Argentine Corporates: Uncertainty of Default Looms Says Fitch

Fitch-Chicago-January 10, 2002: Fitch views the recent announcements and expected actions to
be taken by the Argentine government as detrimental to the financial health of many Argentine
corporates, creating significant uncertainty and possibly leading to payment defaults for some. The
government’s plan to devalue the currency should reopen access to foreign exchange but at a
much higher cost and to the detriment of the private sector. Although beneficial to the government’s
hard currency problem, this devaluation effectively expropriates significant value from the
corporates in this once near-dollarized economy.

The effects of the government’s action on the Argentine corporates’ credit quality will result in a
deterioration of financial flexibility and credit protection measures. Most of the Fitch publicly-rated
entities have tended to be the most financially sound, and thus will be in the best financial position
to emerge successfully from the current crisis, although the outcome is highly uncertain at this time.

The ability of these entities to make timely payments on their debt service obligations is our most
immediate concern. Acute lack of liquidity in the Argentine market place will limit companies’ ability
to offset the adverse effect on cash flow and to meet near term debt service with bank lines of credit
– even for the best credits in the market. For weaker credits, this issue is amplified.

Effects of Devaluation on Corporates

Initial indications suggest a devaluation target of 29%, although it remains to be seen whether this
level will be sustainable in the very short term. Additional measures include the conversion of
public service tariffs and fees to pesos from US dollars and effectively breach privatization
concession contracts by prohibiting adjustment for the increasing costs associated with the
devaluation. Price caps, i.e. controls, to be put in place by the authorities in an effort to ward off
inflationary pressure, will force these companies to absorb the higher costs of devaluation without
an offset, i.e. an adjustment in revenues.

While most of the operating costs of these companies are peso-denominated and will not be
affected by the devaluation, their financial expenses will be dramatically impacted as most of the
debt obligations of Argentina’s blue chip corporates are denominated in US dollars. As a result, this
will immediately increase the debt burden, eliminate and/or reduce free cash flow to service debt
and the ability to repay interest and principal in a timely manner.

The most dramatic impact will be on public service entities, utility and telecommunication
companies, given the large US dollar debt levels and peso revenues (expected to be capped) that
will result in an immediate reduction in cash flow in dollar terms. While the devaluation is quite
painful, many of these companies are in the enviable position of providing basic services to meet
the population’s needs and operate as natural monopolies, placing them in favorable long-term
business positions.

However, as providers of public services they remain exposed to additional intervention on the part
of public policy makers. Financially the devaluation will adversely effect these companies, but for
the strongest entities these companies would still be financable in a stable economic and political
environment — conditions that do not exist in Argentina at this moment.
Exporters should immediately benefit from the devaluation by lowering operating costs that will
generally be in pesos. Although, this may have a favorable initial impact, it is the ability to remain
competitive over the long term on the international arena that will define financial flexibility and
profitability on a global basis. In some sectors, while this is a short-term boost to competitiveness,
many of these companies require significant investment in production technologies and processes
necessary to be able to compete on the international markets.

Given the confluence of the recent events in Argentina, these gains will likely be offset by the more
challenging costs of attracting investment to these exporting sectors. Moreover, the government
has indicated that many of these short-term gains to oil exporters from devaluation may be clawed
back through an export tax on the oil sector (the largest exporting sector, i.e. a windfall tax, to back
up the banks and defend ‘pesofication’.

Liquidity — The Key

Many Argentine companies are facing immediate liquidity and refinancing risk. As liquidity has dried
up in the international capital markets over the past year or so, local and international bank markets
afforded the necessary funding to meeting working capital and refinancing requirements, resulting
in increased short-term debt levels. Entities with debt maturities over the ensuing 3 to 6 months are
likely to have limited financing options. The devaluation will place a similar shock to the already
fragile Argentine banking system, further drying up liquidity for the private sector corporates.

Companies that have short-term bank maturities will likely be able to roll-over these debts as the
banks will likely have incentives to extend these lines of credit and prevent further deterioration in
loan portfolios and heightened reserve requirements.

At issue will be debt maturities on local and international bonds, which could normally be refinanced
by new money bank loans. Higher or new bank lines of credit should be difficult to obtain given the
large amount of uncertainty in the Argentine marketplace. In addition, the weaker companies could
be crowded out of the bank market as they compete with the better credits for scarce financing.
Companies with high cash balances or debt service reserves may avoid the crunch.

Collateral Effects of the Sovereign Default

Many of these companies are owned and supported by large multinational, financially strong
companies. While the possibility exists of receiving financial support from these parent companies,
the actions by the government have created sufficient uncertainties as to whether it is prudent to
support these entities as the new rules of the game have yet to be defined. The Argentine
government’s actions have not only breached the concession contracts but the spirit of market
based reforms, and have shaken the international investors’ confidence for investments in
Argentina.

Nevertheless, companies with sizable investments and a regional Latin American investment
strategy that have common creditors, both at the parent and Argentine subsidiary level will likely be
more compelled to accommodate creditors to ensure future access to international bank and capital
markets in the long term.

We anticipate foreign-owned companies will attempt to negotiate long-term plans with the
government to recapture some of the lost economic value over time and as the country stabilizes.
Alternatively, the sovereign’s decision to default may have reduced the stigma associated with such
an action and could facilitate a corporates’ decision to opt for a measure deemed unthinkable a few
months ago.

Contact: Daniel R. Kastholm, CFA 1 312 368-2070, Chicago, Jason T. Todd 1 312 368-3217,
Chicago, Alejandro Bertuol, 1 212 908-0393, New York.