April 22 (Bloomberg) -- Carlos Slim, the world’s richest man, is giving a lifeline to Mexican homebuilder Desarrolladora Homex SAB.
Homex’s $400 million of bonds due in 2020 soared a record 20 cents to 79.11 cents on the dollar after the builder said on April 19 that it agreed to sell its stake in two prisons to companies controlled by Slim. The notes sank as low as 53.44 cents on April 17 after Homex said it would seek to raise cash from asset sales and junior debt issuance, while rivals Urbi Desarrollos Urbanos SAB and Corp. Geo SAB hired banks to advise on possible restructurings. Urbi said last week it will use a 30-day grace period to make an interest payment due April 19.
Homex, which said it will raise about 4 billion pesos ($326 million) in the sale to Slim’s Ideal and Grupo Financiero Inbursa SAB, is trying to regain investor confidence as the industry struggles to stem a cash drain fueled by a government-subsidized housing program to promote urban apartment buildings. The projects, which require longer planning and building than single-home construction, prompted Homex’s cash to dwindle by 1.7 billion pesos last year, the biggest drop since Bloomberg started compiling the data in 2001.
“He sees Homex’s back against the wall, he saw something he liked and it’s like you made a deal with the ‘Godfather’ --he makes them an offer they can’t refuse,” Ray Zucaro, who helps manage $300 million of emerging-market debt at SW Asset Management in Newport Beach, California, said in a telephone interview. “It gives them a breath of fresh air.”
Vania Fueyo, a spokeswoman for Culiacan, Mexico-based Homex, said in an e-mailed response to questions that the money from the sale positions Homex “strategically” to eventually pull ahead “in an environment of reduced competition.”
The company said in the filing it will use about half of the money as working capital and the rest to pay down debt ahead of schedule. Slim’s bank, Inbursa, and construction firm Impulsora del Desarrollo y el Empleo en America Latina SAB, known as Ideal, will buy the stake in the prisons, one in Morelos state and the other in Chiapas. Homex expects to stay on as builder of the prison in Morelos and to participate in the operations of both prisons, according to the statement.
Homex had bank loans from Inbursa totaling at least 1.8 billion pesos as of the end of 2012, according to the builder’s fourth-quarter report.
As the transaction buys Homex time to adapt to the changing homebuilder industry, it’s giving Slim the opportunity to enter the prison business, according to an e-mail from the billionaire’s son, Inbursa Chairman Marco Antonio Slim.
Urbi said April 19 that it wouldn’t make a $6.4 million bond payment due last week. The Mexicali, Mexico-based company said it planned to use the 30-day grace period for payment while it reviews its business, according to a regulatory filing. The company’s bonds due in 2022 rose 0.16 cents to 32.33 cents per dollar on April 19.
The company said on April 15 that it hired Rothschild and other advisers to review its finances and help analyze options including a debt restructuring.
Geo said on April 12 that it hired Fians Capital to provide advice with the “principal objective of generating efficiencies and reviewing alternatives for restructuring its debt,” according to a filing with the Mexican stock exchange. Its bonds due in 2022 rose 2.44 cents to 52.39 cents on the dollar last week.
Urbi spokesman David Aguilar declined to comment on the company’s efforts to restructure debt. Geo spokesman Alejandro Haiducovich declined to comment on the Mexico City-based company’s restructuring process.
“You would think that there would be a temptation to follow the same path,” Jim Harper, director of corporate research at BCP Securities LLC, said in a telephone interview from Greenwich, Connecticut. “In this business, sometimes willingness to pay is equally important and sometimes more important than capacity to pay, and they’ve shown willingness to pay in spades. The market obviously has reacted extremely favorably and kudos to them.”
Homex’s shares jumped a record 40 percent on April 19 to 16.89 pesos. The Mexico Habita Index of six homebuilders soared 15 percent, led by Homex. Corp. Geo rose 13 percent.
While the prison sale “bought some time,” it doesn’t resolve the deeper concerns of investors, according to Claudio Robertson, the head of fixed-income trading at Investment Placement Group in San Diego.
“There are no indications the current situation will radically change without government involvement,” he said in an e-mailed response to questions. “They still need to address their core business. There’s still no information on what they are keeping and how their cash flow will be impacted.”
The cost to protect Mexican debt against non-payment for five years with credit-default swaps declined one basis point to 90 basis points at 3:11 p.m. in Mexico City, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The peso slipped 0.1 percent to 12.2786 per dollar. Yields on interbank rate futures due in December, known as TIIE, fell nine basis points to 4.19 percent last week.
Jacob Steinfeld and Marcela Nagib, analysts at JPMorgan, raised their recommendation on Homex bonds to marketweight from underweight after the transaction was announced April 19.
“This sale is positive for the credit, not only because it improves the company’s liquidity position, but also because it was able to execute on an asset in such a difficult market environment,” they wrote in the report.