 71.5% in 2005 and 77.9% in 2003. Deposits are also mostly denominated in foreign currency at 48% of total deposits in 2010, down from 66.5% in 2005. Credit expansion has been significant and faster than GDP growth, deriving in a higher credit-GDP ratio at an estimated 24.6% in 2010 from 19% in 2005. However, lending to the private sector is still low relative to GDP compared with other countries in the region. Given the favorable economy in Peru that we expect for the next two years, and if the political environment doesnt deteriorate, we expect the banking industry to continue growing at high rates, similar to 2010. And we expect the Peruvian banking system to be able to maintain its credit quality and adequate financial performance despite high growth. The Banks Are Set To Grow In Argentina, Brazil, Chile, and Peru, banks have shown rapid growth in credit portfolios, and lending has grown in each country. Expansion has led to more banking activity than before the 2009 global financial crisis. Private sector loans have increased in the past year, even though the banks have low funds for private borrowing compared with the financial systems of other regions. Credit quality has improved while the banks maintained high provisioning levels. Capitalization should also remain adequate to accommodate credit growth, and higher earnings should act as a buffer for losses. As a result of all of the improvements, we believe that these South American banking systems are ready to handle strong credit growth and should maintain adequate risk and good capitalization. Related Research Special Report: Latin America Capitalizes On Its Resistance, June 13, 2011
October 2011
39
Will Future Flow Securitizations Help Fund Perus Growing Mining Export Industry?
Eric Gretch, New York (1) 212-438-6791, eric_gretch@standardandpoors.com; Sol Ventura, Buenos Aires (54) 11-4891-2114; sol_ventura@standardandpoors.com; Juan Pablo De Mollein, New York (1) 212-438-2536, juan_demollein@standardandpoors.com.
Much of Latin America is experiencing an economic boom, thanks largely to its considerable supply of commoditieswhose prices have risen rapidly in step with demand from China. Peru has been a big beneficiary of the commodities windfall, which contributed to nearly 9% expansion in the countrys economy in 2010. In fact, Perus mining and energy sector expects $50 billion in new investments over the next decade, a sum that includes the recent $4.8 billion investment in Perus Conga mine. Officials hope the mine will produce as much as 680,000 ounces of gold and 235 million pounds of copper within five years of its opening in 2015. Such long-term investments show confidence that commodity prices will keep rising. But if Chinas economy and its demand for commodities were to cool, prices would begin to slip. Just a decade ago, for instance, a global economic slowdown caused the average prices for copper, oil, pulp, gold, and silver to drop significantly in a years time. Overview Perus growing mining export industry is poised for further expansion. The high costs of funding expansion projects, combined with Peruvian banks restrictive lending policies and the need to hedge against price fluctuations, could make future flow securitizations an attractive funding option for some producers. Previous commodity-backed export future flow transactions in Peru and other parts of Latin America have generally performed well and maintained their credit quality. Price volatility is part and parcel of the commodities markets, and to mitigate that risk, some producers in Peru and other parts of Latin America have entered into commodity-backed export future flow transactions: Securitizations that involve the future sale of their commodities. While Peru has tapped this market to fund projects in the past, it has no transactions currently outstandingand the obvious question is why these producers, whove been reaping enormous profits, would seek such alternative financing. Although Peruvian commodity companies have built up huge cash reserves, expansion projects,
such as the Conga mine, cost billions of dollars, and access to bank credit isnt easy because of Peruvian banks very restrictive lending policies. Moreover, commodity companies planning for potential price volatility may view securitization as a way to cover todays exploration costs using future production. In a country where roughly 60% of exports are minerals, and which plans to become a major regional natural gas exporter, planning and building for tomorrow will be crucial. Commodity-Backed Export Future Flow Securitizations Have Performed Well Historically Commodity-backed export future flow securitizations generally ensure the future sale of producers commodities in one of two ways. The first is to sell all or some of their commodity export receivables into an offshore trust. In such cases, the transactions are either backed by the entire operations of the company or particular mines, oil fields, or products. Alternatively, the producer could sell a set quantity of that commodityin the form of export contractswhich, at a stressed price, would be expected to generate enough cash flow to cover the transactions debt service. Under the first scenario, the investor bears both the risk of variations in export volumes and the commodity price in question. Under the second scenario, the contracts typically stipulate fixed volume levels and occasionally incorporate pricing floors. Nevertheless, the investor in these cases takes on the risk of the offtakers, although this is generally mitigated through replacement language. Overall, the producers creditworthiness is a key indicator of how well that transaction might perform. History has shown that low-cost producers with conservative financial policies have stayed profitable even during the low end of pricing cycles with these transactions. Here are some examples of transactions out of Latin America that have successfully already paid off: Yanacocha Receivables Master Trust Initial rating: BBB- Originator: Minera Yanacocha S.A. Issuance date: May 14, 1997 Country: Peru Amount: $100 million
40
October 2011
Yanacocha Receivables Master Trust was a securitization of future gold receivables (see chart 1 for the transaction structure). The interest and principal payments due to certificate holders were backed by the future sale of proven gold reserves
to third-party purchasers. When Standard & Poors Ratings Services assigned its rating to the transaction, Minera Yanacocha S.A. (Yanacocha) was the largest gold producer in Latin America and operated one of the lowest-cost mines in the
world. The rating on the transaction was higher than the foreign currency rating on Peru given the strategic nature of Yanacochas operations, the lack of refining capacity in Peru at the time, and the structural features of the transaction that discouraged government interference that could result in a loss of hard currency flows. Coverage ratios for the Yanacocha transaction remained strong throughout its life despite fluctuating gold prices, which dropped to a low of $255 per ounce in mid-1999 from a high of $334 per ounce in June 1997, when Standard & Poors first rated the transaction. Debt service coverage ratios fluctuated with the price of gold, peaking at 14.5x in March 2000, when gold prices were
approximately $288 per ounce. The coverage ratio dropped to a low of 7.91x at the end of 2001 as a result of lower gold prices (approximately $271 per ounce) and higher debt service following the issuance of additional loans with the International Finance Corp. The continued strength of the transaction and the stability of the ratings were a testament to the companys ability to efficiently and effectively operate the mine during periods of volatile price movements. Oil Purchase Co. and Oil Purchase Co. II Original ratings: both BBB Originator: Ecopetrol (a state-owned oil company) Issuance date: Oct. 28, 1997 and May 11, 1999 Country: Colombia Size: $290 million
October 2011
41
The Oil Purchase Co. (OPC) and Oil Purchase Co. II (OPC II) transactions were securitizations of future crude receivables associated with certain of Ecopetrols oil fields (see chart 2 for the transactions structure). The transactions benefited from an existing offtaker contract with Repsol S.A. to the size of 550,000 barrels of crude each month, with a floor price of $13.00 per barrel. At the time of
the transaction, Ecopetrol was the sole supplier of refined oil products, principally gasoline, in the Colombian domestic market. We rated the transaction higher than the foreign currency rating on Colombia given the importance of Ecopetrols export business, which accounted for 15% of Colombias total exports in 1996. Overall, oil
exports in 1996 accounted for 27% of the countrys exports. As a state-owned company, Ecopetrol contributed about $2 billion to the governments revenues through taxes, revenues, and dividends. In the event of a sovereign crisis that necessitated foreign exchange, the production, shipping, and sales of oil from these fields would have been a top priority for the government. The OPC and OPC II transactions performed well despite volatile oil prices. For example, oil prices dropped to around $13 per barrel in 1999 and spiked to more than $30 dollars a barrel in 2000.
The transactions withstood the drop and continued to perform given Ecopetrols ability to produce and export a sufficient amount of oil from its Cusiana and Cupiagua fields. A price hedge in the crude oil supply contracts covered price risk. The contracts on the OPC transaction, for example, obligated the buyer, Repsol, to take delivery of a specific number of barrels at a minimum price so that debt service coverage remained above 1x, even when oil prices dropped to below the $13 hedge price in 1998. Since the structure eliminated price risk, our ratings reflected Ecopetrols ability and willingness to fulfill its obligations under the contracts, even
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October 2011
while assuming greater stressed prices than it had experienced in 1998. Despite the strong performance of the transaction, we downgraded it twice from the initial BBB rating to BB+ in May 2000 as a result of a deteriorating sovereign environment, which we believed could weaken the future performance of the transaction. Despite our concerns, the transaction performed as expected and matured in 2002. Southern Peru Ltd. Original rating: BBB- Originator: Southern Peru Ltd. (subsidiary of Southern Peru Copper Corp.) Issuance date: May 30, 1997 Country: Peru Size: $150 million
The Southern Peru Ltd. secured export notes were backed by a percentage security interest in future receivables from the sale of copper to specific offtakers (see chart 3 for the transaction structure). At the time of issuance in 1997, Southern Peru Copper Corp. was the eighth-largest copper producer and one of the 10 lowest-cost producers in the world. We rated the transaction above the foreign currency rating on Peru given the importance of Southern Peru Copper Corp.s export business, which accounted for 27% of Perus copper exports and 13% of total Peruvian exports in 1996. Overall, copper exports accounted for 40% of total exports. Moreover, there was no unmet domestic demand: The country exported 94% of its copper. While the deal performed well, we downgraded it
October 2011
43
to BB- from BBB- over the course of two years because the parent companys balance sheet severely deteriorated. In fact, shortly after repayment of this deal, the parent selectively defaulted on its corporate debt. What Will Fund Perus Continued Mining Industry Boom? Perus exploration investment continues to surge. But that doesnt mean the countrys mining industry isnt without its challengesparticularly with financing future exploration and drilling. The commodities price boom wont last forever, and producers will need to find ways to hedge against future price volatility. It is always convenient and prudent for commodities producers to have different financing alternatives to face macroeconomic challenges like price volatility. Among these, future flow securitizations represent secured options for investors. These structures, given the adequate credit enhancements, allow for a transactions rating to be higher than the issuers credit rating and, thus, often achieve more competitive interest rates for funding investments and capital expenditures. In the past, producers in the country have successfully turned to commodity-backed export future flow transactions to address these issues. What remains to be seen is whether these transactions will prove to be attractive in todays market.
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October 2011
October 2011
Selected Financial Data And Credit Statistics
45
Peer Comparison Table

Company Alicorp S.A.A Compania de Minas Buenaventura S.A.A. Corporacion Lindley S.A. Edegel S.A.A. EDELNOR S.A.A. EnerSur S.A. Gloria S.A. Luz del Sur S.A.A. Minera Barrick Misquichilca S.A Minera Yanacocha S.R.L
Mill US$, Last fiscal year

Revenues EBITDA Net income from cont. oper. Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Total debt/debt plus equity (%) 1,336.2 219.9 101.1 221.3 89.4 33.0 56.3 17.2 44.8 200.3 605.1 805.4 16.5 19.6 23.5 110.4 28.1 0.9 24.9 808.5 310.5 662.9 528.2 418.2 40.8 377.3 260.3 442.0 0.0 2,607.9 2,607.9 38.4 35.4 30.7 N.M. N.M. 0.0 0.0 572.4 79.7 13.4 52.9 49.9 81.7 (31.8) (31.8) 15.1 222.7 208.7 431.5 13.9 3.6 11.5 23.8 (14.0) 2.8 51.6 412.7 209.5 86.6 180.0 147.0 19.1 127.9 51.9 29.5 444.6 856.0 1,300.6 50.8 8.6 9.4 40.5 28.8 2.1 34.2 609.7 165.9 68.2 107.3 123.2 58.5 64.7 22.2 56.5 356.8 330.6 687.4 27.2 7.3 15.1 30.1 18.1 2.2 51.9 398.9 142.1 81.1 116.1 136.7 33.7 103.1 58.9 49.6 306.2 250.9 557.1 35.6 10.9 22.3 37.9 33.7 2.2 55.0 814.6 132.2 75.6 96.4 67.4 51.9 15.5 (28.8) 28.0 144.8 440.8 585.6 16.2 14.2 18.6 66.6 10.7 1.1 24.7 613.8 182.9 104.3 128.0 127.9 43.5 84.3 5.8 4.8 219.9 409.2 629.1 29.8 12.9 22.4 58.2 38.4 1.2 35.0 1,200.0 1,004.3 621.3 677.3 569.9 48.1 521.7 519.9 63.1 320.3 2,968.2 3,288.5 83.7 309.1 31.4 211.5 162.9 0.3 9.7 1,866.8 1,113.4 591.2 703.7 623.7 246.5 377.2 377.2 880.9 189.8 2,303.4 2,493.1 59.6 120.8 37.3 370.8 198.8 0.2 7.6
Average of past three fiscal years

Revenues EBITDA Net income from cont. oper. Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Total debt/debt plus equity (%) 1,254.9 169.1 67.1 160.9 90.1 31.0 59.1 35.2 33.9 236.5 509.2 745.8 13.3 10.9 18.0 66.2 23.8 1.4 32.1 652.9 223.0 469.9 357.9 293.4 43.7 249.7 180.1 431.8 181.4 2,067.9 2,249.3 34.2 12.9 30.4 197.2 137.6 0.8 8.1 492.9 71.8 14.8 50.2 46.6 64.0 (17.4) (17.4) 11.3 167.5 176.7 344.2 14.6 3.1 15.4 30.3 (10.1) 2.3 48.5 388.4 189.2 68.4 141.1 127.9 17.4 110.4 52.9 29.4 465.8 787.6 1,253.4 48.5 6.0 8.6 29.8 23.3 2.5 37.3 541.2 147.9 58.7 95.7 99.5 62.4 37.1 (8.7) 27.6 317.2 296.6 613.8 27.4 6.8 14.6 30.2 11.4 2.1 51.7 405.8 152.3 80.2 111.8 95.0 26.3 68.7 8.4 38.5 277.5 225.3 502.8 37.5 11.9 24.2 40.3 24.7 1.8 55.2 716.6 103.8 76.8 88.8 44.1 31.5 12.6 (24.3) 22.8 151.2 380.1 531.3 14.4 9.8 20.5 59.0 7.5 1.5 28.6 550.4 161.7 89.9 113.1 113.5 46.2 67.2 1.0 5.1 217.2 358.9 576.1 29.4 12.0 20.8 51.8 30.5 1.3 37.8 1,278.4 1,046.6 635.4 707.3 707.5 25.5 682.0 681.4 40.4 279.0 2,346.9 2,625.9 81.9 172.9 40.8 253.5 244.4 0.3 10.6 1,865.7 1,105.2 589.3 788.3 782.1 168.4 613.7 340.4 590.3 272.0 1,747.1 2,019.2 59.2 94.4 44.6 289.8 225.6 0.2 13.5
46
October 2011
Company
Minsur S.A.
Petroperu S.A
Saga Falabella S.A.
Shougang Hierro Peru S.A.A.
Sociedad Minera Cerro Verde S.A.A.
Supermercados Peruanos S.A.
Telefonica Del Peru S.A.A.
Telefnica Mviles S.A.
UCP Backus y Johnston S.A.A.
Volcan Compaia Minera S.A.A.
Mill US$, Last fiscal year

