Pension Fund Giants See an Opportunity in Mexico Builder’s Distress

  • New investment vehicle is well-positioned to buy ICA assets
  • Infrastructure fund could total 17 billion pesos ($1 billion)

Pension funds are finding opportunity in others’ pain.

Consider CKD Infraestructura Mexico, the investment vehicle structured like a private-equity fund that just raised 3.44 billion pesos ($200 million) from institutional investors including Mexican pensions. It will invest those funds with Canadian money manager Caisse de Depot et Placement du Quebec to pay for minority stakes in highways owned by indebted Mexican builder Empresas ICA SAB, with an eye on future asset sales and other infrastructure projects in the country.

ICA, the country’s worst-performing stock in the past year and a highly leveraged company, is selling assets as it tries to turn things around, with little room to move as the economy worsens, the government cuts spending and a cheaper peso swells ICA’s dollar-denominated debt. On Monday, Moody’s Investors Service cut the outlook on the company’s B2 rating to negative from stable.

Even as stocks whiplash traders across emerging markets, investors are proving eager to invest in highways with projected internal rates of return of as much as 17 percent -- three times the payout of a Mexican 10-year bond.

Through an investment vehicle created after the financial crisis that
allows institutional investors to diversify into new asset classes, Infraestructura Mexico, along with its Canadian partner, is not only providing much-needed funds to ICA, it’s well-situated to invest in any future projects should the builder decide to sell to shrink debt further.

Asset Sales

“ICA needs to sell assets to cover its cash flow needs, and the emergence of a new buyer is clearly very positive,” Javier Gayol, an analyst at Corporativo GBM SAB, said by phone from Mexico City. “There have always been buyers in Mexico, but they may feel more comfortable with this new buyer,” in part because it is willing to take minority stakes.

ICA may raise another 7 billion pesos in asset sales over the next 18 months, according to Gayol. Next to go on the block are penitentiaries and water projects, he said.

Gabriel de la Concha, ICA’s chief financial officer, said in an e-mailed response to questions that the company has sufficient liquidity to confront its debts, and pledged he won’t resolve near-term problems by “eroding the value of the company in the long-term.” He said he doesn’t have additional deals lined up with the Caisse-Infraestructura Mexico investors in the short term, but they are analyzing other projects together to expand their cooperation.

Infraestructura Mexico securities were unchanged in today’s trading. The CKD declined to comment. A representative for the Caisse and a spokesman for Barclays Plc, which led the transaction, also declined to comment.

‘Countercyclical’ Strategies

Initial funding for Infraestructura Mexico concluded on Aug. 17, and the fund could total 17.2 billion pesos, including capital calls. That would make it the largest of Mexico’s certificates of capital development, or CKDs, as they are known. CKDs were created in 2009 to aid the flow of capital between infrastructure projects and the 2.5 trillion-peso Mexican pension fund system. The CKD structure was essential in order for Mexico’s pension funds to participate in the purchase of ICA’s assets.

Separately, this was the first direct infrastructure investment in the country for the Caisse.

Canadian pension funds often pursue “countercyclical” investment strategies, looking for deals in countries and sectors facing difficulty, said Alan White, a professor of investment strategy at University of Toronto’s Rotman School of Management.

“They’re long-horizon investors,” White said. “They try to pick and choose as opportunities arise.”

Michael Sabia, Caisse’s chief executive, said on an Aug. 14 conference call that he saw ICA as a “high-quality partner” and Mexico as a market of interest.

“In any business, when you see that someone needs money, they’re going to look to pay as little as possible, because they understand the urgent need for liquidity,” GBM’s Gayol said. “If this new player is going to give you some time and not squeeze you on valuations, that’s good news for ICA.”

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