Posadas Bonds Rallying as Hotel Rooms Fill Up: Mexico Credit

Mexico's President Felipe Calderon
Deaths related to drug trafficking increased almost 60 percent in Mexico last year and total more than 34,000 since President Felipe Calderon took office in December 2006. The Photographer: Scott Eells/Bloomberg

Grupo Posadas SAB’s bonds are posting gains that are triple that of Mexican corporate debt as the country’s largest hotel chain taps into a rebound in travelers spurred by the fastest economic growth in a decade.

The 12 percent rally this year in Posadas’ dollar bonds due in 2015 compares with a 3.7 percent advance for debt sold by companies based in Latin America’s second-biggest economy, according to data compiled by Bloomberg and JPMorgan Chase & Co. Debt from global hotel companies returned 4 percent during the same period, Bank of America Corp. data show. The yield on the Mexico City-based company’s notes tumbled 251 basis points, or 2.51 percentage points, this year to 9.57 percent.

The country’s economic expansion is fueling a revival in tourism. Hotel occupancy rates in the 70 most-important tourist destinations rose to 52.3 percent in the first five months of the year, from 49 percent in 2009, when the global financial crisis and a swine flu outbreak deterred visitors, according to the Tourism Ministry. Posadas said on April 29 that revenue rose 10 percent to 1.7 billion pesos ($146 million) in the first three months of 2011.

“The very worst seems to be over from last year,” Nuria Jorba Arimany, a credit analyst at Union Bancaire Privee in Zurich, said in a telephone interview. “They have taken the right measures to get a recovery in the company.”

Posadas’s bonds yield 728 basis points more than similar-maturity Mexican government dollar bonds, down from a record 1,005 on Nov. 29, according to data compiled by Bloomberg.

Economic Outlook

The company reported net income of 109.2 million pesos in the January-through-March period, its second straight three-month period of profit, as the occupancy rate at Posadas’ hotels rose to 57 percent from 54.8 a year earlier.

Mexico’s economy may grow as much as 5 percent this year after a 5.4 percent expansion in 2010 that was the fastest in a decade, according to the central bank.

“The operational part of the company is improving along with the Mexican economy,” Araceli Espinosa, a debt analyst at Scotia Capital in Mexico City, said in a telephone interview.

Posadas Chief Financial Officer Ruben Camiro didn’t return calls seeking comment.

“We feel like the challenges are behind them,” Geof Marshall, who helps manage about $5 billion in debt denominated in U.S. and Canadian dollars, including Posadas bonds, at CI Investments Inc. in Toronto, said in a telephone interview.

Violence sparked by drug gangs battling for control of trafficking routes in the north is keeping international travelers “away” and hurting Posadas, according to Marshall.

Drug Violence

Deaths related to drug trafficking increased almost 60 percent in Mexico last year and total more than 34,000 since President Felipe Calderon took office in December 2006. The government estimates the violence shaves 1.2 percentage points off economic output annually.

Tourism revenue fell to $11.28 billion in 2009, the lowest since 2004, as swine flu, the financial crisis and worsening drug violence dissuaded international travelers from visiting Mexico. Revenue from tourism rose to $11.87 billion last year.

The yield on Posadas’s bonds climbed to a record 12.5 percent on Nov. 25, according to data compiled by Bloomberg.

The flu outbreak, drug violence and the bankruptcy of airline Compania Mexicana de Aviacion “caused quite poor results last year,” said Esther Chan, a London-based portfolio manager at Aberdeen Asset Management Ltd., the U.K.’s largest independent money manager.

Yield Spread

Posadas’s revenue dropped 9.7 percent to 6.5 billion pesos last year while net income plunged 85 percent to 40.4 million pesos. The company had to inject money into Compania Mexicana, which filed for bankruptcy protection in August.

“This is not a company that’s flying,” Chan said in a telephone interview from London. “They had two years where tourism really suffered. The business is marginally picking up. First-quarter results are not phenomenal.”

The extra yield investors demand to own Mexican dollar bonds instead of U.S. Treasuries narrowed one basis point to 143 at 12:54 p.m. New York time, according to JPMorgan.

The peso fell 0.6 percent to 11.6369 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years dropped three basis points to 102 yesterday, 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.

Credit Ratings

Yields on futures contracts for the 28-day TIIE interbank rate due in December rose one basis point to 5.03 percent.

The yield on Posadas’s bonds may fall below 9 percent and the company may receive a credit-rating increase should earnings improve, Union Bancaire’s Arimany said.

Standard & Poor’s rates Posadas B-, six levels below investment grade, while Moody’s Investors Service has an equivalent B3 ranking on the company. The ratings companies have a negative outlook on Posadas.

S&P is not planning to raise the company’s rating in the short-term, said Monica Ponce, a credit analyst at S&P in Mexico City.

The company may reach an average 60 percent occupancy rate in the second half of the year, according to Ponce.

“The tourism sector is being reactivated,” Ponce said. “We aren’t anticipating any more problems like those caused by swine flu and Mexicana. The gains in the economy are starting to be reflected in the tourism industry.”

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