Revenues EBITDA Net income from cont. oper. Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Total debt/debt plus equity (%) 1,212.6 629.6 371.8 393.7 402.9 131.8 271.1 169.6 618.5 290.3 1,810.7 2,101.1 51.9 40.1 27.0 135.6 93.4 0.5 13.8 3,555.0 182.7 106.7 146.9 (64.4) 68.1 (132.5) (132.5) 57.4 439.2 480.8 920.0 5.1 50.3 18.5 33.5 (30.2) 2.4 47.7 657.9 90.0 52.3 59.4 75.4 16.5 58.9 37.5 29.1 57.8 145.5 203.3 13.7 24.8 45.6 102.8 101.8 0.6 28.4 697.5 458.2 291.5 344.3 347.2 55.8 291.4 238.5 246.7 257.4 356.9 614.3 65.7 13,544.6 89.2 133.8 113.2 0.6 41.9 2,369.0 1,753.5 1,054.4 1,148.5 1,256.9 122.2 1,134.7 184.7 388.1 8.5 1,550.5 1,559.0 74.0 N.M. 101.3 13,553.2 13,390.3 0.0 0.5 854.1 60.8 19.0 42.5 56.3 60.2 (3.9) (3.9) 38.7 118.3 144.2 262.5 7.1 3.9 18.1 36.0 (3.3) 1.9 45.1 2,633.9 1,066.7 305.1 744.0 764.9 470.0 294.9 9.7 201.6 1,483.7 1,266.9 2,750.6 40.5 12.6 22.6 50.1 19.9 1.4 53.9 1,348.9 513.0 250.7 410.6 460.4 235.5 224.9 (22.6) 69.0 340.1 327.1 667.2 38.0 36.0 61.0 120.7 66.1 0.7 51.0 1,141.6 367.0 184.4 281.9 336.6 96.2 240.5 53.7 87.5 82.9 656.7 739.6 32.1 67.3 34.8 340.1 290.2 0.2 11.2 973.3 495.8 272.2 397.8 353.9 93.0 260.9 185.0 135.4 42.9 1,075.6 1,118.5 50.9 349.6 36.3 927.1 608.1 0.1 3.8
Average of past three fiscal years

Revenues EBITDA Net income from cont. oper. Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Total debt/debt plus equity (%) N.M. Not Meaningful 853.3 500.6 303.8 324.0 315.6 64.5 251.1 162.3 492.8 212.4 1,412.5 1,624.9 59.2 50.0 31.0 156.6 123.1 0.4 12.9 3,150.1 113.7 18.1 42.4 (12.0) 44.5 (56.5) (56.5) 46.4 393.4 361.6 755.0 3.5 18.5 6.0 9.0 (15.3) 3.6 52.5 405.3 50.3 27.6 31.8 42.2 7.0 35.2 24.7 12.8 44.3 85.0 129.4 12.4 13.8 29.9 71.2 79.1 0.9 34.4 478.4 267.8 158.5 196.8 169.1 52.7 116.4 34.5 103.7 148.3 222.5 370.7 55.8 1,492.7 76.4 135.9 79.7 0.5 39.4 1,987.5 1,379.3 827.1 909.9 853.5 115.8 737.7 17.2 357.7 11.1 1,440.3 1,451.4 69.4 1,541.1 82.3 8,176.2 6,629.2 0.0 0.8 705.4 46.5 13.0 33.7 51.4 55.9 (4.5) (4.5) 34.6 109.1 112.8 221.9 6.6 3.4 16.4 30.7 (5.0) 2.4 49.3 2,445.7 1,005.6 244.8 734.4 639.7 435.4 204.4 (19.8) 140.8 1,432.4 1,247.9 2,680.3 41.1 11.2 18.2 51.3 13.7 1.4 53.4 1,205.5 450.0 213.9 351.7 383.2 207.9 175.3 (6.6) 53.8 280.8 328.6 609.4 37.3 31.9 58.6 125.4 61.2 0.6 45.8 986.1 332.4 160.4 248.3 300.2 112.9 187.4 (16.2) 70.8 78.4 637.3 715.7 33.7 18.7 32.7 318.1 237.3 0.2 10.8 754.3 339.0 206.3 300.0 261.6 85.8 175.8 106.4 148.2 110.0 953.7 1,063.7 44.9 145.5 24.8 272.8 159.8 0.3 10.3
October 2011
47
48
October 2011
Credit Reports
October 2011
49
Alicorp S.A.A.
Diego Ocampo
Issuer Credit Rating Industry Sector Main shareholder Business Risk Profile Financial Risk Profile
Not Rated Consumers Grupo Romero (45.09%) Fair Intermediate
Main Credit Factors

Strengths: Diversified product portfolio with good competitive positions in Peru Low debt levels
(industrial flours, premixes, fat derivatives, oils, and margarine). Food categories consist mainly of pasta, cookies, sauces, ice creams, instant desserts, soy milk, edible oils, margarines, and powdered drinks. As of December 2010 the companys product portfolio was well positioned in Peruvian markets, with estimated market shares for cookies of 33%, 95% for mayonnaise, 47% for ketchup, 57% for edible oils, 55% for margarines, 62% for powder drinks, 81% for laundry soaps, 47% for detergents, 55% for shampoos, 55% for industrial flours, and 34% for premixes. Amid a currency appreciation of the Peruvian Sol of about 7% year over year, Alicorps revenues grew by approximately 11% in the past 12 months as of June 2011, measured in U.S. dollars. The currency appreciation and the high cost of critical raw materials led to a mild profitability deterioration resulting in an EBITDA generation of $206 million (14.3% of revenues) for the 12 months ended in June 2011, down from $214 million (16.9%) a year before. During the past 12 months as of June 2011 the company generated cash flow from operations (CFO) of $43 million and raised debt for $109 million, which it used to fund capital expenditures of $26 million, asset purchases of $30 million (related with some acquisitions in Argentina) and cash dividends of $53 million. Financial debt as of June 2011 amounted to $309 million, resulting in debtto-EBITDA, debt-to-capitalization, and FFO-to-debt ratios of 1.5x, 33.9%, and 34.5%, respectively. Liquidity as of June 2011 was somewhat tight, with short-term financial commitments of $189 million while cash reserves were $69 million. However, the companys ability to generate free cash flow, its flexible dividends, and its relatively good access to the domestic banking system and debt market enhanced its financial flexibility. Located in Peru, Alicorp is majority owned by Grupo Romero. In fiscal 2010, 86% of its revenues were originated in Peru, while the rest consisted mainly of exports to other Latin American countries. The company is expanding its geographic coverage through off-shore investments such as the acquisitions of two companies in Argentina (with consolidated revenues of $35 million) in June 2011 that produce pasta and juices.
Weaknesses: Lack of geographic diversification Exposure to certain commodities on its cost side adds volatility to margins
Rationale
Standard & Poors Rating Services assessment of Peru-based consumer company Alicorp S.A.A. (Alicorp) reflects its fair business-risk profile and intermediate financial-risk profile. Alicorps business-risk profile benefits from its leading position in the Peruvian consumer market. This position stems from Alicorps well-renowned brand portfolio, its long-standing presence in the market, and its nation-wide coverage distribution network. These, together with good economic conditions in Peru that increase consumer spending, and the companys effective cost structure have resulted in adequate profit margins for the past two years. Counterbalancing factors for Alicorps business-risk profile are its lack of diversification across markets and some exposure to commodity-type raw materials like soy and wheat, which adds volatility to profits of certain product lines (such as food). The companys relatively low debt, and stable operating cash generation underpin its financial-risk profile. Alicorps product portfolio mainly comprises food categories, animal nutrition, personal care, and laundry products such as laundry soaps, detergents, and fabric softeners. The company also produces and sells food products for industrial customers
50
October 2011
Alicorp S.A.A -- Financial Summary

Industry Sector: Food & Kindred Products --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 1,336.2 219.9 101.1 221.3 89.4 33.0 56.3 17.2 44.8 200.3 605.1 805.4 16.5 19.6 24.0 110.4 28.1 0.9 24.9
2009
1,270.3 182.6 75.4 171.8 174.0 29.1 144.8 112.3 39.7 206.3 503.1 709.4 14.4 10.7 20.6 83.3 70.2 1.1 29.1
2008
1,158.2 104.9 24.8 89.6 7.1 30.9 (23.9) (23.9) 17.3 303.0 419.5 722.5 9.1 6.1 11.8 29.6 (7.9) 2.9 41.9
2007
928.2 114.9 51.6 119.2 15.3 26.5 (11.1) (11.1) 9.6 206.4 432.2 638.6 12.4 55.2 14.1 57.8 (5.4) 1.8 32.3
Adjusted ratios
EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Debt/debt and equity (%)
October 2011
51
Compaa de Minas Buenaventura S.A.A.

Candela Macchi
Issuer Credit Assessment Industry Sector Main shareholder Business Risk Profile Financial Risk Profile
Not Rated Metals & Mining Benavides Family (27%) Fair Intermediate
respectively). This scenario, coupled with relatively stable operating costs, resulted in an improvement of EBITDA generation that reached $436 million from $190 million reported a year earlier. As of June 2011, the company did not have longterm financial debt, as it cancelled a syndicated loan of $205 million and bank loans of about $10 million, during 2010. The strong cash-flow generation allowed Minera Buenaventura to pay down all of its existing debt, to prefund its capital expenditure plan (of about $60 million annually), and to make dividend distributions of about $76 million. We believe Minera Buenaventura enjoys a strong liquidity position to meet its financial needs during the next 2 to 3 years. As of June 2011, the company had a relatively high cash position of about $461 million and zero debt maturities. In addition, the companys dividend policy has remained relatively flexible, which gives additional room to maneuver under a stress scenario. Minera Buenaventura is mainly engaged in the exploration, mining, and processing of gold, silver, and other metals (mainly lead and zinc) in Per. It operates several mines including Orcopampa, Poracota, Julcani, Recuperada, Uchucchacua, Antapite, and Ishihuinca, all located in Peru. In addition, Minera Buenaventura through a 43.48% equity stake, controls Sociedad Minera El Brocal S.A.A., a Peruvian mine engaged in the production of silver, lead, and zinc. Also, the company owns a 43.65% equity stake of Peru-based Yanacocha, a relatively large global gold producer, and a 19.3% stake in Peru-based Cerro Verde S.A., a relatively small but competitive global copper producer, controlled by Freeport-McMoRan Copper & Gold Inc. (BBB/Stable/--). The companys majority shareholder is the Benavidez Family, with a stake of 27%, while the remaining 73% is held by Institutional Investors and Peruvian Pension Funds.
Main Credit Factors

Strengths: Conservative debt levels Equity investments in Peruvian large gold producer Yanacocha and Peruvian large copper producer Cerro Verde Favorable industry conditions Weaknesses: Highly volatile cash flow Relatively low scale of operations globally Low diversification of production
Rationale
Standard & Poors Ratings Services assessment of Peruvian-based precious metals producer Compaa de Minas Buenaventura S.A.A. (Minera Buenaventura) mainly reflects the companys good replacement ratio of its reserves (close to 1x in the past 30 years), and its strong and strategic non controlling equity investments in Peruvian Minera Yanacocha S.R.L. (Yanacocha) and Cerro Verde S.A. (Cerro Verde) which have provided with a meaningful stream of dividends in the past. The companys relatively low scale, the highly cyclical nature of the precious-metals sector, its relatively short proven reserves life, and the geographical concentration of its production in Peru partly offset the strengths. During the 12 months ended in June 2011, Buenaventuras consolidated revenues increased about 60% compared with the same period a year before, mainly fueled by higher prices and increases in gold and copper sales (of about 8% and 7%
52
October 2011
Compaa de Minas Buenaventura S.A.A. -- Financial Summary

Industry Sector: Metals & Mining --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 808.5 310.5 662.9 528.2 418.2 40.8 377.3 260.3 442.0 0.0 2,607.9 2,607.9 38.4 35.4 30.7 N.M N.M 0.0 N.M
2009
599.0 180.4 593.6 443.2 402.5 44.9 357.6 316.9 511.6 224.1 2,064.3 2,288.4 30.1 15.4 31.0 197.8 159.6 1.2 9.8
2008
551.1 178.2 153.3 102.3 59.6 45.5 14.1 (36.8) 341.9 320.3 1,531.6 1,851.9 32.3 5.7 29.2 31.9 4.4 1.8 17.3
2007
786.4 403.0 460.7 333.5 261.8 64.7 197.0 127.1 384.5 84.1 1,580.2 1,664.3 51.2 46.8 40.9 396.4 234.3 0.2 5.1
Adjusted ratios
EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Debt/debt and equity (%) N.M. - Not Meaningful.
October 2011
53
Corporacin Lindley S.A.

Luciano Gremone
Not Rated Consumer Products Beverage Industry Lindley Family (59.1%) Satisfactory Significant
Main Credit Factors

Strengths: Exclusive Coca-Cola bottler in the Republic of Peru Strong and diversified product portfolio Stable cash-flow generation Adequate liquidity Strong operational support from The Coca Cola Co. Weaknesses: Exposure to commodity prices Lack of geographic diversification Sensitive and fragmented demand Rationale Standard & Poors Ratings Services assessment of Corporacion Lindley S.A., the Peruvian exclusive Coca-Cola bottler, reflects the companys satisfactory business-risk profile and its significant financial-risk profile. Lindleys satisfactory business-risk profile is supported by strong brand recognition in the Peruvian carbonated soft-drink (CSD) market, a large and diversified product portfolio, a strong and exclusive distribution network, and high market penetration reaching more than 240,000 points of sale throughout the country. Since The Coca Cola Co.s (TCCC) acquisition of a 38.5% equity share of Lindley in 1999 and the acquisition of Embotelladora Latinoamericana S.A. (ELSA) in 2004, Lindley became the exclusive Coca-Cola bottler in the Republic of Peru (BBB-/ Positive/A-3) with more than 65% of the CSD market share and the exclusive rights to produce, bottle, and distribute all TCCCs products throughout the country.
In 2010, the company produced and distributed 236 million unit cases (UC)--85 million UCs to Inca Kola and 65 million UCs to Coca Cola--representing a 7.4% compounded annual growth rate from 20052010, the largest in the region. Between Coca-Cola and Inca Kola, Lindley holds more than 50% of the total CSD market or 5x its closest competitor. This allowed the company to introduce and cross-sell other TCCC products and brands such as isotonic beverages, drinking waters, fruits, nectars, and energy drinks. Manageable debt amortization, adequate liquidity, considerable capital expenditures, and an adequate ability to generate funds from operations (FFO) underpins Lindleys financial-risk profile. The companys EBITDA margin has been relatively steady, between 14% and 16% in the past four years, reflecting Lindleys ability to operate in a volatile commodity environment and demand price sensitivity. In the 12 months ended in June 2011, the companys EBITDA reached $81 million, 14% higher than a year before. It generated $50 million in FFO, and used this mainly to fund considerable capital expenditure of $52 million aimed at building new facilities, improving profitability and expanding its distribution network. Lindleys liquidity is viewed as somewhat tight due to some short term debt concentration. As of June 2011 short term debt amounted to $55 million compared with cash and equivalents of only $3 million. Despite this, we expect the companys good presence in the Peruvian financial system and its positive cash generation to provide sufficient financial flexibility in the short term.
54
October 2011
Corporacin Lindley S.A.

