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Default Concern Drives Maxcom Yields to Record: Mexico Credit

Maxcom Telecomunicaciones SAB’s borrowing costs are rising at twice the pace of similarly rated global peers on speculation the Mexican phone company may default as slowing economic growth deepens losses.

Yields on Maxcom’s dollar bonds due in 2014 soared 1,004 basis points in the past two months to a record 28.26 percent, while the price of the securities sank to 65.09 cents on the dollar yesterday, according to data compiled by Bloomberg. The average yield on debt sold by companies globally that share Maxcom’s CCC rating climbed 446 basis points, or 4.46 percentage points, during the same period to 15.42 percent, Bank of America Corp. data show.

Maxcom has posted six straight quarterly losses as it struggles to compete with billionaire Emilio Azcarraga’s Grupo Televisa SA in Latin America’s second-biggest economy. Slumping global growth and Europe’s debt crisis are eroding demand for higher-yielding assets, increasing concern Maxcom will be unable to refinance its obligations, said Mark Christensen, who helps manage $500 million in emerging-market debt at Doubleline Capital LP in Los Angeles.

“We’ve consistently seen numbers underperform,” Christensen, who sold his Maxcom bonds last year, said in a telephone interview. “It’s kind of a game of chicken to see if they can get something to take place to improve their scenario.”

The yield on Maxcom’s bonds compares with a rate of 2.4 percent yesterday for Mexican government bonds due in 2014, according to data compiled by Bloomberg. Average borrowing costs for Mexican companies rose 85 basis points in the past two months to 7.09 percent yesterday, JPMorgan Chase & Co. data show.


S&P defines CCC debt as vulnerable to nonpayment and “dependent on favorable business, financial and economic conditions.” Moody’s Investors Service rates Maxcom Caa1, seven levels below investment grade, a category “subject to very high credit risk.”

“We are improving our cash levels and our financial position,” Manuel Perez, Maxcom’s director of investor relations, said in a telephone interview from Mexico City. “We are confident we will service totally our debt. We’ll make our commitments.”

Maxcom has held discussions with banks about financing options, Perez said. He declined to identify the banks. The company, based in Mexico City, prefers to wait until markets improve, probably in early 2013, before refinancing or engaging in other transactions to raise cash, he said.

Second Quarter

Maxcom posted a net loss of 51.2 million pesos ($3.64 million) in the second quarter as cable carriers, including three controlled by Grupo Televisa, entered the phone and Internet markets with deep discounts and lured away customers. Its ratio of net debt to earnings before interest, taxes, depreciation and amortization doubled to 3.2 times in 2010 from 1.5 times in 2008, when the company spent 1.63 billion pesos to expand its network infrastructure as the collapse of the global economy began hurting profits.

“The problem with the company is a lot of competition from all fronts,” Nymia Almeida, an analyst at Moody’s in Mexico City, said in a telephone interview. “After the recession in 2009, things just never got back to the way that they were. If they don’t have sound operating results, the question is if they will be able to refinance the debt.”

Mexico’s economy will probably grow 4 percent this year after expanding 5.4 percent in 2010, the fastest pace in a decade, central bank Governor Agustin Carstens said in a Sept. 8 interview with Mexico City-based Radio Formula. Growth in the U.S., the destination for 80 percent of Mexico’s exports, will slow to 1.6 percent this year, according to the median estimate of 66 analysts surveyed by Bloomberg.

Default ‘Unlikely’

Maxcom’s stock plunged 58 percent this year, compared with a 14 percent decline for the benchmark IPC index of 35 Mexican stocks.

Maxcom will likely keep servicing its debt while asking regulators to reduce interconnection fees charged by America Movil SAB, Latin America’s largest wireless carrier, to help boost profit next year, said Martin Lara, an analyst at Corp. Actinver SAB in Mexico City.

“A default is very unlikely,” Lara said. “It’s a problem that they have until the end of 2014 to resolve, and there are still solutions.”

Maxcom is improving its payphones to make them less prone to theft and this month started a new online video service called Yuzu, with plans to sign up 500,000 users in the first year of operations. Those initiatives will help boost sales, Perez said.

‘Risky Bond’

Mary Austin, who manages about $469 million in high-yield debt, including Maxcom bonds, at Pax World Management LLC, said the Mexican phone company is unlikely to stop making payments on its debt and that the decline in the securities is part of the global sell-off.

Concern that European officials will fail to contain the region’s debt crisis and the U.S. recovery is faltering has wiped more than $9 trillion from the value of global stocks in the third quarter.

“It’s a risky bond and there’s been such a huge flight to quality because of what’s going on with Europe,” Austin said in a telephone interview from New York.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose 11 basis points to 278 at 5:23 p.m. New York time, according to JPMorgan’s EMBI Global index.

The peso fell 1 percent to 14.0332 per U.S. dollar.

Default Swaps

The cost to protect Mexican debt against non-payment for five years rose 14 basis points to 215, 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.

Yields on futures contracts for the 28-day TIIE interbank rate due in February 2013 were unchanged today at 5.05 percent.

Speculation the Mexican government would change the law to allow a foreign company to buy Maxcom had prompted some investors to hold on to the company’s bonds, said Doubleline’s Christensen. No such bill has been passed with about 14 months remaining in President Felipe Calderon’s term.

“Unless something dramatically changes, they’re going to have to restructure their debt,” Christensen said. “The cash balance has just continued to get worse. It’s still the same battle now but with less liquidity. They can limp along and hope something changes, and that’s what the owners are doing. They have three more years.”

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