Billionaire’s Junk Supermarket Bonds Show Few Buying Turnaround

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By most measures, billionaire Alvaro Saieh’s SMU SA is turning things around.

Just last month, the Chilean supermarket chain said it posted the biggest jump in quarterly profit before some items since 2012 as same-store sales soared by a record. You might expect this would have been welcome news for bond investors in a company that’s been unprofitable for five straight years.

Not so. SMU has become even more distressed in the eyes of its bondholders this year as its inability to sell assets and pare debt overwhelms the improvement in its operations.

Its $300 million of notes now yield 15.9 percent, or 13 percentage points more than comparable Treasuries.

“Something drastic is still required,” Felipe Lubiano, an analyst at Credicorp Capital, said from Santiago.

In an e-mailed statement, SMU’s press office said Saieh has pledged to provide the capital required for any debt payments this year. He has also agreed to pay half of the company’s bank loans due in December if the retailer hasn’t found a buyer for its building supplies chain Construmart SA, SMU said.

In September, SMU reached an agreement with local banks to push back about $27 million in payments until December and promised to use money from a Construmart sale to pay the debt.

‘Remains Cautious’

“We understand that the market remains cautious with the company,” the Santiago-based company said. “SMU is proving through numbers, not explanations, that the company has good financial perspectives and a sustainable future.”

SMU said April 29 that its earnings before interest, taxes, depreciation and amortization jumped 69 percent to 26.1 billion pesos ($42.4 million) in the first quarter compared with the same period last year. Its Ebitda margin soared 1.9 percentage points to 5.2 percent, the highest since at least 2011.

Still, its debt rose 0.3 percent in the first quarter to 876 billion pesos from a year ago. Chile’s peso gained 0.9 percent Tuesday to 609.56 per dollar as of 12:36 p.m. in New York.

The company, which has cash and equivalents of 40.4 billion pesos ($65.7 million), has a local bond payment due in November that’s equivalent to $80 million.

Standard & Poor’s said March 6 that despite operating improvements, SMU’s capital structure remains unsustainable. It rates SMU CCC+, seven levels below investment grade.

Buy Call

“One swallow doesn’t a summer make,” Aldo Reyes, partner and analyst at local rating company Clasificadora de Riesgo Humphreys Ltda., said by telephone from Santiago. “We’re not completely sure that this recovery will be sustained.”

To Itau BBA Securities’s Soummo Mukherjee, the improvements in SMU’s operations mean it’s time for investors to start buying the company’s bonds. He said the notes may rally to 80 cents on the dollar from 73.5 cents.

“It’s realistic that they can continue to improve margins and boost cash generation,” the analyst said from Santiago.

SMU, the retailer created by Saieh through more than 60 acquisitions between 2007 and 2011, has struggled to regain investor confidence since saying in 2013 that it misstated earnings, leading it to violate bond agreements.

The company’s 2020 notes have returned 2.6 percent this year, with their premium over Treasuries swelling 74 basis points, data compiled by Bloomberg show.

“They’re in a tight spot as they surely aren’t going to get the money to pay their debt from their own cash flow,” Credicorp’s Lubiano said.

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