Industry Sector: Diversified Consumer Products --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 572 80 13 53 50 82 -32 -32 15 223 209 431 13.9 3.6 11.5 23.8 (14.0) 2.8 51.6
2009
509 72 21 53 42 54 -13 -13 12 168 181 349 14.1 3.7 17.4 31.4 (7.6) 2.3 48.1
2008
398 64 10 45 48 56 -8 -8 7 112 140 252 16.1 2.4 18.7 40.2 (6.9) 1.8 44.4
2007
349 48 12 37 21 40 -19 -19 10 119 138 257 13.8 2.4 14.3 31.2 (16.1) 2.5 46.2
Adjusted ratios
October 2011
55
Edegel S.A.A.
Candela Macchi
Issuer Credit Assessment Industry Sector Main shareholder Business Risk Profile Financial Risk Profile
Not Rated Utilities Empresa Nacional de Eletricidad S.A. (62.5%) Fair Intermediate
compared with $178 million, a year before. In line with 2010, during the 12 months as of June 2011 main credit metrics improved, as seen in EBITDA interest coverage and debt-to-EBITDA ratio that reached 9.5x and 1.5x, respectively (from 7.4x and 2.0x in the same period of 2010). Total debt as of June 30, 2011 was $337 million, down from $444 million in 2010, mainly comprising financial leases and bonds. We assessed the companys financial policy as moderate. During the last five years, Edegel exhibited a maximum debt-toEBITDA ratio of 3.3x, that partially offsets its high dividend distributions, which ranged between 90% and 100% of its net income in the mentioned period. In our opinion, Edegel has an adequate liquidity position, based on the combination of a healthy cash balance and a manageable debt maturity schedule. It also has adequate free cash-flow generation ability, and historically very low capital expenditures ($20 million-$30 million). These partially mitigate relatively high dividend payments. As of June 30, 2011, Edegel had about $68 million in aggregated cash and cash equivalents, and marginal short-term debt. Edegel has the highest installed capacity in Peru. The company generates power through seven hydroelectric and two thermal power plants, holding a total generating capacity of 1,668 MW. Of the total generation, 746 MW is based on hydroelectric power sources and 922 MW on thermal gas-fired power plants. It generates nearly 26% of the countrys power needs. Edegels seven hydroelectric power plants are located in the basins of the Santa Eulalia, Rimac, Tarma, and Tulumayo rivers. The company also has two thermal plants operating in the areas of Cercado de Lima and Ventanilla. The companys majority shareholder is Empresa Nacional de Eletricidad S.A. (BBB+/Stable/--), with a controlling stake of 62.5%
Main Credit Factors

Strengths: Leading power generator in the Peruvian electric market Relatively low-cost producer Adequate mix between private contracts and spotmarket sales Stable cash-flow generation Weaknesses: Competitive pressures in the electric industry and, Aggressive dividend policy (100% of net income)
Rationale
Standard & Poors Ratings Services assessment of Peruvian-based power generator Edegel S.A.A (Edegel) reflects its fair business-risk profile resulting from the companys strong competitive position in the Peruvian market, with almost 30% of participation in the National Electrical Grid System (SEIN), its adequate diversification of energy sources (45% hydro and 55% thermal as of December 2010), and its low generation costs. The high competitive pressures in the Peruvian electric market and Edegels exposure to droughts partially offset the above-mentioned factors. The assessment also reflects the companys intermediate financial-risk profile, underpinned by manageable debt levels, relatively stable cash-flow generation, partly counterbalanced by an aggressive dividend policy of distributing 100% of the companys net income during 2011. During the 12 months ended in June 30, 2011, Edegels revenues grew about 12% compared with the same period a year before, mainly boosted by favorable prices in new power-purchase agreements (PPAs), and the termination of some PPAs that bore prices below market standards. EBITDA generation during the same period reached about $228 million,
56
October 2011
Edegel S.A.A. -- Financial Summary

Industry Sector: Electric Utility Company --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 412.7 209.5 86.6 180.0 147.0 19.1 127.9 51.9 29.5 444.6 856.0 1,300.6 50.8 8.6 9.6 40.5 28.8 2.1 34.2
2009
389.5 208.7 83.2 149.5 166.1 25.4 140.7 73.7 41.3 462.7 812.0 1,274.7 53.6 4.9 10.1 32.3 30.4 2.2 36.3
2008
363.0 149.3 35.5 93.8 70.5 7.8 62.7 33.0 17.3 490.0 694.8 1,184.7 41.1 5.7 6.6 19.1 12.8 3.3 41.4
2007
350.1 162.1 60.8 105.9 109.0 32.3 76.7 30.1 9.6 457.6 745.6 1,203.2 46.3 4.4 7.5 23.2 16.8 2.8 38.0
Adjusted ratios
October 2011
57
Empresa de Distribucin Elctrica de Lima Norte S.A.A. EDELNOR S.A.A.

Javier Vieiro Cobas
Issuer Credit Rating Industry Sector Main shareholder
Not Rated Utilities Inversiones Distrilima 51.68%) Ultimately controlled by Endesa S.A. Satisfactory Intermediate
Business Risk Profile Financial Risk Profile
Main Credit Factors

Strengths: Solid competitive position in the power-distribution sector in Peru Relatively stable cash-flow generation Sizable residential and commercial customer bases Strong relationship with creditworthy sponsor Weaknesses: Significant dividend payments Relatively high past-due receivables
EDELNORs financial-risk profile is underpinned by its relatively good cash-flow protection measures, low leverage, and stable operating margins. Total revenue increased about 5% in 2010 from 2009, mainly boosted by an increase in the physical volume of energy sold, and partially offset by a decrease in the average sale price of energy. The growth in physical sales reflected Perus economic recovery in 2010 (GDP grew about 8.8% in 2010) and a continued population increase in the companys concession area. Amid low inflation levels and high GDP growth, EBITDA margins remained stable in the past four years at about 27%, without meaningful volatility. EDELNORs financial debt as of June 2011 was about $348 million. Leverage was relatively stable in the past couple of years with debt-to-EBITDA at about 2.2x. The companys debt-to-total capitalization ratio reached 49.2%, as of June 2011, from 52.5%, as of June 2010. The companys credit metrics were relatively stable in the past couple of years, with cash flow from operations -to-debt and EBITDA interest coverage ratios exceeding 30% and 7x, respectively. We asses the companys liquidity as adequate given its relatively high cash levels at $21.6 million, compared with short-term debt maturities of $33.3 million, as of June 2011. In addition, the companys free operating cash flow has been consistently positive, reaching $49.1 million in the twelve months ended June 2011, compared with $52.4 million in the twelve months ended June 2010. However, the company made significant dividend payments in the past. It distributed $42.5 million and $52.4 million in fiscals 2010 and 2009, respectively. EDELNOR is an electric power distribution company in Peru. The company serves approximately 1.1 million residential, industrial, and commercial customers in northern Metropolitan Lima and other provinces. The company was founded in 1994 and is based in Lima, Peru. Inversiones Distrilima and Enersis have a 51.68% and 24% stake in EDELNOR, respectively. Inversiones Distrilima and Enersis are indirectly controlled by ENDESA Group.
Rationale
Standard & Poors Ratings Services assessment of Peru-based power distributor EDELNOR S.A.A. reflects the combination of a satisfactory businessrisk profile and an intermediate financial-risk profile. EDELNOR benefits from a solid competitive position as a result of its exclusive concession to distribute electricity in the north of Metropolitan Lima and the provinces of Callao, Huaura, Barranca, Huaral, and Oyn; and its adequate cash-flow protection metrics that are supported by rising consumer demand. The companys strong dividend distribution and relatively high past-due receivables partially offset the strengths. The companys good competitive position in the Peruvian electricity sector as a result of its exclusive concession to distribute electricity in part of the city of Lima to about 1.1 million customers, including residential, commercial, and industrial clients, supports its business-risk profile. However, the companys relatively high levels of past-due receivables (currently representing about 25 days of revenues) partially offset the strengths.
58
October 2011
Empresa de Distribucin Elctrica de Lima Norte S.A.A. - EDELNOR S.A.A. -- Financial Summary
Industry Sector: Utility Company --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 609.7 165.9 68.2 107.3 123.2 58.5 64.7 22.2 56.5 356.8 330.6 687.4 27.2 7.3 15.3 30.1 18.1 2.2 51.9
2009
559.4 149.0 59.2 95.1 98.8 64.9 33.8 (18.6) 15.5 322.1 293.3 615.4 26.6 6.9 15.1 29.5 10.5 2.2 52.3
2008
454.7 128.8 48.8 84.6 76.3 63.6 12.7 (29.8) 10.8 272.7 265.8 538.6 28.3 6.1 14.0 31.0 4.7 2.1 50.6
2007
446.5 121.8 40.3 72.9 50.6 43.4 7.2 (23.0) 5.5 255.3 269.1 524.4 27.3 8.1 11.7 28.6 2.8 2.1 48.7
Adjusted ratios
October 2011
59
EnerSur S.A.
Javier Vieiro Cobas
Not Rated Utilities GDF Suez S.A. (61.73%) Fair Intermediate
a power purchase agreement and services agreement with SPCC until 2017. EnerSurs relatively stable cash-flow generation and good cash-flow protection measures support its financial-risk profile. However, the company has relatively high short-term debt maturities. EnerSurs revenues increased about 7% in 2010 from 2009, mainly because of new contracts with regulated customers, higher revenues from unregulated customers (26% increase), and higher capacity payments. Operating costs also increased about 7% in 2010 from 2009, resulting in a stable EBITDA margin of about 35%. With financial debt of about $338 million as of June 2011, EnerSurs debt-to-EBITDA ratio was 2.2x as of the same date, compared with 1.5x as of June 2010. The companys credit metrics were relatively stable and strong in the past couple of years, with the cash flow from operations-to-debt and EBITDA interest coverage ratios exceeding 30% and 10x, respectively. We assess the companys liquidity to be adequate, given its relatively high cash holdings of about $28 million as of June 2011, compared with short term debt maturities of about $38 million as of June 2011. In addition, the companys free operating cash flow in the twelve months ended June 2011 reached about $38 million. However, in fiscal 2010 the company distributed dividends for about $44 million. The companys policy is to distribute at least 30% of annual earnings as dividends. EnerSur engages in the generation, transmission, and commercialization of electricity for regulated and unregulated clients. The company generates and distributes electricity directly and through partnerships. It operates three thermal powergeneration plants, a hydroelectric plant, and an electricity substation, and sells its electricity through the Peruvian National Interconnected Electricity Grid. The company has a current generation capacity of about 1,030 megawatts.
Main Credit Factors

Strengths: Solid competitive position in the power-generation and transmission sector in Peru Relatively stable cash-flow generation Strong relationship with creditworthy customers Weaknesses: High customer concentration Some reliance on short-term debt financing Significant dividend payments
Rationale
Standard & Poors Ratings Services assessment of Peru-based power generation and transmission company EnerSur S.A. reflects the combination of a fair business-risk profile and an intermediate financial-risk profile. EnerSur benefits from a solid competitive position, reliance on creditworthy customers, and relatively good credit metrics. The companys high concentration of debt maturities in the short term and high customer concentration mitigate these strengths. The companys business-risk profile is underpinned by its good competitive position in the Peruvian electricity sector as the second-largest private powergeneration company in the country and its fairly diversified electricity-generation sources. However, the company has significant customer concentration. In 2010, power sales to Southern Peru Copper Corp., Chilean Branch (SPCC; BBB-/Positive/--) represented about 39% of the companys total sales. EnerSur has
60
October 2011
EnerSur S.A. -- Financial Summary

2010 (Mil. $)
2009
372.3 129.8 66.0 94.4 61.8 27.2 34.6 (36.2) 24.5 281.3 220.8 502.1 34.9 10.2 19.4 33.6 12.3 2.2 56.0
2008
446.1 185.0 93.5 124.8 86.4 18.0 68.4 2.4 41.3 245.0 204.2 449.2 41.5 14.8 31.6 50.9 27.9 1.3 54.5
2007
274.5 126.7 63.1 93.6 89.5 19.2 70.2 (18.8) 44.8 211.4 190.0 401.4 46.2 12.6 21.5 44.3 33.2 1.7 52.7
Adjusted ratios
October 2011
61
Gloria S.A.
Cecilia Fullone
Not Rated Consumer Products Jos Rodriguez Banda S.A. (75.55%) Fair Significant
per year). Of all the raw milk produced in Peru, approximately 75% is transformed into evaporated milk. Gloria has a leading position in this segment, with an approximate 80% market share. Overall, the dairy industry in Per is highly concentrated as three companies Gloria, Nestle and Laive dominate almost 95% of the market. Low leverage levels, adequate liquidity, and a strong ability to generate free cash flow underpin Glorias financial-risk profile. In the 12 months ended in June 2011, Glorias revenues increased 12% as a result of higher prices and higher volumes sold. The strong performance also boosted EBITDA generation, which increased 38%, reaching $131 million. In the same period, cash flow from operations (CFO) stood at $53 million and was mainly devoted to fund relatively high capital expenditures of $70 million, that included improvements in its yoghurt and evaporated milk manufacturing plants. In addition, Gloria paid dividends of $45 million, during the 12 months ended in June 2011. The company financed part of its cash shortfalls with intercompany loans and the issuance of long term debt for a total of $45 million. Glorias total leverage is relatively low with debt standing at $168 million as of June 30, 2011, resulting in conservative credit metrics: debt-toEBITDA and CFO-to-debt of 1.3x and 31.8%, respectively. In our opinion , as of June 2011 Glorias financial flexibility was somewhat tight due to some short term debt concentration. Scheduled debt payments for the next 12 months were $50 million, while cash holding stood at $10 million. Gloria is part of Grupo Gloria, one of the biggest conglomerates in Per. The company specializes in the production of evaporated milk, being the leading producer worldwide. In addition, the company manufactures and distributes other fresh dairy products such as condensed and UTH milk, yogurt, and cheese.
Main Credit Factors

Strengths: Solid market position as one of the three largest dairy producers in Per Vertical integration leads to more-efficient operations Relatively high bargaining power with farmers Low debt levels and adequate liquidity Weaknesses: Exposure to a highly competitive environment Narrow product diversification Limited flexibility to pass on increasing costs of raw milk to prices
Rationale
Standard & Poors Ratings Services assessment of Peru-based consumer company Gloria S.A. reflects the combination of a fair business-risk profile and a significant financial-risk profile. Glorias business-risk profile is mainly driven by its good competitive position in the industry, its extensive distribution network, and good brand recognition. In addition, the company has integrated most of its production processes and has relatively high bargaining power with farmers due to the scale of its operations. Main counterbalancing factors for Glorias business-risk profile are its low product diversification as evaporated milk represents more than 60% of sales, and its limited flexibility to pass on cost increases of raw milk to prices. Fluid milk consumption per capita in Per has been increasing steadily during the past 10 years, reaching approximately 65 liters per capita per year. However, penetration is still low compared with other Latin American countries, where consumption averages 140 liters per year and below the level recommended by the Food and Agriculture Organization (120 liters
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October 2011
Gloria S.A. -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 814.6 132.2 75.6 96.4 67.4 51.9 15.5 (28.8) 28.0 144.8 440.8 585.6 16.2 14.2 18.6 66.6 10.7 1.1 24.7
2009
688.2 92.7 62.3 67.4 73.5 18.4 55.1 18.8 34.8 162.1 401.7 563.8 13.5 8.0 17.1 41.6 34.0 1.7 28.8
2008
647.0 86.6 92.5 102.7 (8.6) 24.2 (32.9) (63.0) 5.5 146.7 297.7 444.4 13.4 8.2 26.3 70.0 (22.4) 1.7 33.0
2007
599.0 86.5 60.0 71.8 13.3 22.2 (8.9) (39.4) 6.0 162.0 337.2 499.3 14.4 7.4 17.7 44.3 (5.5) 1.9 32.5
Adjusted ratios
October 2011
63
Luz del Sur S.A.A.

