Beating Slim Makes Maxcom Debt a Buy to JPMorgan: Mexico Credit

Billionaire Carlos Slim
Billionaire Carlos Slim. Photographer: David Rochkind/Bloomberg

Maxcom Telecomunicaciones SAB’s bonds are rebounding and yields are down from record levels in overseas markets after JPMorgan Chase & Co. said the Mexican phone company may win a battle to cut fees charged by billionaire Carlos Slim’s America Movil SAB.

Yields on Maxcom’s dollar bonds due 2014 have declined 286 basis points, or 2.86 percentage points, to 19.219 percent from a record 22.078 percent on April 28. Yields on Mexican corporate dollar debt fell four basis points while those on Latin American utility companies rose nine during the same period, according to data compiled by JPMorgan and Credit Suisse Group AG.

Maxcom, a Mexico City-based fixed-line company that has posted five straight quarterly losses, is asking regulators to reduce interconnection fees charged by America Movil, Latin America’s largest wireless carrier. On May 2, regulators ruled in favor of Grupo Televisa SAB in its bid to cut America Movil fees, bolstering speculation that Maxcom will also win its case as the government seeks to curb Slim’s dominance in the mobile-phone and fixed-line markets.

“We feel more positive about the credit now because of the interconnectivity fees,” said Mary Austin, who manages $469 million in high-yield debt, including Maxcom bonds, at Portsmouth, New Hampshire-based Pax World Management LLC. “Believe me, we were worried about it for a while because of the liquidity issues.”

‘Cash Burn’

Yields on Maxcom’s 11 percent bonds soared 438 basis points in the first four months of the year as Standard & Poor’s lowered the company’s credit rating to B-, or six levels below investment grade, on March 3, citing a “high cash burn rate.” Moody’s Investors Service rates Maxcom Caa1, or seven levels below investment grade.

The bonds yield 1,729 basis points more than similar-maturity Mexican government dollar bonds, up from 1,476 basis points at the end of 2010.

Customer losses at Maxcom led to a net loss of 38 million pesos ($3.3 million) in the January-to-March quarter, compared with a 57 million-peso loss a year earlier. The company has replaced its chairman, chief executive officer and chief financial officer in the past eight months.

While Maxcom is waiting on the regulator’s ruling, it began to pay the reduced connection fee of 39 centavos per call to America Movil in January. America Movil, controlled by Slim, whom Forbes magazine ranks as the world’s richest person, charges 95 centavos.

An official in the press office of the Federal Telecommunications Commission declined to comment.

America Movil may appeal the commission’s rulings in Mexican courts, Chief Executive Officer Daniel Hajj said yesterday on a conference call.

JPMorgan’s ‘Overweight’

Miguel Cabredo, Maxcom’s chief financial officer, told investors on an April 29 conference call that the lower fees will save the company about 200 million pesos this year.

JPMorgan analysts raised Maxcom’s bonds to “overweight” from “marketweight” on May 2, saying the securities may generate returns of as much as 8 percent in the next two months.

“We assign a high probability of a ruling in Maxcom’s favor,” wrote Jacob Steinfeld, an analyst at JPMorgan Securities in New York. “The potential earnings are too high to ignore.”

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries widened 3 basis points to 143, according to JPMorgan.

Alestra Victory

The cost to protect Mexican debt against non-payment for five years was little changed at 98, 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.

The peso fell 0.6 percent to 11.6440 per U.S. dollar at 5 p.m. New York time. Yields on futures contracts for the 28-day interbank rate due in October fell 8 basis points to 5.04 percent.

S&P maintained a negative outlook on Maxcom debt after the rating downgrade.

“The negative outlook reflects the company’s tight liquidity and our expectations of continued weak financial performance,” S&P analysts Marcela Duenas and Fabiola Ortiz wrote in a March 14 note in Mexico City.

Maxcom is one of dozens of phone carriers disputing America Movil’s fee to connect customers to its network.

Supreme Court Ruling

The Federal Telecommunications Commission ruled in March that fixed-line phone carrier Alestra SA should pay America Movil a rate of 39 centavos a minute, less than half the rate America Movil was seeking. This week, the regulator fixed the same 39-centavo rate for calls from customers of Televisa and NII Holdings Inc. to America Movil.

Maxcom expects an identical ruling for its own dispute with America Movil this month, Cabredo said on the conference call.

A Supreme Court ruling yesterday made it more difficult for America Movil to protect the prices it wants to charge competitors. The company can no longer seek an injunction to allow it to keep charging competitors a higher price while appealing the decision on a fee cut, according to the ruling.

Televisa, NII and other carriers have said America Movil is hurting competition by keeping the interconnection fees too high. Mexico’s antitrust agency fined America Movil $1 billion last month, saying its market share allows it to control prices on the connection fees. America Movil plans to appeal the ruling, Hajj said.

Threat to Investment

While the company has been lowering its fees, bigger cuts could reduce investment in the industry, Hajj said.

Maxcom’s residential phone lines slid 1 percent to 223,648 last quarter, while Internet subscriptions climbed 38 percent to 89,219 and TV clients rose 27 percent to 49,598.

The first-quarter results make it “more than ever certain” that Maxcom will generate cash this year, Cabredo said on the conference call. Manuel Perez, Maxcom’s investor relations director, said in an interview yesterday that the company will service its debt while declining to comment on the dispute with America Movil.

“We are really confident we’ll be able to cover our liabilities,” Perez said in a phone interview from Mexico City. “The company will make important improvements this year.”

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