ICA Debt, Shares Slumping on Pena Nieto Mexico Boom Delay

Empresas ICA SAB fell the most in more than 21 months after Deutsche Bank AG cut its rating on Mexico’s largest construction company following debt downgrades by Standard & Poor’s and Moody’s Investors Service.

The shares fell 8.1 percent to 25.76 pesos at the close in Mexico City, the most since August 2011. ICA’s $500 million of 8.9 percent bonds due 2021 declined 0.7 cents to 86.2 cents on the dollar, pushing the yield to 11.7 percent, the highest since October 2011.

ICA’s shares have plunged more than 20 percent since Moody’s downgraded the builder’s debt on May 17, citing the Mexico City-based company’s high leverage and delays in public-works spending by President Enrique Pena Nieto’s administration. S&P yesterday trimmed the builder’s debt rating saying the lack of infrastructure investment could hurt the company’s sales. The downgrades could lead to pressures including margin calls, requests for more debt collateral, or forced asset sales, Deutsche Bank analyst Esteban Polidura said.

“Based on our experience covering Mexican homebuilders, we believe that sudden and widespread credit rating cuts could have three negative implications for ICA,” Polidura wrote in a report today.

The company could see credit restrictions, more expensive access to funding, or be forced to pursue new equity offerings, said Polidura, who cut his rating to hold from buy and reduced his target price to 31 pesos from 43 pesos.

S&P, Moody’s

S&P trimmed its rating on the builder one step to B+, or four levels below investment grade, with a negative outlook. That followed a May 17 reduction by Moody’s to B2, or five steps below investment quality. Moody’s said it may lower the rating further.

An ICA spokesman declined to comment and asked not to be named, citing company policy.

Mexican homebuilders’ woes have made investors warier of highly leveraged companies such as ICA, said Ana Hernandez, an analyst with Invex Casa de Bolsa SA, who lowered her recommendation on the shares to hold from buy on May 13.

“People are feeling scared about the homebuilder effect and they’re taking precautions with other companies that are highly leveraged,” Hernandez said in a telephone interview from Mexico City.

Desarrolladora Homex SAB, Mexico’s biggest homebuilder by sales, said credit-rating downgrades and lawsuits over derivatives contracts have “arguably” put the company in default on peso-denominated bonds.

Mexican Homebuilders

Homebuilders Urbi Desarrollos Urbanos SAB and Corp. Geo SAB defaulted last month after a shift in government policy to promote more capital-intensive apartments in urban areas over homes in commuter towns depleted their cash.

ICA is in the process of selling its homebuilding operation to Servicios Corporativos Javer SAPI in an all-stock deal expected to close this quarter.

ICA is likely to rebound when Pena Nieto announces his priorities for public-works spending, said Eugenio Amador, an analyst with Credit Suisse Group AG who has a buy rating on the shares.

The new president, who took office Dec. 1, has vowed to back building projects such as railroads, highways and port expansions as well as stepped-up investment in state-owned oil monopoly Petroleos Mexicanos. Additional details on the administration’s infrastructure plans could be announced in the coming weeks, Luis Zarate, president of the Mexican Construction Industry Chamber, said last week.

“Fundamentally the company hasn’t changed,” Amador said in e-mailed comments. “It’s preparing its balance sheet for the new national infrastructure plan, which will be reflected in its backlog around the end of 2013.”

Debt Levels

Increased debt at the corporate level is limiting ICA’s financial flexibility, while higher short-term maturities are crimping liquidity, according to Luis Martinez, an S&P analyst in Mexico City.

Sales may rise 5 percent in 2013, S&P said. ICA in April forecast a 9 percent to 12 percent jump. While a plan to sell stock in airport operator Grupo Aeroportuario del Centro Norte SAB may raise about $400 million, that may not be enough to repay all debt due within a year, S&P said.

First-quarter revenue declined 27 percent to 6.91 billion pesos ($556 million), including a 41 percent drop in construction, ICA said in April. ICA’s backlog of construction projects fell 7 percent from Dec. 31 to 30.3 billion pesos.

Total debt climbed 14 percent to 54.2 billion pesos as obligations due within a year increased 17 percent to 12.4 billion pesos.

Before it's here, it's on the Bloomberg Terminal.