Javier Vieiro Cobas
Not Rated Utilities Ontario Quinta S.R.L. (61.16%) Satisfactory Intermediate
Main Credit Factors

Strengths: Solid competitive position in the powerdistribution sector in Peru Relatively stable cash-flow generation and good credit metrics Sizable residential and commercial customer bases Weaknesses: Relatively high short term debt concentration Significant dividend payments Relatively high past-due receivables
Luz del Surs financial-risk profile is underpinned by its relatively good cash-flow protection measures, low leverage, and stable operating margins. Total revenue increased about 3.4% in 2010 from 2009. This was mainly due to a 7% increase in the physical volume of energy sold, and partially offset by a decrease in the average sale price of energy. The growth in volumes reflected Perus economic recovery in 2010 (GDP grew about 8.8% in 2010). Amid low inflation levels and high GDP growth, EBITDA margins remained stable in the past four years at about 30%, without meaningful volatility. With financial debt of about $220 million as of June 2011, Luz del Surs debt-to-EBITDA ratio was 1.2x for the 12 months ended June 2011 (less than the 1.4x posted as of June 2010). The companys debt-to-total capitalization ratio reached about 34% as of June 2011 from 36.4% as of June 2010. In addition, the companys credit metrics were relatively stable and strong in the past couple of years, with cash flow from operations-to-debt and EBITDA interest coverage ratios exceeding 50% and 12x, respectively. We asses the companys liquidity to be somewhat tight given its low cash levels of about $5.8 million as of June 2011 compared with short-term debt maturities of about $60 million. This is partially offset by its continued positive free operating cash flow. In the twelve months ended June 2011 the company reached a free operating cash flow of about $75 million. In addition, the company made significant dividend payments in the past. It distributed $78 million and $69 million in 2010 and 2009, respectively. Luz del Sur operates as an electric power distribution company in Peru. The company serves approximately 890,000 residential and industrial customers in 30 districts of eastern, central, and southern Metropolitan Lima, which includes about 4 million inhabitants. It was formerly known as Edelsur. The company was founded in 1994 and is based in Lima, Peru. Luz del Sur is a subsidiary of Ontario Quinta S.R.L.
Rationale
Standard & Poors Ratings Services assessment of Peru-based power distributor Luz del Sur S.A.A. reflects the combination of a satisfactory businessrisk profile and an intermediate financial-risk profile. Luz del Sur benefits from a solid competitive position as a result of its exclusive concession to distribute electricity in eastern, central, and southern Metropolitan Lima; low energy losses; and its adequate cash-flow protection metrics that are supported by rising consumer demand. The companys less than adequate liquidity position, strong dividend distribution and relatively high pastdue receivables partially offset the strengths. The companys good competitive position in the Peruvian electricity sector as a result of its exclusive concession to distribute electricity in part of the city of Lima to more than 890,000 customers, including residential, commercial and industrial clients, supports its business-risk profile. In addition, Luz del Surs losses are relatively low at about 7.5%. The companys relatively high levels of past-due receivables (currently representing about 25 days of revenues) partially offset the strengths.
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October 2011
Luz del Sur S.A.A. -- Financial Summary

2010 (Mil. $)
2009
571.9 161.3 95.8 115.4 124.9 48.3 76.6 7.5 4.7 220.8 369.4 590.2 28.2 13.0 22.3 52.3 34.7 1.4 37.4
2008
465.5 140.9 69.7 95.7 87.6 46.8 40.8 (10.3) 5.6 211.0 298.0 509.1 30.3 10.3 17.9 45.4 19.3 1.5 41.5
2007
461.0 136.1 62.9 95.7 67.3 33.4 33.9 (9.3) 11.3 213.0 292.6 505.6 29.5 7.9 16.6 44.9 15.9 1.6 42.1
Adjusted ratios
October 2011
65
Minera Barrick Misquichilca S.A.

Diego Ocampo
Not Rated Metals & Mining Barrick Gold Corp. (100%) Fair Modest
Main Credit Factors

Strengths: Worldwide low-cost gold producer, supported by the relatively high ore-grade of its mines Strong free cash-flow generation Very low debt levels Strong operational support from creditworthy parent Weaknesses: Highly volatile cash flow due to the cyclical gold industry Lack of product and asset diversification Relatively short life of mines
its modest positioning as a global gold producer-with an estimated market share of less than 1%, its low asset diversification, and the relatively short life of its two mines, Laguna Norte (2019) and Pierina (2014). Combined, these mines have proven and probable reserves of 6.7 million ounces of gold and 27 million ounces of silver (estimated at $1,000 per ounce of gold and $16 per ounce of silver). Very low leverage, adequate liquidity, low capital expenditures, and a strong ability to generate free cash flow underpin Misquichilcas financial-risk profile. The companys EBITDA margin has remained at more than 75% for the past four years, reflecting Misquichilcas very low operating leverage and efficient cost structure. In the 12 months ended in June 2011, the companys EBITDA reached $812 million, which allowed it to generate cash flow from operations (CFO) of $528 million. These were used to fund low capital expenditures of $48 million. The companys excess cash is managed by Barrick globally, so Misquichilca usually loans the excess cash flow to the group. As of June 2011, Misquichilca was owed $2.7 billion by subsidiaries of Barrick. As of June 30, 2011, Misquichilcas adjusted debt was $344 million, comprising mainly financial debt of $167 million and asset-retirement obligations of $177 million. The companys financial debt consists mainly of two local bonds of $50 million each that mature in 2012 and 2013. Total leverage is very low as evidenced by its debt-to-EBITDA and debt-tototal capital ratios of 0.4x and 9.5%, respectively. In our opinion, as of June 2011 Misquichilcas liquidity was adequate. Cash balances were $243 million, while scheduled payments on its financial debt for 2011 amounted to only $12 million. In addition, even when it faces annual amortizations on its bonds of $50 million in 2012 and 2013, its robust ability to generate cash should prove more than enough, even at more-conservative price scenarios. In fact, annual discretionary cash-flow generation has averaged $620 million for the past four years. Barrick indirectly owns 100% of Misquichilca. The group ranks among the worlds largest gold producers with an estimated market share of about 9%, a broad base of operations, and below-average cash costs. It also has a leading market position in copper.
October 2011
Rationale
Standard & Poors Ratings Services assessment of Peru-based mining company Minera Barrick Misquichilca S.A. (Misquichilca) reflects the combination of a fair business-risk profile and a modest financial-risk profile. Misquichilcas highly efficient operations and operational support from 100% owner Canadian mining company Barrick Gold Corp. (Barrick, A-/ Negative/A-2) support Misquichilcas business-risk profile. The companys costs effectiveness stems from the relatively high ore-grade of its mines. This allows it to achieve stronger profitability through the cycle than other gold producers and provides some shelter against the natural volatility of gold prices. In 2010, Misquichilcas largest mine (Laguna Norte) contributed about 73% of its total gold production at cash costs of $182 per troy ounce, after deducting by-products. The factors counterbalancing Misquichilcas business-risk profile are its commodity-type nature,
66
Minera Barrick Misquichilca S.A -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 1,200.0 1,004.3 621.3 677.3 569.9 48.1 521.7 519.9 63.1 320.3 2,968.2 3,288.5 83.7 309.1 31.4 211.5 162.9 0.3 9.7
2009
1,269.9 1,027.1 625.9 700.6 883.7 17.3 866.5 866.5 31.2 254.2 2,349.2 2,603.4 80.9 178.9 40.6 275.7 340.9 0.2 9.8
2008
1,365.2 1,108.3 659.1 744.1 668.9 11.2 657.7 657.7 27.0 262.6 1,723.3 1,985.9 81.2 120.9 58.0 283.3 250.5 0.2 13.2
2007
1,100.4 881.5 489.9 588.9 491.5 54.7 436.9 436.9 45.9 269.0 1,064.2 1,333.2 80.1 68.7 55.0 218.9 162.4 0.3 20.2
Adjusted ratios
October 2011
67
Minera Yanacocha S.R.L.

Diego Ocampo
Not Rated Metals & Mining Newmont Mining Corp. (51.35%) Fair Modest
Main Credit Factors

Strengths: Low-cost gold producer Strong free cash-flow generation Very low debt levels Strong liquidity Operational support from creditworthy parent Weaknesses: Declining ore grade and output capacity Relatively short life of mines Highly volatile cash flow in the cyclical gold industry Lack of product and asset diversification
Yanacochas three active open-pit mines (Cerro Yanacocha, La Quinua, and Chaquicocha) produced about 1.5 million ounces of gold in 2010 and have proven and probable reserves of 5 million ounces. The company plans to extend the life of its operations through expansions to current mines and the gold project Conga, situated in nearby Yanacocha. The project has finalized feasibility studies and is awaiting approval from the government of Peru. It would demand a total investment of about $1.8 billion and would produce an annual output estimated at 400,000 ounces per year, starting in 2015. Reserves of this project are estimated at 6.1 million ounces of gold and 1,660 million pounds of copper. In all cases gold reserves were calculated using a gold price of $950 per pound. Although rising due to declining ore grade, cost effectiveness continues to compare well with industry average. During fiscal 2010 the company reported costs before amortization of $431 per ounce (after deducting by-products), compared with $310 in 2009 and industry averages of $557. Congas costs were estimated at $400 per ounce. The higher production costs resulted in a decline of EBITDA margin to 59.6% in fiscal 2010 from 63.9% a year before. Gold prices helped counterbalance the rise in costs, as during 2010 they ranged between $1,100 and $1,400 per ounce, well above 2009 standards of $800 to $1,100 per ounce. In 2010, the companys revenues and EBITDA reached $1.9 billion and $1.1 billion, respectively, compared with $2.1 billion and $1.3 billion in 2009. The decline in revenues and EBITDA was mainly due to lower volumes sold, as the companys production capacity was reduced due to the declining ore grade. Output in 2010 reached 1.5 million ounces, compared with 2.1 million a year before. Despite this, main credit metrics remained very strong, due to Yanacochas very low debt levels and strong operating performance. As of December 2010, Yanacochas adjusted debt amounted to $190 million consisting mainly in asset retirement obligations and resulting in very conservative leverage metrics: Debt-to-capitalization and debt-to-EBITDA ratios stood at 7.6% and 0.2x, respectively. Also, main coverage metrics were
Rationale
Standard & Poors Ratings Services assessment of Peruvian gold mine Minera Yanacocha S.R.L. (Yanacocha) reflects the combination of a fair business-risk profile and a modest financial-risk profile. Yanacochas business-risk profile is mainly characterized by its relatively low production costs that allow it to reach high operating margins, and by the operational support it gets from its controlling shareholder Newmont Mining Corp. (BBB+/ Stable/--). These factors override the commodity-type nature of its business, its relatively small size with an estimated market share of less than 2%, its low asset diversification, and the relatively short life of its mines, which are expected to decline in production consistently through 2017. The companys financial-risk profile mainly benefits from strong liquidity, robust cash-flow generation levels, and very conservative financial leverage, all of which results in strong coverage and leverage metrics.
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October 2011
robust, as evidenced by EBITDA interest coverage and funds from operations-to-debt ratios of 120.8x and 371%, respectively. As of December 2010 Yanacocha had robust cash balances of $881 million, well above operating and financial needs. Furthermore, the companys
ample ability to generate free cash flow enhances its financial flexibility. Yanacocha is controlled by Newmont Mining Corp. through its ownership of 51.35% of its capital. The rest of the equity is owned by Compaa de Minas Buenaventura S.A. (43.65%) and International Finance Corp. (5%).
Minera Yanacocha S.R.L -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 1,866.8 1,113.4 591.2 703.7 623.7 246.5 377.2 377.2 880.9 189.8 2,303.4 2,493.1 59.6 120.8 37.3 370.8 198.8 0.2 7.6
2009
2,089.1 1,335.7 712.8 1,023.4 987.3 97.8 889.5 659.5 732.6 304.1 1,711.1 2,015.2 63.9 97.8 57.0 336.5 292.5 0.2 15.1
2008
1,641.3 866.4 463.8 637.8 735.4 161.0 574.4 (15.6) 157.5 322.2 1,227.0 1,549.2 52.8 70.6 41.0 198.0 178.3 0.4 20.8
2007
1,148.5 501.7 244.2 379.6 271.3 222.4 48.9 (51.1) 288.4 316.2 1,353.2 1,669.4 43.7 35.2 21.1 120.0 15.5 0.6 18.9
Adjusted ratios
October 2011
69
Minsur S.A.
Daro Lpez Zadicoff
Not Rated Metals & Mining Brescia family (99%) Fair Intermediate
cement subsidiary. Adjusted debt to EBITDA and CFO-to-debt ratios stood at 0.5x and 111%, for the 12 months as of June 2011. As of June 2011, liquidity was adequate, given cash balances of $568 million, short term debt of $243 million and strong cash-flow generation, with discretionary cash-flow of $371 million in the 12 months ended June 2011. Minsur is controlled by the Brescia Family. The companys main business is the operation of two tin mines, in Peru (San Rafael) and Brazil (Pitinga), from where it extracts this metal largely used as an input for welding. With roughly 36,000 metric tons of refined tin in 2010, Minsur is the fourth-largest producer worldwide. In addition, in 2009, Minsur bought a majority stake in Cementos Melon S.A. (not rated), formerly a Chilean subsidiary of Lafarge S.A. (BB+/Stable/B). The Chilean cement business accounted for about 25% of consolidated revenues in 2010.
Main Credit Factors

Strengths: Sound competitive position in the tin market Strong cash-flow generation Very low debt levels Enhanced product and geographic diversity Weaknesses: Operates in cyclical industry with volatile prices Reduced profitability
Rationale
Standard & Poors Ratings Services assessment of Peru-based Minsur S.A. (Minsur) reflects the combination of a fair business-risk profile and an intermediate financial-risk profile. Minsurs business profile is driven by its sound competitive position in the tin market, as the worlds fourth-largest producer (10% market share). Furthermore, the recent incursion in the Chilean cement industry enhanced Minsurs product and geographic diversification, despite some deterioration in its aggregate operating performance. The companys high exposure to volatile tin prices somewhat offsets its strengths. Minsurs financial profile is characterized by strong cashflow generation, very low debt and significant cash holdings. During the 12 months ended in June 2011, Minsurs revenues reached $1,399 million, increasing 35% year over year. Accordingly, EBITDA generation reached $677 million, a 36% higher than previous year, as well as cash-flow from operations (CFO) which increased $371 million. The sound operating performance allowed the company to maintain credit metrics robust, despite debt increases of $78 million, on higher short-term debt of the Chilean
70
October 2011
Minsur S.A. -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 1,212.6 629.6 371.8 393.7 402.9 131.8 271.1 169.6 618.5 290.3 1,810.7 2,101.1 51.9 40.1 27.4 135.6 93.4 0.5 13.8
2009
650.6 338.1 252.2 224.9 140.8 50.1 90.7 (17.3) 363.5 297.2 1,411.4 1,708.6 52.0 29.1 20.2 75.7 30.5 0.9 17.4
2008
696.7 534.2 287.4 353.5 403.2 11.6 391.5 334.7 496.4 49.8 1,015.4 1,065.2 76.7 155.4 53.2 709.5 785.9 0.1 4.7
2007
551.7 416.8 278.8 269.2 307.6 12.0 295.5 234.5 620.3 5.5 856.1 861.7 75.6 263.3 47.0 4,882.4 5,359.4 0.0 0.6
Adjusted ratios
October 2011
71
Petrleos del Per Petroper S.A.

