Junk Bond Windfall Triggered by Slim Deal Was Only the Beginning

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For Axtel SAB bondholders, the surge triggered by a settlement with long-time rival America Movil SAB two months ago is proving to be just the start of their good fortune.

After jumping 3.3 percent from a record low when the mobile-phone company announced the deal on March 19, Axtel’s $545 million of notes due 2020 have climbed 9 percent more. That’s over three times the emerging-market average.

The latest gains come in the wake of Axtel winning a three-level rating upgrade from Moody’s Investors Service and reporting the biggest profit before items since 2013. That’s adding to optimism the company will be better able to compete against billionaire Carlos Slim’s America Movil, the landline and wireless giant that’s under regulatory pressure to shrink.

“It’s a positive sector to be in currently given the reform and we foresee the bonds to continue to perform positively,” Mariela Anguiano, an analyst at BCP Securities LLC who recommends the notes, said from Greenwich, Connecticut. “You are starting to see improvement.”

“The price and returns of our bonds at the beginning of the year did not accurately reflect Axtel’s financial risk, which, additionally, improved after the settlement with America Movil, said Adrian de los Santos, Axtel’s head of investor relations and corporate finance, from San Pedro Garza Garcia in an e-mailed response to questions. ‘‘We expect the bonds to keep performing so well, in line with the results of our business.”

Moody’s lifted Axtel’s rating to B3 from Caa3 on April 13, citing the settlement of a decade-long dispute over interconnection fees with America Movil.

‘Potential Threat’

As part of the deal, America Movil agreed to pay Axtel 950 million pesos ($62 million) and allow the smaller carrier to sell phone services on its network.

“The resolution has alleviated liquidity concerns for Axtel since the unresolved litigations represented a potential threat to the company’s financial sustainability,” Moody’s said in its report.

Later that month, Axtel said before interest, taxes, depreciation and amortization, its first-quarter earnings jumped 8 percent compared with the same quarter last year.

Axtel’s 2020 bonds have now climbed to 98.9 cents on the dollar from as low as 83.9 cents on March 4, data compiled by Bloomberg show. At 9.4 percent, the yield is less than 0.01 percentage point away from a five-month low reached May 4.

The peso fell 0.4 percent to 15.2901 per U.S. dollar at 10:29 a.m. in New York.

Edgar Cruz, an analyst at BBVA Bancomer SA, says Axtel’s bonds will probably hold close to current levels unless the company is acquired.

‘Exploratory Conversations’

“There will be consolidation in Mexico, and Axtel would be one of the companies to consolidate,” he said by telephone from Mexico City.

Felipe Canales, Axtel’s executive director of finance, said on an April 30 call with investors that the company is having exploratory conversations when asked about the prospect of an acquisition.

It’s more likely the company will combine with “smaller or similar size players,” he said. “And eventually, we might see a potential acquisition from a major player.”

BCP’s Anguiano said the likelihood that Axtel will seek to buy back debt will also fuel more bond gains.

Axtel’s Canales said on the April 30 call that the company may look to repurchase some of its notes, including those due in 2017 and 2019. De los Santos said by e-mail that the company is “evaluating” whether paying their 2017 bonds in advance and reducing their debt is the “best alternative.”

“When a company is considering calling and paying bondholders, that’s a positive,” Anguiano said. “The possibility of an acquisition or merger given the reform is there.”

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