Urbi’s Greek-Like Distress Captivating Greylock: Mexico Credit

The rout in Mexican homebuilder bonds is luring distressed-debt investors including Greylock Capital Management who say the yields on the securities are too attractive to pass up.

Urbi Desarrollos Urbanos SAB’s $300 million of dollar notes due in 2020 have plummeted 11 cents to 82 cents on the dollar in the past month, helping make homebuilder debt the worst-performing securities in Mexico. At 13.6 percent, Urbi’s bonds yield 12.16 percentage points more than similar-maturity U.S. Treasuries, meaning they’re considered distressed.

While Mexico’s homebuilders are slumping as the government pushes the industry to boost investment in capital-intensive apartment construction, the companies still have the ability to pay their debt in the short term, allowing investors to profit, Greylock said. The investment firm likens homebuilders to its investment in Greek bonds, whose 10-year debt more than doubled in value since it was issued in February 2012.

“You have to step back and say, ‘That’s fine, there are these issues, but with the ongoing business and the residual value -- that’s more than what it’s trading at,” Juan Pedro Moreno, who helps oversees $500 million in investments at Greylock, said in a telephone interview. “We were receiving the same kind of accusations when people were saying, ‘Oh, Greece is too risky, or it may default.’ Yeah, OK, it may default, but at 13 cents on the dollar you’re getting compensated for that.”

Housing Policy

Alma Beltran, a press official at Urbi, didn’t return a phone call seeking comment on the company’s bonds.

The securities rallied today 1.93 cents on the dollar to 84.31 cents, sending the yields down 0.42 percentage point to 12.74 percent, according to data compiled by Bloomberg.

Mexican President Enrique Pena Nieto said Feb. 11 that he’ll use the government’s subsidized-housing program to promote apartment construction, which requires bigger initial cash outlays than single-family home construction.

His administration will focus on building apartments in cities to help ease Mexico’s housing shortage, extending the policy initiated in 2011 by then-President Felipe Calderon, according to a statement on the presidential website on Feb. 11.

While Mexican homebuilders have traditionally focused on single-construction housing, apartments require longer planning, building and sales cycles.

Alejandro Nieto, the head of the National Housing Commission, held a closed-door meeting with industry analysts yesterday.

Fitch’s Concern

Urbi’s bonds touched a record low 80.6 cents on Feb. 22 after Fitch Ratings put the industry on rating-watch negative, citing dwindling cash and the prospect of land writedowns.

With government subsidy programs now placing increased emphasis on more urban areas, builders will have to sell some of their lands that “are now unsuitable for future projects,” Fitch said in the note, referring to Urbi, Corp. Geo SAB, Servicios Corporativos Javer SAPI and Desarrolladora Homex SAB. Urbi and Javer are rated B by Fitch, five levels below investment grade, while Homex and Geo have a BB- rating.

Geo’s bonds due in 2020 have dropped 12 cents in the past month, pushing yields to a record high 10.45 percent. Similar-maturity debt from Javer and Homex have dropped at least nine cents.

Alejandro Haiducovich, a Geo spokesman, didn’t respond to phone calls and e-mail messages seeking comment on the possibility of writedowns and the performance of their bonds. Eugenio Garza y Garza, Javer’s chief executive officer, said by e-mail that his company is “not contemplating any writedowns.”

‘Still Positive’

Vania Fueyo, an investor relations official at Homex, said her company is “confident in the quality and location” of its land reserves and doesn’t expect writedowns.

“It’s not worth selling now,” Omar Zeolla, an analyst at Oppenheimer & Co., said in a telephone interview from New York. “The biggest homebuilders represent between 25 and 30 percent of the market. They’re an important group, and the government wants to keep cutting down the housing deficit. That’s still positive.”

Charles de Quinsonas, a credit analyst at Spread Research, says it’s too early to make an investment decision because the impact of the government’s policy on the homebuilders is still unknown.

“The fears are coming from the government,” de Quinsonas said by telephone from Lyon, France. “We don’t know what’s going to happen.”

The extra yield investors demand to own Mexican dollar bonds instead of Treasuries fell two basis points, or 0.02 percentage point, to 180 basis points at 2:50 p.m. in New York, according to JPMorgan Chase & Co.

Default Swaps

The cost to protect Mexican debt against non-payment for five years with credit-default swaps fell one basis point to 103 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value if the issuer fails to comply with debt agreements.

The peso strengthened 0.6 percent to 12.7619 per U.S. dollar.

Urbi, which has lost three-fourths of its market value in the past year, will report negative free cash flow to equity for the fourth quarter of 2012, according to a company official with direct knowledge of the matter.

Cash Generation

The amount of cash generated in the fourth quarter that can be paid to the company’s owners after expenses, reinvestments and debt repayments will be similar to the third quarter, when the homebuilder had negative 152.3 million pesos ($12 million) in free cash flow to equity, according to the official. Sales will be in the lower end of the company’s 3 billion peso to 4 billion peso projection, said the person, who asked not to be identified because the information is private.

Urbi’s stock has tumbled 37 percent in the past month.

Greylock’s Moreno says land writedowns are already factored into his wager on the sector.

“We’re expecting those writedowns,” Moreno said. “With debt trading at 80 cents and the equity trading at a fraction of the value that it was a couple years ago, it’s all about taking advantage of guys that are throwing in the towel.”