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Posadas Bond Yields Jump to Four-Month High on Debt Concern: Mexico Credit

Grupo Posadas SAB’s borrowing costs are rising to a four-month high after the Mexican hotel operator’s decision to hire an advisor to evaluate financing options deepened speculation the company is struggling to reduce debt.

The yield on Posadas’s dollar bonds due in 2015 jumped 54 basis points, or 0.54 percentage point, last month to 10.10 percent, the highest since Feb. 28, according to data compiled by Bloomberg. The average yield on debt sold by Mexican companies climbed 25 basis points, or 0.25 percentage point, since the end of May, to 6.40 percent, according to JPMorgan Chase & Co. Brazilian corporate yields rose 7 basis points in the past month.

Posadas’s obligations rose to 9.5 billion pesos ($818.5 million) at the end of March from a year earlier amid mounting evidence the expansion in Latin America’s second-biggest economy is slowing. The economy expanded in April at the slowest pace since December 2009 as U.S. demand for the nation’s exports weakened. Posadas’s total debt relative to earnings rose to 7.3 times in the 12 months ended in March from 6.1 times a year earlier, according to Standard & Poor’s.

“Posadas is a highly leveraged company,” Araceli Espinosa, a debt analyst at Scotia Capital in Mexico City, said in a telephone interview. “They are not generating enough cash to pay back their debts and that’s why they’re raising capital.”

Posadas’ bonds yield 808 basis points more than similar- maturity Mexican government dollar bonds, up from 736 a month ago, according to data compiled by Bloomberg.

Rating Outlook

The company, Mexico’s largest hotel operator, has 4.63 billion pesos of bonds due in 2013 and 2015 and 676 million pesos in cash and short-term investments at the end of the first quarter, according to Bloomberg data.

Posadas said on June 27 it reached an agreement with shareholders to raise $50 million in the third quarter.

The equity financing isn’t enough to reduce the company’s debt and won’t lead to an increase in its credit rating, said Monica Ponce, a credit analyst at S&P in Mexico City. S&P rates Posadas B-, six levels below investment grade. The outlook is negative.

“Even if they were going to use the capital to pay back debt, the levels of leverage will still be high,” Ponce said in a telephone interview. “Even though we think it’s a positive sign, it won’t be enough to take any action on the credit rating.”

‘Perfectly Well’

NM Rothschild & Sons Ltd., a London-based investment bank, is advising the company on plans to sell shares or seek a new institutional investor and improve liquidity, Chief Financial Officer Ruben Camiro said in an interview on June 27. Camiro declined to say how much Posadas is seeking to invest in new projects with the money the company could raise through the options it is exploring with Rothschild’s help.

“The debt situation is such that we can handle it perfectly well,” Camiro said. “You are always working and thinking on how to manage liabilities and what you do with it.”

A new investor could acquire a controlling stake in Posadas as part of the actions taken to raise funds, Camiro said.

“Institutional investors might come in different flavors,” Camiro said. “What we are looking for is to grow, so those are the types of things one has to consider. I cannot rule it out, but I would say that would not necessarily be preferred.”

The Azcarraga Andrade family, headed by Posadas Chairman and Chief Executive Officer Gaston Azcarraga Andrade, controls Posadas.

‘Take Risks’

The U.S. economic recovery will pick up speed in the second half of the year, helping fuel tourism, said Camiro in an interview yesterday. Reducing debt will allow the company to better expand and take advantage of the recovery, he said.

“Of course we want to deleverage,” Camiro said yesterday. “Obviously this is one of our major goals, to be more comfortable and remove this threat.”

Concern Posada’s ownership may change is also prompting investors to shun the company’s bonds, Scotia Capital’s Espinosa said.

“Investors don’t want to take risks,” Espinosa said. “If there’s a change in ownership, they’re thinking, What’s going to happen with the bonds? Am I going to get paid in full?”

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 1 point to 122 basis points at 5 p.m. New York time, according to JP Morgan.

The cost to protect Mexican debt against non-payment for five years was little changed at 107, 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 the cash equivalent if a government or company fails to adhere to its debt agreements.

Bargain

The peso rose 0.9 percent to 11.6071 per U.S. dollar.

Yields on futures contracts for the 28-day TIIE interbank rate due in February fell 2 basis points to 5.01 percent, indicating traders expect the central bank to raise the rate that month.

The slump in Posadas’s bonds is making the securities a bargain as the new equity financing will help the company cut debt, said Alvaro Gonzalez, an emerging-market credit analyst at Miller Tabak Roberts Securities Llc in New York.

“The infusion of capital is going to help reduce their short-term debt,” Gonzalez, who has a buy rating on Posadas’s debt, said in a telephone interview. “They are attractive and their liquidity is going to improve with this injection of cash.”

Posadas’s bonds rallied earlier this year as quickening growth boosted hotel occupancy, fueling a 10 percent jump in revenue to 1.7 billion pesos in the first three months of the year.

Slowing Growth

Mexico’s economy grew 2.4 percent in April, the national statistics agency said on its website on June 28. Federal Reserve officials last week cut their 2011 and 2012 growth forecasts for the U.S. economy, the destination for about 80 percent of Mexico’s exports. The world’s biggest economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections.

The slump in Posadas’s bonds is also part of a sell-off in Mexican corporate debt fueled by slowing U.S. growth and the European debt crisis, said Geof Marshall, a Toronto-based fund manager at CI Investments Inc., who oversees about C$5 billion in high-yield bonds.

Traders are “marking them lower with the rest of the market,” Marshall said in an e-mail.

To contact the reporters on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net; Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

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

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