Luciano Gremone
Not Rated Oil & Gas Republic of Peru (100%) Fair Intermediate
inherent volatility of the companys profitability and cash-flows, its high concentration of debt in the short term, and high required working-capital financing. We asses the companys business-risk profile as fair and its financial risk profile as intermediate. The companys strong competitive position (holding about 46% of Perus refining installed capacity) is somewhat protected by the strong barriers of entry stemming from the large investments required for the construction of greenfield refineries. The companys main competitor is Refineria La Pampilla S.A.A., a company from the Repsol group that accounts for about 52% of the countrys installed capacity in refineries. Petroperus financial performance is somewhat volatile, mainly given its exposure to international oil prices and refining margins that result in volatile debt levels to finance inventories. Nevertheless, the company has been able to maintain relatively moderate leverage with a total-debt-to-EBITDA of less than 2.5x. In fiscal 2010, Petroperus funds from operations (FFO)-to-total-adjusted debt and totaladjusted debt-to-EBITDA ratios reached 33.5% and 2.4x, respectively, showing a deterioration from the 48.5% and 1.8x in 2009, mainly as a result of higher debt to finance increased inventories and capital expenditures. We expect the companys leverage and cash-flow protection metrics to remain volatile but likely within ranges commensurate with our assessment of its intermediate financial risk profile (total-adjusted debt-to EBITDA ratio of less than 3x and FFO-to-total debt ratio of at least 30%). We assess Petroperus liquidity position as adequate, mainly given its relatively strong access to credit lines and good financial flexibility, enhanced by the governments ownership. The company had about $70 million in cash and cash equivalents as of June 30, 2011, while its financial debt was $320 million, concentrated in the short term. Such concentration is partially offset by the fact that most of the financial debt is for import financing and matched with high inventory levels that reached about $780 million as of June 2011. We believe Petroperu would continue benefiting from its sound relationship with banks, while its liquidity position would depend on its working-capital cycle that is in turn highly dependant on oil prices and refining margins.
Main Credit Factors

Strengths: Very high likelihood of potential extraordinary support from the government of Peru Strong market position in the growing Peruvian fuel market (about 45% market share) Good financial flexibility enhanced by government ownership Vertical integration with retail activities (service stations) Weaknesses: Inherent volatility derived from exposure to oil prices and refining margins High debt concentration in the short term High needs of working-capital financing
Rationale
Standard & Poors Ratings Services assessment of Perus 100% state-owned oil and gas company, Petroleos del Peru Petroperu S.A.s credit quality reflects our opinion that there is a very high likelihood that the Republic of Peru would provide timely and sufficient extraordinary support to Petroperu in the event of financial distress. Our view of a very high likelihood of extraordinary government support is based on our assessment of Petroperus very important role as a significant fuel refiner and distributor in Peru: Petroperu supplies about 45% of the local markets needs. The company also has a very strong link with the Peruvian State that has strong and stable ownership in the company. On a stand-alone basis, Petroperus credit quality benefits from its strong market position as one of the two main oil refiners in the country, favorable growth prospects for fuel demand in Peru, and its vertical integration with retail activities. Those factors are counterbalanced in our view by the
72
October 2011
Petroper S.A -- Financial Summary

Industry Sector: Oil & Gas --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 3,555.0 182.7 106.7 146.9 (64.4) 68.1 (132.5) (132.5) 57.4 439.2 480.8 920.0 5.1 50.3 18.5 33.5 (30.2) 2.4 47.7
2009
2,505.7 161.3 91.8 139.0 232.0 34.2 197.8 197.8 37.1 286.4 358.5 644.9 6.4 27.3 19.0 48.5 69.0 1.8 44.4
2008
3,389.7 (2.8) (144.3) (158.6) (203.6) 31.0 (234.6) (234.6) 44.6 454.6 245.5 700.1 (0.1) (0.4) (17.1) (34.9) (51.6) (162.0) 64.9
2007
2,577.7 289.8 113.7 181.7 (111.8) 25.6 (137.4) (137.4) 75.0 281.9 428.2 710.1 11.2 60.3 30.3 64.5 (48.7) 1.0 39.7
Adjusted ratios
October 2011
73
Saga Falabella S.A.

Diego Ocampo
Not Rated Retail S.A.C.I. Falabella. (83%) Fair Intermediate
clothing, and design in its product portfolio. In fact, in 2009 the company experienced a decrease in same-store sales of 0.1% year over year due to the crisis, and then grew 11.6% in 2010 as economic conditions improved. Sagas financial risk profile is mainly driven by relatively good free cash-generation thanks to its positive cash cycle and relatively low capital expenditures, a conservative debt level, and adequate financial flexibility. During the 12 months as of June 2011 the companys revenues rose by 17% (measured in U.S. dollars), which allowed it to reach a record EBITDA generation of $92 million. The strong performance supported funds from operations of $69 million, which it used to partially fund working capital needs of $51 million, capital expenditures of $16 million and dividends of $16 million. The balance was financed with debt and cash holdings. Despite this, credit metrics remained robust with debtto-EBITDA, funds from operations-to-debt, and EBITDA interest coverage ratios of 0.9x, 87%, and 20.8x respectively, during the 12 months ended in June 2011. As of Jun. 30, 2011, Sagas liquidity was adequate. Although the company had cash balances of $10 million and short-term debt maturities of $47 million, the companys financial flexibility is enhanced by its ability to generate free operating cash flow, which averaged $53 million annually for the past two years. With reported revenues and EBITDA of $8.9 billion and $1.385 million, respectively, in 2010, Sagas controlling shareholder Falabella is a leading integrated retailing company, with operations in Chile, Peru, Argentina, and Colombia. Falabella is 83.6% owned by seven Chilean families.
Main Credit Factors

Strengths: Relatively good positioning in the incipient department stores market, in Peru Conservative debt levels Good operating cash generation Operational support from its parent Weaknesses: Lack of geographic and business diversification Inherent exposure to economic cycles
Rationale
Standard & Poors Ratings Services assessment of Peruvian retailer Saga Falabella S.A. (Saga) reflects the combination of a fair business-risk profile and an intermediate financial-risk profile. A leading position in the incipient Peruvian market of department stores and the operational support of its shareholder, S.A.C.I. Falabella (Falabella, not rated) mainly underpin Sagas business-risk profile. With 17 department stores comprising a total selling space of about 111,000 square meters as of December 2010, Saga leads the Peruvian market of department stores through a 57% market share, according to market estimates. The company is owned by the Chilean retailer Falabella, which also has a credit card operation in Peru that mostly finances department-store shoppers; a supermarket chain (Tottus); a home-improvement division (Sodimac); and a real estate operation through its ownership of shopping malls. Partially counterbalancing the positive factors is the fact that department stores are traditionally more exposed to economic cycles than are other types of retail businesses such as supermarkets, given the relatively higher proportion of electronic, apparel,
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October 2011
Saga Falabella S.A. -- Financial Summary

Industry Sector: Retail --Fiscal year ended Dec. 31--
2010 (Mil. $)
2009
558.0 60.8 30.4 35.9 51.2 4.4 46.7 36.4 9.2 75.2 109.6 184.8 10.9 8.4 31.7 47.7 62.2 1.2 40.7
2008
484.8 54.2 29.4 36.0 28.0 24.8 3.2 (27.7) 13.7 103.1 82.1 185.1 11.2 8.7 31.5 34.9 3.1 1.9 55.7
2007
426.9 45.1 25.6 28.8 32.1 20.2 11.9 3.7 8.2 74.8 87.3 162.1 10.6 8.5 29.3 38.5 15.9 1.7 46.2
Adjusted ratios
October 2011
75
Shougang Hierro Peru S.A.A.

Daro Lpez Zadicoff
Not Rated Metals & Mining Shougang Corporation (99%) Fair Intermediate
Main Credit Factors

Strengths: Cost-efficient operations Low debt levels Weaknesses: Operates in cyclical industry with volatile prices Single asset nature, with limited product diversity
In the 12 months ended in June 2011, revenues increased by 208% as compared to the 12 months ended in June 2010, thanks to significantly higher iron ore prices and to a lesser extent, an increase of volumes sold (about 19%). This supported higher EBITDA generation and cash-flow from operations, which reached $784 and $624 million, respectively, and positively impacted credit metrics. In particular, adjusted debt-to-EBITDA was 0.3x, and funds from operations to debt 243%, compared with 1.6x and 33%, in the same period a year before. As of June 2011, liquidity was adequate, given cash balances of about $550 million, short term debt of roughly $250 million and strong cash-flow generation, with discretionary cash-flow of $530 million in the 12 months ended June 2011. The fact that the bulk of short-term debt was owed to the companys main shareholder also adds flexibility. Shougang Hierro is controlled by Shougang Corporation, which is among Chinas largest steel producers. The company is the sole Peruvian producer of iron ore, with roughly 6 million tones in 2010 from the San Juan de Marcona mine mainly shipped to its controlling shareholder. Through a $1 billion investment, for which the company has just secured a syndicated credit line worth $240 million, it expects to increase the yearly output of the mine to 10 million tons.
Rationale
Standard & Poors Ratings Services assessment of Shougang Hierro Peru S.A.A. (Shougang Hierro) reflects the companys fair business-risk profile and intermediate financial-risk profile. Shougang Hierros business-risk profile benefits from its cost-efficient operations, which result in higher profitability than industry average. This is due to the relatively high grade of its ore reserves and its cost-efficient logistics, as the mine is nearby the port from which it exports the bulk of the production. Shougang Hierros exposure to the cyclical iron ore industry, which is characterized by high price, revenue and earnings volatility, partially offsets its strengths. Furthermore, the company has limited asset, product and geographic diversity, as its only revenue-generating asset is the San Juan de Marcona iron ore mine. Shougang Hierros financial-risk profile benefits from low leverage, which mitigates inherent cash-flow volatility.
76
October 2011
Shougang Hierro Peru S.A.A. -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 697.5 458.2 291.5 344.3 347.2 55.8 291.4 238.5 246.7 257.4 356.9 614.3 65.7 13,544.6 89.2 133.8 113.2 0.6 41.9
2009
309.2 114.3 52.6 86.3 17.5 59.0 (41.5) (161.1) 11.1 187.4 119.7 307.1 37.0 241.0 32.7 46.0 (22.1) 1.6 61.0
2008
428.4 231.0 131.6 159.9 142.5 43.3 99.2 26.1 53.4 0.0 190.8 190.8 53.9 7,461.3 108.1 N.M. N.M. 0.0 0.0
2007
335.1 169.0 91.8 114.6 134.7 23.5 111.2 34.6 47.1 0.5 154.8 155.3 50.4 988.2 87.5 22,338.1 21,661.4 0.0 0.3
Adjusted ratios
October 2011
77
Sociedad Minera Cerro Verde S.A.A.

Daro Lpez Zadicoff
Issuer Credit Rating Industry Sector Main shareholder
Not Rated Metals & Mining Freeport-McMoRan Copper & Gold Inc. (54%) Satisfactory Intermediate
Business Risk Profile Financial Risk Profile
Main Credit Factors

Strengths: Cost-efficient production Strong free cash-flow generation Very low debt levels Operational support from creditworthy parent Weaknesses: Operates in cyclical industry with volatile prices Single asset nature, with limited product diversity
During the 12 months ended in June 2011, Cerro Verdes revenues grew 52%, compared with the prior year. This was mostly driven by higher copper prices (about 29% according to the London Metal Exchange) and, to a lesser extent, by a 10% increase of volumes, with copper sales at roughly 700 million tons. EBITDA generation of $2,223 (up from $1,342) was boosted by both higher revenues and improved profitability. This sound operating performance resulted in a 47% increase of cash-flow from operations to $1,359 million. As of June 2011, liquidity was adequate, with no short term debt commitments and cash holdings of about $1 billion. Cerro Verdes main shareholder is Freeport, with a 54% stake. Sumitomo Metal Mining Co. Ltd. (not rated) and Compania de Minas Buenaventura S.A.A. (not rated) own minority stakes (21% and 19%, respectively). Through the operation of the Cerro Verde mine, the company is the third largest Peruvian copper producer, with 312,000 tons in 2010. The bulk of its revenues (80% in 2010) derives from trade with its shareholders, mainly through long-term agreements.
Rationale
Standard & Poors Ratings Services assessment of Sociedad Minera Cerro Verde S.A.A. (Cerro Verde) reflects the companys satisfactory business-risk profile and intermediate financial-risk profile. Cerro Verdes business-risk profile benefits from low production costs, sizable proven and probable copper reserves (estimated at roughly 12 billion tones as of December 2010) and a life-of-mine planned at over 75 years. The company also counts with operational support from its main shareholder, Freeport-McMoRan Copper & Gold Inc. (Freeport; BBB/Stable/--), which is the worlds second-largest copper producer. Cerro Verdes exposure to the cyclical copper market, which is characterized by high price volatility, its single asset nature and limited product diversity, partially offset the strengths. In particular, the Cerro Verde mine is the only revenue-generating asset, and its output is mainly copper (94% of sales in 2010). Cerro Verdes financial risk profile is driven by its strong free cash-flow generation and almost zero financial debt (adjusted debt only comprises very low asset retirement obligations).
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October 2011
Sociedad Minera Cerro Verde S.A.A. -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 2,369.0 1,753.5 1,054.4 1,148.5 1,256.9 122.2 1,134.7 184.7 388.1 8.5 1,550.5 1,559.0 74.0 N.M. 101.3 13,553.2 13,390.3 0.0 0.5
2009
1,757.5 1,202.1 708.5 625.0 399.6 91.3 308.3 (63.4) 203.4 13.0 1,446.1 1,459.1 68.4 N.M. 73.8 4,789.1 2,362.2 0.0 0.9
2008
1,835.9 1,182.3 718.4 956.1 903.9 133.7 770.1 (69.9) 481.7 11.9 1,324.2 1,336.0 64.4 440.3 70.7 8,061.1 6,493.1 0.0 0.9
2007
1,794.6 1,347.6 804.7 1,057.4 1,118.6 99.8 1,018.7 398.7 630.4 84.7 1,445.7 1,530.4 75.1 121.6 76.1 1,248.3 1,202.7 0.1 5.5
Adjusted ratios
October 2011
79
Supermercados Peruanos S.A.

