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Homebuilder Bonds Fall in High-Rise Push: Mexico Credit

Urbi’s 56-Cent Bonds Show Pena Nieto No Savior
Urbi Desarrollos Urbanos SAB’s $500 million of notes due in 2022 have led declines, sinking 33 cents to below 56 cents on the dollar. Photographer: Susana Gonzalez/Bloomberg

Mexican President Enrique Pena Nieto is creating a windfall for government bondholders while saddling investors in the homebuilding industry with the worst losses in the country’s debt market.

Dollar-denominated bonds issued by the nation’s three-biggest homebuilders have plunged an average of 28 cents on the dollar since Pena Nieto took office Dec. 1. Urbi Desarrollos Urbanos SAB’s $500 million of notes due in 2022 have led declines, sinking 33 cents to below 56 cents on the dollar. Government peso bonds have handed investors a return of 9.5 percent in dollar terms this year, the best in the world after the Philippines, according to Credit Suisse Group AG.

While Pena Nieto’s bid to overhaul tax and energy policies is luring investors to the nation’s sovereign debt and prompting Standard & Poor’s to boost its rating outlook, his push for more apartment construction is exacerbating a rout in homebuilder bonds. Pena Nieto said Feb. 11 that he will use the government’s subsidized-housing program to promote urban apartment building projects, which require longer planning, building and sales cycles than single-construction housing and have caused homebuilders to boost debt and hemorrhage cash.

The government is “signaling very, very strongly that they want people more focused on urban development with high-rise buildings,” Robert Rauch, who helps oversee $3.3 billion as a Greenwich, Connecticut-based partner and money manager at Gramercy Funds Management, said in a telephone interview. He said cash bleed is a sign the biggest builders lack “a good business model.”

Government Plan

Alejandro Nieto Enriquez, the head of the National Housing Commission, says the government’s housing scheme is part of an “urban reform” aimed at curbing sprawl. The policy seeks to meet the country’s housing needs, not to support specific homebuilders, and it shouldn’t be judged based upon “short-term” results, he said.

“What the specialized public sees is what’s happening with the builders listed on the stock exchange,” Nieto Enriquez said in an interview in Mexico City. “That’s not what’s happening in the industry. For the industry in general, and Mexicans overall, the housing policy is clearly going to have its benefits.”

The Finance Ministry said March 6 that lenders will provide as much as 15 billion pesos ($1.2 billion) of construction loans, with the government guaranteeing as much as 30 percent of losses.

BBB Rating

S&P said March 12 it’s considering lifting Mexico’s BBB rating, the second-lowest investment grade, as the prospects for legislative changes that bolster the country’s finances and fuel growth “have improved” under Pena Nieto.

Mexican government dollar-denominated bonds due in 2022 have lost 2.2 percent this year, according to data compiled by Bloomberg.

This month, S&P, Moody’s Investors Service and Fitch Ratings have either downgraded or lowered the outlook on ratings of Urbi, Desarrolladora Homex SAB and Corp. Geo SAB, the biggest homebuilders.

Yields on Urbi’s notes have soared 758 basis points, or 7.58 percentage points, to a record 20.78 percent this month, according to data compiled by Bloomberg. Moody’s cut the rating of Mexico’s third-biggest public homebuilder by sales one level to B2, five steps below investment grade.

David Aguilar, a spokesman for Urbi, declined to comment on the company’s bond market performance.

Homex Bonds

Yields on $400 million of bonds due in 2020 sold by Desarrolladora Homex SAB, the country’s biggest homebuilder by revenue, have jumped 366 basis points to 14.59 percent this month. Moody’s cut the outlook on Homex’s rating to negative from stable. The Culiacan-based company is rated Ba3, three levels below investment grade.

“We support the efforts of the government to improve urban planning and order, and in that sense we’ve said that our land reserves meet the objectives of the government,” Homex said in an e-mailed response to questions. “We saw positive progress near the end of the first quarter and we’re confident that we’ll keep seeing positive signs throughout the year.”

Moody’s also lowered the rating outlook on Corp. Geo SAB, the nation’s second-biggest homebuilder, to negative from stable.

Alejandro Haiducovich, a spokesman for Geo, declined to comment on the company’s performance.

Debt ‘Spiral’

“The debt will continue to spiral,” Rodrigo Covian, the Miami-based head of fixed-income trading at Bulltick Capital Markets, said in a telephone interview. The builders will have to “redo all their strategy in order to go more for other types of construction,” he said.

In 2011, Infonavit, the government agency that provides about 70 percent of the nation’s mortgages, changed its criteria for subsidies to encourage multi-family apartment construction as it seeks to provide housing for about 8.9 million families without homes or living in substandard dwellings.

Homebuilders such as Geo and Servicios Corporativos Javer SAPI are better prepared to adapt to changes in housing policy than the others, according to Omar Zeolla, an analyst at Oppenheimer & Co.

‘Better Shape’

“Javer and Geo are the ones that are in better shape to get through this period of transition from the old model to the new one,” Zeolla said in a telephone interview from New York.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries narrowed three basis points to 181 basis points at 2:26 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose one basis point to 95, according to data compiled by Bloomberg.

The peso gained 0.1 percent to 12.3393 per dollar. Yields on Mexican interbank rate futures contracts due in December, known as TIIE, rose one basis point to 4.39 percent yesterday.

Pena Nieto’s housing plan also encourages development closer to cities, which could hurt the value of some of the builders’ current land banks, Fitch said in a Feb. 22 report.

“The government has made it very clear that they are not going to be supportive of projects in the areas where many of these companies built their land banks,” Bulltick’s Covian said. “We have a lot of clients asking if this is the right time to buy because they have gone too low, too quick, but I don’t think this is the time to catch the knife. We have to see more clarity from the government.”

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