Apartment Subsidies Hurt Builder Bonds: Mexico Credit

(Corrects to show that a call made to Homex’s investor relations officer went unanswered in 10th paragraph of story published yesterday. Deletes reference to call made to CEO Gerardo de Nicolas Gutierrez.)

The Mexican government’s push to ease a housing shortage is driving up costs for homebuilders, prompting bonds from Desarrolladora Homex SAB to Urbi Desarrollos Urbanos SAB to lag behind those of corporate peers.

The 0.7 percent loss in dollar bonds sold by Urbi this year compares with an average 2.1 percent return for Mexican corporate debt, according to data compiled by Bloomberg and JPMorgan Chase & Co. Notes from Homex, Mexico’s biggest homebuilder, are up 0.7 percent in the same period, while securities from Corp. Geo SAB, Mexico’s second-largest homebuilder, returned 0.2 percent. Homebuilder bonds globally have returned 4.8 percent this year, according to Bank of America Merrill Lynch.

Investors are growing concerned that a government subsidy encouraging Mexicans to buy apartments instead of houses is pushing construction companies into a business that requires larger initial investments. Infonavit, the agency that finances about 70 percent of mortgages, changed its criteria this year so that borrowers are more than twice as likely to get a subsidy for an apartment as for a house.

“There are concerns about the cash-flow cycle,” Natalia Corfield, a corporate bond analyst at ING Groep NV in New York, said in a telephone interview.

Yields on Homex’s $250 million of 9.5 percent bonds due in 2019 have risen 33 basis points this year to 7.63 percent, or 348 basis points more than similar-maturity Mexican government debt, according to data compiled by Bloomberg.

Rising Yields

The yield on Geo’s bond due in 2020 climbed 32 basis points, or 0.32 percentage point, in the same period to 7.54 percent. Similar-maturity dollar debt from Urbi has risen 35 basis points this year to 7.56 percent.

Homex boosted its ratio of net debt to earnings before interest, taxes, depreciation and amortization to 2.8 times in 2010, a 10-year high, from 1.9 times in 2009, according to data compiled by Bloomberg. Urbi’s debt-to-Ebitda ratio climbed to 1.26 times from 1.1 in 2009.

Homebuilders’ rising debt levels are also sparking losses in equity markets. Geo’s stock is down 25 percent this year, the worst performer on Mexico’s benchmark index of 37 stocks. Homex has dropped 21 percent and Urbi 0.4 percent.

“The working capital is limited right now,” Gerardo Copca, an equity analyst at Metanalisis SA in Mexico City, said in a telephone interview. “The raw material costs are up. The companies are between a rock and a hard place.”

Overcrowding

A call made to the mobile phone of Vania Fueyo Zarain, Homex’s investor relations officer, went unanswered. Alejandro Haiducovich, a Geo spokeswoman, declined to comment and said company executives weren’t immediately available.

“When you construct the buildings, you can’t sell an apartment until you’ve completed the whole building, which extends the working capital cycle,” Antonio Jorge, an investor relations officer with Urbi, said in a telephone interview from Mexico City. “The company has been working to increase its efficiency in the construction process so that this won’t lead to increased working capital requirements.”

The company’s net debt-to-Ebidta ratio will be less than 2.5 times in 2011, which is conservative, Jorge said.

Government Goals

The government is promoting apartment complexes in a bid to reduce energy use, prevent overcrowding and house workers closer to their jobs, according to Victor Borras, Infonavit’s chief executive officer.

“The model here in Mexico in recent years has been a single-family model,” Borras said in a telephone interview. “The undesirable effect is that cities have expanded a lot and it’s costing more to bring not only public services, but also for people to transport themselves to their jobs, to their children’s schools. Vertical housing is becoming indispensable in achieving more compact cities.”

Starting in May, Infonavit will accept applications for loans and subsidies as long as six months before a building is finished to give homebuilders greater security, Borras said.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries was unchanged at 137 today, according to JPMorgan.

The cost to protect Mexican debt against non-payment for five years fell 1 basis point to 99, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Yields on the interbank rate futures contract, known as TIIE, due in September fell four basis points to 5.01 percent, indicating that traders expect a rate increase that month. In the past five years, the gap between the 28-day TIIE and the overnight rate has averaged 36 basis points.

The peso rose 0.2 percent to 11.5779 per U.S. dollar.

Relative Risk

Bonds from Homex, Geo and Urbi are attractive because of the yields the securities offer, said Juan Carlos Moreno, a debt portfolio manager at Grupo Financiero Interacciones SA.

“I like these bonds for the risk that they have compared to what they pay,” Moreno said in a telephone interview from Mexico City.

Homebuilders’ bonds are also slumping after a rally last year made the securities too expensive, according to Carlos Legaspy, who manages about $300 million in emerging-market debt at San Diego, California-based Precise Securities.

Urbi bonds returned 23 percent last year, while Homex bonds returned 24 percent and Geo notes rallied 19 percent, according to data compiled by Bloomberg. Mexican corporate dollar debt gained 13 percent in 2010, according to JPMorgan.

“It’s just a matter of valuation,” Legaspy said in a telephone interview. “They were such outperformers.”

To contact the reporter on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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