Junk Supermarket Bond’s 40% Rally Seen Fading as Chile Sputters

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In the past year, no company in Latin America has delivered bigger returns to bond investors than Chilean supermarket operator SMU SA.

Its $300 million of notes due in 2020 have soared 42 percent as the long-distressed company controlled by billionaire Alvaro Saieh shut stores and sold assets to restore investor confidence.

But with a plunge in copper prices depressing Chile’s economy, SMU will have a tough time generating enough improvement to spur further gains, according to Seaport Global Holdings LLC. Since reaching a two-year high of 83.9 cents on the dollar in July, the notes have been largely unchanged.

“SMU’s management has made a commendable effort,” said Michael Roche, an analyst at Seaport Global Holdings LLC. “But your efforts can only take you so far. If you don’t have a strong underlying business environment, it ultimately will limit the improvement in valuation. We may be seeing that with the bonds stuck in the mid-80s for a while now.”

A SMU external press relations officer, who asked not to be identified, citing company policy, declined to comment when contacted by e-mail.

SMU’s notes have risen from 64 cents on the dollar a year ago, when the company was still reeling from record losses and misstated earnings. The bonds now yield 12.63 percent, or 10.36 percentage points more than Treasuries. That’s still above the threshold for securities considered distressed.

Chile Economy

In April, the Santiago-based company said it posted the biggest jump in quarterly profit before some items since 2012 as same-store sales soared by a record.

SMU may struggle to sustain those gains as economic growth slows. Central bank President Rodrigo Vergara warned this month that the bank is planning to cut its growth forecast for this year. The economy will expand between 2.25 percent and 3.25 percent in 2015, the central bank has said. It grew just 1.9 percent last year, the weakest since 2009.

To Larrain Vial SA analyst Veronica Ayzaguer, SMU’s bonds still have room to gain further because Saieh will be able to come up with enough cash to meet a $75 million local debt payment in November.

The company only had $65 million in cash as of March.

“Upcoming results will continue to be good as they’ve been able to deliver on improving their efficiency,” she said by telephone from Santiago. “The most important thing for the company right now is to pay the upcoming maturity in November.”

Not everyone is convinced, however.

SMU IPO

SMU will find it difficult to make the bond payment if it’s unable to pull off a planned initial public offering, said Felipe Lubiano, an analyst at Credicorp Capital.

Newspaper Diario Financiero reported Aug. 13 that SMU hired Banco BTG Pactual SA to manage an IPO by the end of this year or in early 2016, citing people close to the company it didn’t identify. Still, that will likely be a tough sell. There hasn’t been an IPO in Chile since March 2013.

“The main risk for the company is that, despite the improvements from an operational point of view, we still have fears on how they plan to face their upcoming local bond maturities,” Lubiano said by telephone from Santiago.

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