Diego Ocampo
Issuer Credit Rating Industry Sector Main shareholder Business Risk Profile
Not Rated Retail IFH Peru Ltd. (99.99%) Fair
leads the market, with another Chilean retailer, Falabella, in third place. The companys business model is focused on food retail, which entails lower profit margins than other categories (such as clothing or furniture) but is less subject to economic downturns. SPSAs main competitors are integrated into different business units, which adds strength and resilience to their operations. Cencosud operates the Wong super and hypermarket chain, and Falabellas flagship in Peruvian food retail market is its supermarket chain Tottus. Both Chilean retailers also provide financing to shoppers through their own credit cards, and Falabella operates a department-store division (SAGA Falabella) and a home-improvement chain (Sodimac). The companys financial-risk profile is mainly driven by healthy coverage ratios, supported by relatively stable cash-flow generation from operations, manageable debt levels, and adequate liquidity. Debt-to-EBITDA, funds from operations (FFO)to-debt, and EBITDA interest coverage ratios were 2.6x, 28.5%, and 3.7x, respectively, in the 12 months ended in June 2011. Also, as of June 30, 2011, the company had cash balances of $14 million and short-term debt of $69 million (mainly consisting of a mix of short-term revolving bank loans and bonds amortizations). The company has been entirely devoting its internal cash generation to fund capital expenditures, as it has an aggressive growth plan. During the past four years the company invested an aggregated sum of $189 million, while consolidated cash flow from operations totaled $180 million. As a consequence, the company was able to grow its operations systematically, to revenues and EBITDA levels of $935 million and $62 million, respectively, in the 12 months ended in June 2011, from $435 million and $18 million in 2007. During that time, debt increased to $160 million as of June 2011, from $87 million. SPSA is ultimately owned by IFH Peru Ltd. (IFH; BB-/Stable/--), an investment holding company controlled by the Peruvian family Rodriguez Pastor. IFH also owns the Peruvian bank Banco Internacional del Per Interbank (BBB-/Stable/--), the Inkafarma drugstore chain, and other investments mainly in real estate.
Financial Risk Profile Signficant
Main Credit Factors

Strengths: Relatively good positioning in the Peruvian foodretail market Significant growth opportunities in the medium term Weaknesses: Lack of geographic and business diversification Relatively large capital expenditures may limit free cash-flow generation Stiff competition may put pressure on the companys growth needs
Rationale
Standard & Poors Ratings Services assessment of Peruvian retailer Supermercados Peruanos S.A. (SPSA) reflects the combination of a fair businessrisk profile and a significant financial-risk profile. SPSAs business-risk profile benefits from its 30% estimated market share in the still-low developed but growing Peruvian supermarket industry, and good brand recognition. The relatively low scale of its operations and a stiff competitive environment counterbalance the positive factors. The Peruvian retail market is still underdeveloped. According to the Peruvian Chamber of Commerce penetration levels are estimated at less than 20% in Lima, compared with 80% in Santiago de Chile or Rio de Janeiro. The food retail market in Peru is dominated by traditional, more-informal markets (bodegas) that concentrate about 70% of the sales in Lima and more than 90% outside Lima. The relatively low penetration provides significant industry growth potential to all market participants. SPSA has close to 190,000 square meters of selling area in 67 malls (most of them hypermarkets). The Plaza Vea hyper and supermarket chain and Mass discount stores rank second in the Peruvian supermarket business, with an estimated 35% share. Chilean integrated retailer Cencosud (not rated)
80
October 2011
Supermercados Peruanos S.A. -- Financial Summary

Industry Sector: Supermarkets --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 854.1 60.8 19.0 42.5 56.3 60.2 (3.9) (3.9) 38.7 118.3 144.2 262.5 7.1 3.9 18.1 36.0 (3.3) 1.9 45.1
2009
705.2 43.9 13.3 32.6 60.8 49.7 11.1 11.1 46.4 112.7 110.1 222.8 6.2 2.8 17.7 28.9 9.9 2.6 50.6
2008
556.8 34.8 6.6 25.9 37.1 57.9 (20.8) (20.8) 18.6 96.4 84.0 180.4 6.2 3.7 13.6 26.9 (21.6) 2.8 53.4
2007
434.6 19.8 3.9 18.8 34.9 44.0 (9.1) (9.1) 35.2 86.9 77.1 163.9 4.6 3.4 6.3 21.7 (10.5) 4.4 53.0
Adjusted ratios
October 2011
81
Telefnica del Per S.A.A.

Cecilia Fullone
Issuer Credit Rating Industry Sector Main shareholder Financial Risk Profile
Not Rated Telecommunications Telefnica S.A. (98.4%) Intermediate
Business Risk Profile Satisfactory
Main Credit Factors

Strengths: Good market position as the largest fixed and mobile telecommunications company in Per Solid profitability and debt-service coverage metrics Operational support from its parent Weaknesses: The fixed telephony segment is mature and highly regulated High competitive pressures put downward pressure on prices and margins, mainly in the fixed segment Large capital expenditures and high dividends, but with some room for flexibility
and long-distance tariffs, infrastructure sharing, and mobile number portability, which became compulsory for all operators in 2010. Telefnica del Per and Telefnica Mviles are the largest fixedand mobile-telephony providers, respectively, in the country, with about 93% and 63% market shares in lines in service and customers. In the 12 months ended in June 2011, the fixed and paid TV segments represented about 68% of total revenues. In line with the trend in Latin America, the fixed business is likely to remain stagnated, which should be partly mitigated by sustained participation in flexible plans, broadband Internet, and digital-TV businesses. In the mobile business, competitive pressures might intensify due to the entrance of Vietnam-based Viettel Group at the beginning of 2011. During the past 12 months ended in June 2011, Telefnica del Perus revenues reached $2.7 billion, mainly fueled by increases in the mobile segment. Nevertheless, revenues in the fixed-telephony segment decreased due to lower traffic and interconnection charges. The companys EBITDA margin has remained above 40% for the past four years. In the past 12 months ended in June 2011, funds from operations (FFO) reached $680 million and was mainly used to fund capital expenditures of $454 million and to pay dividends of $285 million. As of June 2011, Telefnica del Pers debt levels were relatively low, totaling $1.47 billion and resulting in robust credit metrics. Debt-to-EBITDA, FFO-to-debt, and EBITDA interest coverage ratios were 1.3x, 47%, and 12.7x, respectively. In our opinion, as of June 2011, liquidity was adequate. Even when the company reported shortterm debt of $423 million and cash holdings of $297 million, it has a FFO generation in excess of $700 million per year, good access to debt markets and, flexible capital expenditures and dividend policies. Telefnica del Per is the leading provider of fixed and mobile telecommunication services in Per. The company provides fixed and mobile telephony services, domestic and international long-distance calls, and broadband services, among others. Spanish Telefnica S.A. has a 98.4% controlling interest in Telefnica del Per.
Rationale
Standard & Poors Ratings Services assessment of Peru-based telecommunication company Telefnica del Per S.A.A. reflects the combination of a satisfactory business risk profile and an intermediate financial risk profile. The assessment is supported by the companys good competitive position as a leading telecommunication provider, its operational support from Telefnica S.A (BBB+/Stable/A-2) and its solid cash-flow protection metrics. These strengths mitigate the increasing competitive pressures in the industry and the decreasing revenues and margins in fixed telephony. Perus fixed-line penetration is among the lowest in Latin America, (Telefnica del Per had approximately eight lines per 100 inhabitants as of March 2011) and most of the fixed lines are concentrated in Lima. On the other hand, the mobile customer base has significantly increased, achieving approximately 31 million customers as of June 2011. Competition is encouraged in Per through a regulatory regime that includes regulated fixed
82
October 2011
Telefnica Del Per S.A.A, -- Financial Summary

Industry Sector: Telecom --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 2,633.9 1,066.7 305.1 744.0 764.9 470.0 294.9 9.7 201.6 1,483.7 1,266.9 2,750.6
2009
2,495.3 1,046.6 278.4 773.5 814.0 446.9 367.1 42.6 129.7 1,481.9 1,218.1 2,699.9
2008
2,207.7 903.5 150.8 685.7 340.3 389.2 (48.9) (111.8) 91.0 1,331.6 1,258.9 2,590.5
2007
2,148.6 871.3 2.6 633.0 451.0 361.1 89.9 89.9 173.1 1,336.5 1,214.2 2,550.7
Adjusted ratios
EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Debt/debt and equity (%) 40.5 12.6 22.6 50.1 19.9 1.4 53.9 41.9 11.6 20.1 52.2 24.8 1.4 54.9 40.9 9.7 13.0 51.5 (3.7) 1.5 51.4 40.6 11.5 5.3 47.4 6.7 1.5 52.4
October 2011
83
Telefnica Mviles S.A.

Cecilia Fullone
Not Rated Telecommunications Telefnica de Per (99.99%) Satisfactory Intermediate
Main Credit Factors

Strengths: Good market position as the largest mobile telephony player with approximately 63% market share Solid profitability and debt-service coverage metrics Synergies with Telefnica de Per Weaknesses: Operates in a highly competitive market Large capital expenditures and high dividends
Lima to 16% in some of the lowest-income areas of the country. Perus mobile broadband market is also growing strongly, driven by the relatively lessdeveloped fixed broadband network. In this context, we believe there would be some growth potential through continued expansion in lines and traffic and higher penetration of value-added services. TM enjoys a leading competitive position in the Peruvian mobile telecom market, with a 63% share, followed by America Movil and Nextel, with 34% and 3% market shares, respectively. Competitive pressures might intensify in coming periods due to the entrance of Vietnam-based Viettel Group at the beginning of 2011. In the past 12 months ended in June 2011, TMs revenues grew 11%, mainly due to increases in the number of postpaid subscribers and, to a lesser extent, higher revenues in the broadband segment. This boosted adjusted EBITDA generation to approximately $531 million and cash flow from operations (CFO) to $498 million. CFO was used to fund capital expenditures of $219 and to pay dividends of $320 million. As of June 2011, TMs debt levels were low, totaling approximately $390 million and resulting in robust credit metrics. Debt-to-EBITDA, CFO-to-debt, and EBITDA interest coverage ratios were 0.7x, 129%, and 32x, respectively, which is in line with the credit metrics posted by its regional peers. In our opinion TM enjoys an adequate liquidity position, given the companys good cash generation, which is mainly used to finance high capital expenditures. In addition, the companys high dividend policy is relatively flexible, which gives TM additional room to maneuver. As of June 30, 2011, the company had cash holdings of approximately $141 million and short-term financial debt of approximately $172 million. TM is the leading provider of mobile telecommunication services in Per. The company operates under the brand name Movistar and offers prepaid and postpaid mobile telephony to 19 million clients, interconnection, roaming, and mobile broadband, among other services. TM is 99.99% owned by Telefnica del Per S.A.
Rationale
Standard & Poors Ratings Services assessment of Peru-based telecommunication company Telefnica Mviles S.A. (TM) reflects the combination of a satisfactory business risk profile and an intermediate financial risk profile. The assessment is supported by the companys good competitive position as a leading telecommunication provider and its solid cash flow protection metrics. It also reflects the synergies achieved with its main shareholder, Telefnica de Per, which has a 99.99% controlling interest in the company. However, the company operates in a highly competitive market, which is subject to increasing regulatory risks, such as mobile portability number and reduction in interconnection charges. We believe that those initiatives would not have a significant impact on the companys profitability. Following the global trend, the mobile customer base in Per has increased strongly during the past five years, reaching 31 million customers as of June 2011, according to companys estimates. In the same period, Perus mobile penetration achieved 103.5%, which is in line with average for Latin America and compares favorably with the countrys economic indicators. However, there is a huge gap between urban and rural regions, ranging from 133% in
84
October 2011
Telefnica Mviles S.A. -- Financial Summary

Industry Sector: Telecom --Fiscal year ended Dec. 31--
2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 1,348.9 513.0 250.7 410.6 460.4 235.5 224.9 (22.6) 69.0 340.1 327.1 667.2
2009
1,221.0 455.8 226.8 356.3 467.7 187.2 280.5 61.0 52.5 280.5 311.5 592.0
2008
1,046.7 381.2 164.2 288.2 221.5 200.9 20.7 (58.2) 39.9 221.7 347.3 569.0
2007
853.9 235.3 34.3 185.8 117.9 154.9 (37.0) (37.0) 43.4 196.9 270.6 467.6
Adjusted ratios
EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Debt/debt and equity (%) 38.0 36.0 61.0 120.7 66.1 0.7 51.0 37.3 27.0 58.7 166.8 100.0 0.6 47.4 36.4 34.1 55.7 99.9 9.3 0.6 39.0 27.6 16.5 19.1 59.9 (18.8) 0.8 42.1
October 2011
85
Unin de Cerveceras Peruanas Backus y Johnston S.A.A.

