Geo-Led Junk-Bond Implosion Sparks Worst Losses: Mexico CreditVeronica Navarro Espinosa
Mexico’s highest-rated junk bonds are saddling investors with the biggest losses in emerging markets as the nation’s homebuilders collapse.
Dollar-denominated notes sold by Mexican companies in the BB category have lost 10.5 percent this month, versus a 0.82 percent return for similarly rated developing-nation debt, according to Credit Suisse Group AG. Homebuilder bonds sank an average of 31.7 cents on the dollar in April as Urbi Desarrollos Urbanos SAB and Corp. Geo SAB defaulted on debt payments.
The homebuilder rout, coupled with phone company Maxcom Telecomunicaciones SAB’s warning it may seek bankruptcy protection, threatens to damp Mexican junk bond sales that are off to their fastest start in two years, according to Aberdeen Asset Management and Oppenheimer & Co. The losses come at a time when speculation Mexico will overhaul tax and energy laws sparked a 3.04 percent gain in the government’s investment-grade dollar debt this month and a 5.09 percent rally in its peso bonds in U.S. currency terms, the most in the world after New Zealand.
“The whole story is about the homebuilders,” Siddhart Dahiya, who helps oversee $11.8 billion of emerging-market debt as portfolio manager at Aberdeen Asset Management, said in an interview from London. “Depending on how they treat their bondholders in the future, it could have some impact on Mexican issuers in general and high-yield issuers definitely.”
Geo’s $400 million of bonds due in 2022 tumbled 40.68 cents to a record 44.84 cents on the dollar in April as the biggest Mexican builder by the number of homes sold said it would miss an interest payment and its cash decreased by 84 percent in the first quarter. The company, which was stripped of its BB- rating by Standard & Poor’s, said this month it hired Fians Capital to advise it on a possible restructuring
Geo’s slump is part of a rout in the homebuilding industry, which has struggled to stem a cash drain fueled by a government-subsidized program to promote urban apartments.
Alejandro Haiducovich, a Mexico City-based spokesman for Geo, declined to comment on the performance of the company’s bonds and the restructuring process, as did David Aguilar, a press official for Urbi. Marena Rubio, a press official with Homex, didn’t respond to an e-mail seeking comment on Homex’s performance in the market. It wasn’t possible to leave a telephone message.
Bonds sold by Desarrolladora Homex SAB, which lost its BB-from Fitch Ratings April 16, have also dropped. The company’s notes due 2020 fell 25.82 cents in April to 59.08 cents on the dollar.
Urbi, which fell out of the BB category before this month’s slump, said April 19 it will use a 30-day grace period to make a $6.4 million payment that was due that day on its 2016 notes, four days after saying it hired Rothschild and other advisers to review its finances and analyze options including a debt restructuring. S&P cut Urbi’s credit rating to D on April 19, or the equivalent of default.
Mexican junk-rated companies sold $1.76 billion of bonds abroad this year, 19 percent more than the $1.49 billion issued in the same period a year earlier, according to data compiled by Bloomberg.
“In the last month, distressed cases have increased in Latin America and that’s going to cut demand for the speculative companies,” Omar Zeolla, a corporate credit analyst at Oppenheimer, said in a telephone interview from New York.
Maxcom, which is rated CC, said last week it may seek bankruptcy protection after the carrier failed to persuade enough debtholders to complete a swap of its bonds for notes due in 2020. Only 61.93 percent of notes were tendered in the exchange, below the 80 percent private equity firm Ventura Capital Privado SA required to go ahead with its offer for Maxcom shares.
The company’s notes due 2014 were trading at 67.98 cents on the dollar yesterday.
Shamaila Khan, an emerging-market money manager at AllianceBernstein LP, which oversees $443 billion of assets, says that investors will remain positive on Mexico because the selloff is largely concentrated in one industry.
“We’re still pretty positive on Mexico,” Khan said in a telephone interview from New York. “It happened is specific to a sector and to individual companies in the sector. We are not really expecting major contagion.”
S&P said March 12 it may raise Mexico’s BBB rating because the prospect for reforms that bolster finances and fuel growth have improved under Pena Nieto.
Mexico’s economy will expand 3.5 percent in 2013, outpacing that of Latin America for a second year, according to data compiled by Bloomberg.
The extra yield investors demand to own Mexican dollar bonds instead of Treasuries narrowed five basis points, or 0.05 percentage point, to 166 basis points at 3:03 p.m. in New York, according to JPMorgan Chase & Co.
The cost to protect Mexican debt against non-payment for five years with credit-default swaps dropped two basis points to 82 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 gained 0.6 percent to 12.1351 per U.S. dollar.
The debt restructurings of Geo and Urbi may begin to sour some investors on Mexico if the homebuilders impose “aggressive” losses on bondholders, according to Joe Kogan, the head of emerging-market debt strategy at Scotia Capital Market.
Pena Nieto said on Feb. 11 that he will use the nation’s subsidized-housing program to promote urban apartments, which require longer planning, building and sales cycles than single-construction housing and have caused homebuilders to boost debt and bleed cash.
“If these homebuilders behave in ways that foreign investors don’t like, then it’s possible that people will start talking about, ‘You know you really don’t want to be in Mexican high yield because of what happens in a restructuring,’” Kogan said in a telephone interview in New York.