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Mexican Homebuilder Geo Seeks Restructuring as Bonds Sink

Corp. Geo SAB, Mexico’s second-largest publicly traded homebuilder, said it will seek to restructure debt after bleeding cash for a third straight year, sparking a selloff that sent its bonds to record lows.

Geo hired Fians Capital to provide advice with the “principal objective of generating efficiencies and reviewing alternatives for restructuring its debt,” according to a filing to the Mexican stock exchange.

Geo’s $400 million of notes due 2022 tumbled 30.16 cents to 49.95 cents on the dollar as of 3:56 p.m. in New York, leading a rout in bonds from Mexican builders. Shares tumbled 8.8 percent to 6.34 pesos, the lowest price on a closing basis since 2003.

“We’ve been very concerned about industry developments from the beginning of the year,” said Shamaila Khan, an emerging-market money manager at Alliance Bernstein, which oversees about $419 billion of assets. “We really expected there would be defaults and bond restructurings.”

Geo’s announcement comes a day after a person familiar with the matter said competitor Urbi Desarrollos Urbanos SAB had hired Rothschild to provide advice on a possible restructuring. Mexico’s largest publicly traded homebuilders are touching record lows in the stock and bond markets on concern that a shift in government housing policy that favors construction of apartment buildings, which require more upfront capital than single-family homes, is cutting into their cash flow.

Cash Outflows

Geo had negative free cash flow to equity -- the amount of cash that can be paid to owners after all expenses, reinvestments and debt repayments -- of 1.75 billion pesos ($145 million) last year, marking its third straight year of cash bleed, according to its Feb. 27 fourth-quarter report. Fourth-quarter revenue fell 31 percent to 4.3 billion pesos as the company sold 26 percent fewer homes, while net income narrowed 61 percent to 177.5 million pesos.

The builder had total debt of 14.2 billion pesos as of the end of last year, making net debt 2.8 times trailing earnings before interest, taxes, depreciation and amortization, or Ebitda.

Luis Orvananos Lascurain, Geo’s chief executive officer, said in the company’s latest earnings report that 2012 was a “year full of challenges for the housing industry.”

In 2013, the company would “work on a conservative strategy to strengthen operations,” he wrote. “Our efforts for the year will be focused on cash generation, as well as reducing leverage levels, with a priority being the reduction of investment.”

Homex, Urbi

Bonds from Desarrolladora Homex SAB, Mexico’s largest homebuilder, due 2020 lost 20.76 cents today to 59.84 cents. Benchmark securities from Urbi, the third-biggest, due 2022 fell 5.41 cents to 38.93 cents, leaving them down more than 20 cents this week.

Urbi shares fell 8.5 percent to 2.69 pesos, a record low on a closing basis. Homex fell 10.2 percent to 15.72 pesos.

Marena Rubio, a press official at Homex, said her company is working “hand in hand” with lenders to extend this year’s bank debt maturities. The builder hasn’t hired an investment bank for a bond restructuring, Rubio said.

Homex said in a regulatory filing yesterday that it obtained a bridge loan through ABC Capital under a Sociedad Hipotecaria Federal guarantee program that it will use as working capital to build apartments.

Carlos Hermosillo, an equity analyst with Grupo Financiero Banorte SAB, said investors took the loan as a sign of Homex’s cash shortfall. He said he didn’t “necessarily” agree with that interpretation, according to a telephone interview yesterday.

“Confidence in Homex is reflected, for example, in the new loan that was just secured with ABC Capital,” Homex’s Rubio wrote in an e-mailed response to questions. “At the same time, as we’ve previously mentioned, work is continuing on the monetization of infrastructure projects, which will give Homex greater liquidity.”

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