No More Bonds Is Winning Formula for Mexico’s Mexichem

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Mexichem SAB’s overseas sales and its pledge to cut debt are sheltering bondholders from a plunge in the petrochemicals maker’s home currency, the Mexican peso.

The company’s $750 million of bonds due in 2022 have returned 3.8 percent in the past six months, exceeding the average advance for debt issued by Mexican borrowers over the same span and triple the gain in emerging markets. The peso has weakened 12 percent during the period, eroding bond returns of companies with dollar-denominated debt and mostly local revenue.

Mexichem, Latin America’s largest maker of plastic pipes, gets about 60 percent of its revenue in dollars, or from contracts whose pricing is pegged to the dollar, Chairman Juan Pablo del Valle said last week in an interview. He also said the company will refrain from selling new debt this year as it tries to reduce leverage that climbed last year to the highest in two decades.

The company “has a natural hedge in dollars, so with the depreciation of the peso, it will benefit,” said Alonso Madero, who helps manage $7.5 billion at Actinver SAB.

In an April 16 report, Moody’s Investors Service named Mexichem as one of two companies in the country that face little overall risk from peso depreciation.

‘Pricing Mechanisms’

Mexichem and another chemicals maker, Alpek SAB, “use pricing mechanisms tied to costs,” according to the Moody’s report.

Mexico’s peso weakened 0.6 percent to 15.4323 per dollar as of 2:10 p.m. in New York.

The yield on the 2022 bonds has fallen 0.28 percentage point over the past six months to 3.95 percent. That’s less than the average of 4.41 percent for emerging-market corporate bonds with the same Baa3 rating from Moody’s.

In the April 17 interview, del Valle said his costs are split in roughly the same proportion as revenue.

“What makes our bonds attractive is, in part, that most of our income is in dollars,” he said.

Mexichem’s leverage climbed last year as it sold $750 million of 30-year bonds. Tlalnepantla, Mexico-based Mexichem acquired U.S. pipe manufacturer Dura-Line Corp. for $630 million and German chemical maker Vestolit GmbH for 219 million euros ($233 million) in 2014.

Ebitda Outlook

At the end of the year, net debt represented 2.2 times earnings before interest, taxes, depreciation and amortization, the highest since 1994. Del Valle said he wants to reduce the ratio to two by the end of the year -- even if it means selling stock to pay for an acquisition.

“We will maintain our discipline,” he said.

Del Valle estimates that by 2017, Ebitda could increase $600 million to $800 million over 2014 levels. That would include contributions from last year’s acquisitions, as well as the Ingleside ethylene joint venture with Occidental Petroleum in Texas under development, added revenue from price increases in refrigerants and higher margins on plastics, he said.

“Mexichem is one of the companies we’ve liked since they first issued,” said Rafael Elias, a Latin America debt strategist at Credit Agricole “They’ve successfully made their acquisitions grow and become productive and profitable in short amounts of time. Their fundamentals are very attractive.”

(Corrects del Valle’s title in third paragraph.)
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