Cecilia Fullone
Not Rated Diversified Consumer Products Beverages SABMiller PLC. (99.2%) Satisfactory Intermediate
discounts, and brand innovations. More than 63% of Backuss volume sold in 2010 was through distribution centers that represented a more efficient platform to gain the point of sale and reach the mom and pops shops. From a financial perspective, Backuss risk profile is characterized by a conservative financial policy a relatively stable EBITDA margin, a strong ability to generate free operating cash flow, and a low and well structured financial leverage. During the past four years and in spite of the financial crises, the companys EBITDA margin has remained above 32%, reflecting its effective cost structure and its approach to commodity price variations. In 2010, Backuss EBITDA reached $367 million or 8.2% higher than $340 million in 2009. It thereby generated operating cash flow of $337 million, which it used to fund $96 million of capitalexpenditure requirements and pay $186 million of dividends to SABMiller PLC. As of June 30, 2011, Backuss adjusted debt reached $75.8 million comprising financial obligations with two major banks due in September and October 2011, and $800.000 of the last installment of an operational lease due in 2012. On the other hand, the combination of the companys performance and low leverage resulted in debt to EBITDA and debt to total capital of 0.2x and 10.4%, respectively. Even though as of June 2011 we consider liquidity somewhat tight, we believe Backuss strong ability to generate free operating cash flow (FOCF) combined with its relatively good access to the domestic banking system and debt market enhanced its financial flexibility. As of June 2011, the company held cash and short term investments of $32 million while short term financial obligations reached $75 million. Backus is 99.2% indirectly owned by SABMiller PLC (BBB+/Stable/A-2), the U.K.-based brewing company. SABMiller is the worlds second-largest brewer by volume with sales exceeding $15 billion, supported by a diversified geographic presence and a strong brand portfolio.
Main Credit Factors

Strengths: Strong and diversified product portfolio High market penetration Stable cash-flow generation Operational parent support Low leverage Weaknesses: Exposure to commodity prices Lack of geographic diversification Sensitive demand linked to GDP variations
Rationale
Standard & Poors Ratings Services assessment of Peruvian beverage producer Union de Cervecerias Peruanas Backus y Johnston S.A.A. (Backus) reflects the combination of its satisfactory business-risk profile combined with its intermediate financial-risk profile. Backuss business-risk profile is underpinned by a strong presence in the Peruvian beer market with a large and well-diversified product portfolio, high market penetration, considerable brand recognition and strong operational support from parent SABMiller. Even though the company is engaged in the production, bottling, and distribution of beer, soft drinks, water, juices, and liquors, beer represented 95% of total revenues in 2010. Cristal, Pilsen Callao, Cusquea, and Pilsen Trujillo are among Backuss top brands, with 33.8%, 15.1%, 10%, and 7% of market share, respectively. During the fiscal year ended Dec. 31, 2010, the company consolidated its market presence even more, by selling more than 10 million hectoliters, reaching a solid 90.8% market share or 3% market gain compared with the same period of 2009. To continue growing in a mature and relatively stable market, the company focused its 2010 commercial strategies in volume, price, customer
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October 2011
Union de Cervecerias Peruanas Backus Y Johnston S.A.A.

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 1,141.6 367.0 184.4 281.9 336.6 96.2 240.5 53.7 87.5 82.9 656.7 739.6
2009
963.5 339.9 170.1 262.9 337.0 99.2 237.8 (2.4) 94.5 102.8 630.0 732.8
2008
853.1 290.4 126.7 199.9 227.1 143.3 83.8 (99.9) 30.5 49.4 625.3 674.6
2007
781.6 242.4 101.2 195.6 162.1 133.2 28.9 (83.2) 89.2 9.0 731.0 740.1
Adjusted ratios
EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Debt/debt and equity (%) 32.1 67.3 34.8 340.1 290.2 0.2 11.2 35.3 37.8 32.8 255.8 231.6 0.3 14.0 34.0 7.9 30.7 404.8 169.7 0.2 7.3 31.0 7.4 23.9 2,163.0 319.4 0.0 1.2
October 2011
87
Volcn Compaa Minera S.A.A.

Candela Macchi
Not Rated Metals & Mining Greenville Overseas Investments (52.6%) Fair Intermediate
$398 million, from $280 million and $270 million, respectively, in 2009. This strong cash generation allowed the company to continue reducing its debt levels and make dividend payments of $76 million in 2010. As of June 2011 Volcans debt stood at only $102 million, which allowed the company to post conservative credit metrics, as evidenced by rolling twelve months adjusted debt-to-EBITDA of 0.2x. We consider such a prudent approach to leverage as a key factor from a credit perspective, given the inherent volatility affecting the cash flows. We assessed Volcans liquidity position as adequate. As of June 30, 2011 cash balances stood at $99 million, well above short term financial obligations. Its strong cash generation, manageable debt maturity schedule and historically flexible dividends and capital expenditures also enhance the companys financial flexibility. With outputs levels of 19 million ounces of silver and 655 metric tons of zinc in 2010, Volcan ranks among the top 10 global producers of both metals. The company also produces copper and lead in its five operating mines: Cerro Pasco, Yauli, Chungar, Vinchos, and Alpamarca located in the departments of Pasco and Junin, and is currently undergoing power generation projects in Peru. The companys majority shareholder is Greenville Overseas Investments with a stake of 52.6%.
Main Credit Factors

Strengths: Good positioning as a silver and zinc producer Strong free cash-flow generation Reduced debt levels and comfortable maturity profile Relatively long reserves with an average life of 18 years Weaknesses: Highly volatile cash flow in the cyclical industry exposed to mineral and metals price fluctuations, partly mitigated by product diversification. Low geographic diversification
Rationale
Standard & Poors Ratings Services assessment of Peruvian-based mining Volcn Compaa Minera S.A.A (Volcan) reflects the combination of what we consider to be a fair business-risk profile and intermediate financial-risk profile. The assessment also reflects the companys relatively good competitive position as a global silver and zinc producer; its increasing reserves base; adequate liquidity; and strong credit metrics. The volatility of its cash-flow generation--which is subject to commodity price fluctuations--and the lack of geographic diversification partially, offset the strengths. During fiscal 2010, Volcans revenues grew 47% compared with 2009, mainly due to higher international prices for zinc, silver, and lead (that represented almost 97% of its consolidated income). Costs increased about 27% during the mentioned period, fueled by higher fixed costs in Cerro del Pasco (which has been engaged in an optimization program that temporarily decreased its production) and increased costs of material and power. Nevertheless, adjusted EBITDA generation increased to $496 million and funds from operations (FFO) to
88
October 2011
Volcn Compaa Minera S.A.A. -- Financial Summary

2010 (Mil. $)
Revenues EBITDA Net income from continuing operations Funds from operations (FFO) Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow Cash and short-term investments Debt Equity Debt and equity 973.3 495.8 272.2 397.8 273.4 93.0 260.9 185.0 135.4 42.9 1,075.6 1,118.5
2009
662.4 280.2 170.2 270.4 158.4 53.9 202.4 146.5 124.5 84.7 896.5 981.2
2008
627.1 241.0 176.6 231.9 168.3 110.6 64.0 (12.3) 184.6 202.3 889.1 1,091.4
2007
1,053.9 694.9 396.7 465.2 271.7 94.4 332.0 192.9 143.4 3.8 774.2 778.0
Adjusted ratios
EBITDA margin (%) EBITDA interest coverage (x) Return on capital (%) FFO/debt (%) Free operating cash flow/debt (%) Debt/EBITDA (x) Debt/debt and equity (%) N.M. - Not Meaningful. 50.9 349.6 36.3 927.1 260.9 0.1 3.8 42.3 223.4 19.3 319.3 202.4 0.3 8.6 38.4 55.8 18.2 114.6 64.0 0.8 18.5 65.9 136.7 77.6 12,365.2 322.0 0.0 0.4
October 2011
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90
October 2011
Understanding Ratings and Definitions

October 2011
91
Guide To Credit Rating Essentials

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Credit ratings are forward looking
Credit Ratings
Credit ratings are opinions about credit risk. Standard & Poors ratings express the agencys opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issue may default. Ratings are provided by credit rating agencies which specialize in evaluating credit risk. In addition to international credit rating agencies, such as Standard & Poors, there are regional and niche rating agencies that tend to specialize in a geographical region or industry. Each agency applies its own methodology in measuring creditworthiness and uses a specific rating scale to publish its ratings opinions. Typically, ratings are expressed as letter grades that range, for example, from AAA to D to communicate the agencys opinion of relative level of credit risk. Standard & Poors ratings opinions are based on analysis by experienced professionals who evaluate and interpret information received from issuers and other available sources to form a considered opinion. Unlike other types of opinions, such as, for example, those provided by doctors or lawyers, credit ratings opinions are not intended to be a prognosis or recommendation. Instead, they are primarily intended to provide investors and market participants with information about the relative credit risk of issuers and individual debt issues that the agency rates.
As part of its ratings analysis, Standard & Poors evaluates available current and historical information and assesses the potential impact of foreseeable future events. For example, in rating a corporation as an issuer of debt, the agency may factor in anticipated ups and downs in the business cycle that may affect the corporations creditworthiness. While the forward looking opinions of rating agencies can be of use to investors and market participants who are making long- or short-term investment and business decisions, credit ratings are not a guarantee that an investment will pay out or that it will not default.
Credit ratings do not indicate investment merit
While investors may use credit ratings in making investment decisions, Standard & Poors ratings are not indications of investment merit. In other words, the ratings are not buy, sell, or hold recommendations, or a measure of asset value. Nor are they intended to signal the suitability of an investment. They speak to one aspect of an investment decision credit qualityand, in some cases, may also address what investors can expect to recover in the event of default. In evaluating an investment, investors should consider, in addition to credit quality, the current make-up of their portfolios, their investment strategy and time horizon, their tolerance for risk, and an estimation of the securitys relative value in comparison to other securities they might choose. By way of analogy, while reputation for dependability may be an important consideration in buying a car, it is not the sole criterion on which drivers normally base their purchase decisions.
Credit ratings are not absolute measures of default probability
Since there are future events and developments that cannot be foreseen, the assignment of credit ratings is not an exact science. For this reason, Standard & Poors ratings opinions are not intended as
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guarantees of credit quality or as exact measures of the probability that a particular issuer or particular debt issue will default. Instead, ratings express relative opinions about the creditworthiness of an issuer or credit quality of an individual debt issue, from strongest to weakest, within a universe of credit risk. For example, a corporate bond that is rated AA is viewed by the rating agency as having a higher credit quality than a corporate bond with a BBB rating. But the AA rating isnt a guarantee that it will not default, only that, in the agencys opinion, it is less likely to default than the BBB bond.
the issuer and other sources to evaluate the credit quality of the issue and the likelihood of default. In the case of bonds issued by corporations or municipalities, rating agencies typically begin with an evaluation of the creditworthiness of the issuer before assessing the credit quality of a specific debt issue. In analyzing debt issues, for example, Standard & Poors analysts evaluate, among other things: The terms and conditions of the debt security and, if relevant, its legal structure. The relative seniority of the issue with regard to the issuers other debt issues and priority of repayment in the event of default. The existence of external support or credit enhancements, such as letters of credit, guarantees, insurance, and collateral. These protections can provide a cushion that limits the potential credit risks associated with a particular issue.
Rating issuers and issues
Credit rating agencies assign ratings to issuers, such as corporations and governments, as well as to specific debt issues, such as bonds, notes, and other debt securities.
Rating an issuer
Surveillance: Tracking credit quality
To assess the creditworthiness of an issuer, Standard & Poors evaluates the issuers ability and willingness to repay its obligations in accordance with the terms of those obligations. To form its ratings opinions, Standard & Poors reviews a broad range of financial and business attributes that may influence the issuers prompt repayment. The specific risk factors that are analyzed depend in part on the type of issuer. For example, the credit analysis of a corporate issuer typically considers many financial and non-financial factors, including key performance indicators, economic, regulatory, and geopolitical influences, management and corporate governance attributes, and competitive position. In rating a sovereign, or national government, the analysis may concentrate on political risk, monetary stability, and overall debt burden. For high-grade credit ratings, Standard & Poors considers the anticipated ups and downs of the business cycle, including industry-specific and broad economic factors. The length and effects of business cycles can vary greatly, however, making their impact on credit quality difficult to predict with precision. In the case of higher risk, more volatile speculativegrade ratings, Standard & Poors factors in greater vulnerability to down business cycles.
Agencies typically track developments that might affect the credit risk of an issuer or individual debt issue for which an agency has provided a ratings opinion. In the case of Standard & Poors, the goal of this surveillance is to keep the rating current by identifying issues that may result in either an upgrade or a downgrade. In conducting its surveillance, Standard & Poors may consider many factors, including, for example, changes in the business climate or credit markets, new technology or competition that may hurt an issuers earnings or projected revenues, issuer performance, and regulatory changes. The frequency and extent of surveillance typically depends on specific risk considerations for an individual issuer or issue, or an entire group of rated entities or debt issues. In its surveillance of a corporate issuers ratings, for example, Standard & Poors may schedule periodic meetings with a company to allow management to: Apprise agency analysts of any changes in the companys plans. Discuss new developments that may affect prior expectations of credit risk. Identify and evaluate other factors or assumptions that may affect the agencys opinion of the issuers creditworthiness. As a result of its surveillance analysis, an agency may adjust the credit rating of an issuer or issue to signify its view of a higher or lower level of relative credit risk.
Rating an issue
In rating an individual debt issue, such as a corporate or municipal bond, Standard & Poors typically uses, among other things, information from
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Glossary Of Financial Ratio Definitions

Ratios are helpful in broadly dening a companys position relative to its rating category. However, caution should be exercised when using ratios for comparisons because of differences in business environments and nancial practices. While the absolute levels of ratios are important, it is equally important to focus on trends. Below are the denitions for some of Standard & Poors key nancial ratios. Total debt includes current and non-current debt, secured and unsecured debt, subordinated debt, bank overdrafts, loans, nance lease liabilities, redeemable preference shares, debenture stock, promissory notes, convertible notes, and bills payable (non-trade). Off-balance-sheet items sometimes factored into leverage calculations include guarantees, contingent liabilities, non-recourse debt, debt of joint ventures, and operating leases. Equity consists of paid-up capital, capital reserves, unappropriated prots and minority interests, less treasury shares. Subordinated convertible notes and bonds are excluded from equity. Total capital is total debt plus equity. Permanent capital is equity, adjusted for provisions for deferred tax and future tax benets (where appropriate), plus total debt. Sometimes Standard & Poors excludes the asset revaluation reserves gure from permanent capital so as to arrive at a different leverage comparison. Earnings before interest, tax, depreciation, and amortization (EBITDA) is operating income (before depreciation and amortization) or revenue less cost of goods sold (excluding depreciation and amortization), selling, general, and administrative expenses, and other operating expenses. Earnings before interest and tax (EBIT) is operating income (before depreciation and amortization) or EBITDA less depreciation and amortization, adjusted for equity income, interest income, and other non-operating items. Gross interest expense is interest expenses plus capitalized interest. Funds from operations (FFO) is dened as operating prot before taxes, plus dividends from associates, and depreciation and amortization less income tax paid, and is adjusted for non-cash items. Free operating cash ow is dened as FFO adjusted for working capital movements and capital expenditure. Operating lease adjustment is performed on nancial ratios where applicable. Standard & Poors operating lease model improves the comparability of nancial ratios by considering de facto assets and liabilities, whether they are accounted for on or off the balance sheet. In capitalizing non-cancelable operating lease commitments, a present value is calculated by discounting future lease commitments at the companys prevailing average interest rate. This method converts a stream of payments tied to temporary assets to a debt-nanced purchase of property, plant, and equipment. Standard & Poors reallocates the average of the current and previous years minimum rst-year lease commitment to interest and depreciation.
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Incorporating Adjustments Into The Analytical Process

