Maxcom’s 31% Yield Signals Buy to Scotia Capital: Mexico Credit
Maxcom Telecomunicaciones SAB’s dollar bonds are yielding twice as much as similar-rated global debt, a sign to Scotia Capital and Tradition Asiel Securities that the securities are a bargain as the Mexican phone company has enough cash to service debt for the next three years.
Maxcom’s notes due in 2014 yield 31.08 percent, or 1,786 basis points more than securities that share the company’s CCC rating, according to data through Oct. 28 compiled by Bloomberg and Bank of America Corp. Yields on Maxcom’s bonds touched a record 31.47 percent on Oct. 7 on concern the company would be unable to refinance its obligations as global growth slows and Europe’s debt crisis erodes demand for emerging-market assets.
While Maxcom has posted seven straight quarterly losses as it struggles to compete with larger rivals in Mexico’s phone and Internet markets, the company’s 444 million pesos ($34.2 million) of cash is sufficient to cover debt payments until its dollar bonds mature in 2014, said Joe Kogan, an analyst at Scotia Capital in New York. Vinicius Pasquarelli, an emerging- market debt trader at Tradition Asiel, said Maxcom’s bonds will benefit from renewed demand for higher-yielding assets after European leaders agreed on a debt plan.
“I find it to be a highly risky credit, but I feel like 10 percentage points” of the yield “is just the problems in Europe that have nothing to do with Mexico,” Kogan said in a telephone interview. “That’s one that certainly has room to recover given the improvement in global risk appetite.”
The average yield on global debt ranked CCC, or eight levels below investment grade, tumbled 92 basis points, or 0.92 percentage point, last week to 13.22 percent as French President Nicolas Sarkozy said the euro region’s bailout fund will be leveraged by four to five times, according to Bank of America. Yields on Mexican corporate dollar bonds fell 27 basis points during the same period to 6.32 percent, JPMorgan data show.
The price of Maxcom’s bonds touched a two-year low of 60.60 cents on the dollar on Oct. 7, according to data compiled by Bloomberg.
“Our trading prices don’t correspond to the reality of the company,” Manuel Perez, Maxcom’s director of investor relations, said in a telephone interview from Mexico City. “We are totally able to service our debt, and we are committed to do that. We are really showing an iron discipline regarding our capital expenditure program, and we are achieving break-even cash flow this year.”
Maxcom said on Oct. 26 that its cash balance in the third quarter climbed from 329 million pesos in the previous three- month period. Churn, or the rate of customer defections, slowed to 2.4 percent from 3.3 percent a year earlier.
‘Plenty of Cash’
“The company is generating plenty of cash to service its debt,” Christopher Buck, a corporate debt analyst at Barclays Plc, said in an e-mailed response to questions. “The maturity date isn’t until December 2014, so they do have time to execute. We are waiting to see if after many quarters of flat or declining revenues they can pull it off.”
Maxcom posted a net loss of 244 million pesos in the third quarter, three times the 80 million peso loss in the same quarter a year earlier, as cable carriers, including three controlled by billionaire Emilio Azcarraga’s Grupo Televisa SA (TLEVICPO), offer discounts and lure away customers.
Maxcom still hasn’t “found the formula for revenue growth,” Nymia Almeida, an analyst at Moody’s Investors Service in Mexico City, said in a telephone interview. “This doesn’t help build a more solid business case for refinancing.”
Moody’s rates Maxcom Caa1, seven levels below investment grade.
The company’s net debt to earnings before interest, taxes, depreciation and amortization was 2.9 times at the end of September, up from 2.6 times in the previous quarter.
“We’re still staying away,” Mark Christensen, who helps manage $500 million in emerging-market debt at Doubleline Capital LP in Los Angeles and sold his Maxcom bonds last year, said in a telephone interview. “It’s a fundamental issue.”
Maxcom’s stock plunged 61 percent this year through last week, compared with a 4.8 percent decline for the benchmark IPC index of 35 Mexican stocks.
The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries widened 13 basis points to 219 at 3:49 p.m. in Mexico City, according to JPMorgan’s EMBI Global index.
The peso fell 2.6 percent to 13.3517 per U.S. dollar.
The cost to protect Mexican debt against non-payment for five years rose eight basis points today to 138, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
Yields on futures contracts for the 28-day TIIE interbank rate due in December rose two basis points today to 4.71 percent.
Maxcom’s bonds offer a “nice opportunity” for investors seeking to profit from the rally in higher-yielding debt, said Tradition’s Pasquarelli.
“Real money is going to go in and buy,” Pasquarelli said in a telephone interview from New York. “The high-yield sector is a good sector for those who were lagging on stepping into emerging-markets and now are seeing the rally and still want to get this move. This is a nice opportunity for them.”
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