Our analysis of financial statements begins with a review of accounting characteristics to determine whether ratios and statistics derived from the statements adequately measure a companys performance and position relative to both its direct peer group and the larger universe of industrial companies. To the extent possible, our analytical adjustments are made to better reflect reality and to minimize differences among companies. Our approach to adjustments is meant to modify measures used in the analysis, rather than fully recast the entire set of financial statements. Further, it often may be preferable or more practical to adjust separate parts of the financial statements in different ways. For example, while stock-options expense represents a cost of doing business that must be considered as part of our profitability analysis, fully recasting the cash implications associated with their grant on operating cash flows is neither practical nor feasible, given repurchases and complexities associated with tax laws driving the deduction timing. Similarly, the analyst may prefer to derive profitability measures from LIFO-based inventory accounting--while retaining FIFO-based measures when looking at the valuation of balance sheet assets. Certain adjustments are routine, as they apply to many of our issuers for all periods (e.g., operating lease, securitizations, and pension-related adjustments). Other adjustments are made on a specific industry basis (e.g., adjustments made to reflect asset retirement obligations of regulated utilities and volumetric production payments of oil and gas producing companies). Beyond that, we encourage use of nonstandard adjustments that promote the objectives outlined above. Individual situations require creative application of analytical techniques--including adjustments--to capture the specific fact pattern and its nuances. For example, retail dealer stock sometimes has the characteristics of manufacturer inventory--notwithstanding its legal sale to the dealer. Subtle differences or changes in the fact pattern (such as financing terms, level of inventory relative to sales, and seasonal variations) would influence the analytical perspective. We recognize that the use of nonstandard adjustments involves an inherent risk of inconsistency. Also, some of our constituencies want to be able to easily replicate and even anticipate our analysis--and nonstandard adjustments may frustrate that ability. However, for us, the paramount consideration is producing the best possible quality analysis. Sometimes, one must accept the tradeoffs that may be involved in its pursuit. In many instances, sensitivity analyses and range estimates are more informative than choosing a single number. Accordingly, our analysis at times is expressed in terms of numerical ranges, multiple scenarios, or tolerance levels. Such an approach is critical when evaluating highly discretionary or potentially varied outcomes, where using exact measurement is often impossible, impractical, or even imprudent (e.g., adjusting for a major litigation where there is an equal probability of an adverse or a favorable outcome). Similarly, in some cases, the analyst must evaluate financial information on an adjusted and an unadjusted basis. For example, most hybrid equity securities fall in a grey area that is hard to appreciate merely by making numerical adjustments. So, while we do employ a standard adjustment that splits the amounts in two, we also prefer that our analysts look at measures that treat these instruments entirely as debt--and entirely as equity. In any event, adjustments do not always neatly allow one to gain full appreciation of financial risks and rewards. For example, a company that elects to use operating leases for its core assets must be compared with peers that purchase the same assets (e.g., retail stores), and our lease adjustment helps in this respect. But we also recognize the flexibility associated with the leases in the event of potential downsizing, and would not treat the company identically with peers that exhibit identical numbers. Likewise, in a receivable securitization, while the sale of the receivables to the securitization vehicle generally shifts some of the risks, often the predominant share remains with the issuer. Beyond adjusting to incorporate the assets and related debt of the securitization vehicles, analysts must appreciate the funding flexibility and efficiencies related to these vehicles and the limited risk transference that may pertain.
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Apart from their importance to the quantitative aspects of the financial analysis, qualitative conclusions regarding the companys financial data can also influence other aspects of the analysis-including the assessment of management, financial policy, and internal controls.
Encyclopedia Of Analytical Adjustments
The list of adjustments we use in analyzing industrial companies, in alphabetical order, includes: Accrued Interest And Dividends Asset Retirement Obligations Capitalized Development Costs Capitalized Interest Captive Finance Operations Exploration Costs Foreign Currency Exchange Gains/Losses Guarantees
Hybrid Instruments LIFO/FIFO: Inventory Accounting Methods Litigation Nonrecourse Debt Of Affiliates (Scope Of Consolidation) Nonrecurring Items/Noncore Activities Operating Leases Postretirement Employee Benefits/Deferred Compensation Power Purchase Agreements Share-Based Compensation Expense Stranded Costs Securitizations Of Regulated Utilities Surplus Cash Trade Receivables Securitizations Volumetric Production Payment Workers Compensation/Self Insurance
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Standard & Poors Rating Definitions

A Standard & Poors issuer credit rating is a forward-looking opinion about an obligors overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligors capacity and willingness to meet its financial commitments as they come due. Ratings are based on current information furnished by the borrower or debt issuer or from data obtained by Standard & Poors from other sources which it considers reliable. Standard & Poors does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited nancial information.
BB
An obligor rated BB is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligors inadequate capacity to meet its financial commitments.
Long-Term Issuer Credit Ratings AAA
An obligor rated B is more vulnerable than the obligors rated BB, but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitments.
CCC
An obligor rated AAA has extremely strong capacity to meet its financial commitments. AAA is the highest issuer credit rating assigned by Standard & Poors.
An obligor rated CCC is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
AA
CC
An obligor rated AA has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.
An obligor rated CC is currently highly vulnerable. Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
An obligor rated A has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
BBB
An obligor rated BBB has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
An obligor rated R is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. Please see Standard & Poors issue credit ratings for a more detailed description of the effects of regulatory supervision on specific issues or classes of obligations.
BB, B, CCC, and CC
SD and D
Obligors rated BB, B, CCC, and CC are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and CC the highest. While such obligors will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
An obligor rated SD (selective default) or D has failed to pay one or more of its financial obligations (rated or unrated) when it came due. A D rating is assigned when Standard & Poors believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An SD rating is assigned when Standard & Poors believes that the obligor has selectively defaulted
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on a specific issue or class of obligations, excluding those that qualify as regulatory capital, but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. A selective default includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
compared to other speculative-grade obligors. B-3 Obligors with a B-3 short-term rating have a relatively weaker capacity to meet their financial commitments over the short-term compared to other speculative-grade obligors.
NR
An obligor rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for it to meet its financial commitments.
An issuer designated NR is not rated.
Short-Term Issuer Credit Ratings A-1
An obligor rated A-1 has strong capacity to meet its financial commitments. It is rated in the highest category by Standard & Poors. Within this category, certain obligors are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitments is extremely strong.
An obligor rated R is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. Please see Standard & Poors issue credit ratings for a more detailed description of the effects of regulatory supervision on specific issues or classes of obligations.
A-2
An obligor rated A-2 has satisfactory capacity to meet its financial commitments. However, it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in the highest rating category.
SD and D
A-3
An obligor rated A-3 has adequate capacity to meet its financial obligations. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
An obligor rated B is regarded as vulnerable and has significant speculative characteristics. Ratings of B-1, B-2, and B-3 may be assigned to indicate finer distinctions within the B category. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitments. B-1 Obligors with a B-1 short-term rating have a relatively stronger capacity to meet their financial commitments over the short-term compared to other speculative-grade obligors. B-2 Obligors with a B-2 short-term rating have an average speculative-grade capacity to meet their financial commitments over the short-term
An obligor rated SD (selective default) or D has failed to pay one or more of its financial obligations (rated or unrated) when it came due. A D rating is assigned when Standard & Poors believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An SD rating is assigned when Standard & Poors believes that the obligor has selectively defaulted on a specific issue or class of obligations, excluding those that qualify as regulatory capital, but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. Please see Standard & Poors issue credit ratings for a more detailed description of the effects of a default on specific issues or classes of obligations.
NR
An issuer designated NR is not rated.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poors analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligors capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign governments own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific
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issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
Rating Outlook Definitions
CreditWatch Definitions
CreditWatch highlights our opinion regarding the potential direction of a short-term or long-term rating. It focuses on identifiable events and shortterm trends that cause ratings to be placed under special surveillance by Standard & Poors analytical staff. Ratings may be placed on CreditWatch under the following circumstances: When an event has occurred or, in our view, a deviation from an expected trend has occurred or is expected and when additional information is necessary to evaluate the current rating. Events and short-term trends may include mergers, recapitalizations, voter referendums, regulatory actions, performance deterioration of securitized assets, or anticipated operating developments. When we believe there has been a material change in performance of an issue or issuer, but the magnitude of the rating impact has not been fully determined, and we believe that a rating change is likely in the short-term. A change in criteria has been adopted that necessitates a review of an entire sector or multiple transactions and we believe that a rating change is likely in the short-term. A CreditWatch listing, however, does not mean a rating change is inevitable, and when appropriate, a range of potential alternative ratings will be shown. CreditWatch is not intended to include all ratings under review, and rating changes may occur without the ratings having first appeared on CreditWatch. The positive designation means that a rating may be raised; negative means a rating may be lowered; and developing means that a rating may be raised, lowered, or affirmed.
A Standard & Poors rating outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years). In determining a rating outlook, consideration is given to any changes in the economic and/or fundamental business conditions. An outlook is not necessarily a precursor of a rating change or future CreditWatch action. Positive means that a rating may be raised. Negative means that a rating may be lowered. Stable means that a rating is not likely to change. Developing means a rating may be raised or lowered. N.M. means not meaningful. For a full listing of definitions, visit our website at www.standardandpoors.com. Select Credit Ratings, Credit Ratings Criteria, Ratings Denitions.
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Contact list
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Contacts List
Standard & Poors Jane Eddy, Managing Director Latin America Region Head Marta Castelli, Managing Director - Lead Analytical Manager
Corporate Ratings Pablo Lutereau, Senior Director & Analytical Manager 54-11-4891-2125 pablo_lutereau@standardandpoors.com Luciano Gremone, Director 54-11-4891-2143 luciano_gremone@standardandpoors.com Cecilia Fullone, Associate 54-11-4891-2170 cecilia_fullone@standardandpoors.com Candela Macchi, Associate 54-11-4891-2110 candela_macchi@standardandpoors.com Patricio Bayona, Rating Specialist 54-11-4891-2112 patricio_bayona@standardandpoors.com Luisina Berberian, Rating Analyst 54-11-4891-2156 luisina_berberian@standardandpoors.com Guadalupe Merea, Senior Research Assistant 54-11-4891-2147 guadalupe_merea@standardandpoors.com Diego Ocampo, Associate Director 54-11-4891-2124 diego_ocampo@standardandpoors.com Dario Lpez Zadicoff, Associate 54-11-4891-2142 dario_lopez@standardandpoors.com Javier Vieiro Cobas, Associate 54-11-4891-2118 javier_cobas@standardandpoors.com Victoria Lemos, Rating Specialist 54-11-4891-2117 victoria_lemos@standardandpoors.com Francisco Serra, Rating Analyst 54-11-4891-2141 francisco_serra@standardandpoors.com
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Financial Institutions Sergio Garibian, Senior Director & Analytical Manager 54-11-4891-2119 sergio_garibian@standardandpoors.com Sergio Fuentes, Director 54-11-4891-2131 sergio_fuentes@standardandpoors.com Delfina Cavanagh, Associate 54-11-4891-2153 delfina_cavanagh@standardandpoors.com Mnica Gavito, Rating Specialist 54-11-4891-2140 monica_gavito@standardandpoors.com
Sebastin Liutvinas, Associate Director 54-11-4891-2109 sebastian_liutvinas@standardandpoors.com Cynthia Cohen Freue, Associate 54-11-4891-2161 cynthia_cohenfreue@standardandpoors.com Joaqun Meda, Rating Analyst 54-11-4891-2136 joaquin_meda@standardandpoors.com
Sovereign & International Public Finance Sebastin Briozzo, Director 54-11-4891-2120 sebastian_briozzo@standardandpoors.com Structured Finance Juan Pablo De Mollein, Managing Director 1-212-438-2536 juan_demollein@standardandpoors.com Sol Ventura, Associate Director 54-11-4891-2114 sol_ventura@standardandpoors.com Facundo Chiarello, Associate 54-11-4891-2134 facundo_chiarello@standardandpoors.com Marketing & Communications Fernanda Cravero 54-11-4891-2133 fernanda_cravero@standardandpoors.com Mara Laura Ingaramo 54-11-4891-2107 laura_ingaramo@standardandpoors.com Quality Ivana Recalde, Director & Quality Officer 54-11-4891-2127 ivana_Recalde@standardandpoors.com Ignacio Estruga, Associate 54-11-4891-2106 ignacio_estruga@standardandpoors.com
Origination Lorena Rossi 54-11-4891-2135 lorena_rossi@standardandpoors.com
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Standard Poors Standard && Poors Av. L.N. Alem 855 3er Piso Av. L.N. Alem 855 3er Piso Buenos Aires C1001AAD Buenos Aires C1001AAD Argentina Argentina Tel: +54 11 4891 2100 Tel: +54 11 4891 2100 argentina@standardandpoors.com argentina@standardandpoors.com www.standardandpoors.com.ar www.standardandpoors.com.pe

Top20 Peruvian Companies 2011

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Top20 Peruvian Companies 2011

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Peruvian Companies

Top 20: Peruvian Companies

Selected Financial Data and Credit Statistics

Understanding Ratings and Definitions

Top 20: Peruvian Companies

Selection Criteria and Methodology

Top 20: Peruvian Companies

Major Rating Factors

Year ended Dec. 31

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Table 2 | Perus Economic Indicators

External Finances: Moderate Current Account Deficits Going Forward

Top 20: Peruvian Companies

Table 3 I Perus External Indicators

25,347 27,331 38,041

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Table 4 I Perus Fiscal Indicators

Monetary Policy: Further Institutionalization Of Monetary Policy

Top 20 Peruvian Companies

Table 5 I Perus Monetary Indicators

Comparative Analysis: Better Economic Indicators And A Weaker Political Stance

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Related Criteria And Research

Ratings Detail (As Of 15-Sep-2011)* Republic of Peru

Top 20: Peruvian Companies

Latin Americas Resilience, Recovery, And Consolidation

Latin America---Growth And Inflation Outlook

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Current Policy Rate -12 5 3.75 4.5 -4.25 --

11.0 5.6 2.5 2.6 4.3 4.3 2.2 26.9

10.9 5.9 3.0 3.2 4.4 4.9 2.1 27.4

10.6 6.0 2.7 3.4 3.8 4.8 2.2 28.9

10.0 6.0 2.7 3.2 3.6 5.0 2.2 29.8

9.7 6.3 3.4 3.2 3.0 5.5 2.7 28.7

9.7 6.5 3.2 2.8 3.4 6.3 3.3 24.0

-4.5 (+/-2) 3 (+/-1) 3 (+/-1) 3 (+/-1) -2 (+/-1) --

Top 20: Peruvian Companies

Resistance, June 13, 2011

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Latin America Is Seeing A Rise In Privately Financed Infrastructure Projects

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies

South American Banks Resilience Should Support Rapid Credit Growth

Top 20: Peruvian Companies

N/A--Not applicable. Capital Tier 1 level as defined by each countrys regulator.

Top 20 Peruvian Companies

Top 20: Peruvian Companies

Top 20 Peruvian Companies