Sexagenarian Bus-Fare Cheats Cost Creditors in Worst Rout

Bondholders of a Santiago bus-system operator are reeling from the deepest losses in emerging markets as a drop-off in ridership and persistent fare cheating caused the company to violate its debt agreements.

Inversiones Alsacia SA’s bonds due in 2018 have tumbled 10 cents to 74.28 cents on the dollar in the past month. That’s the worst return on a percentage basis among similar-maturity notes that had comparable grades from Fitch Ratings, which lowered its rating on Alsacia’s debt three levels today to B. In the same span, junk-rated corporate bonds in developing nations gained 1.1 percent on average, according to data compiled by Bloomberg.

The company, which operates about 1,494 buses under a concession from the city of Santiago, said Aug. 5 that it isn’t generating enough cash to satisfy the terms of its $405 million of bonds. Alsacia has lost money for the past two years as commuters spurned buses for cars after route cuts on the state-subsidized bus system and longer wait times. Yields on the debt, secured by assets including buses, real estate and bank accounts, have doubled this year to a record 15.58 percent.

“It’s not looking good,” Mariela Anguiano, an analyst at BCP Securities LLC, who began covering the bonds in June with the equivalent of a sell recommendation, said in a telephone interview from New York. While Alsacia says it has the money to meet its obligations, “clearly the fact that they have breached covenants isn’t good news.”

Jumping In

Ridership has been falling as more Chileans buy vehicles instead of using public transportation. To make matters worse, about 19 percent of passengers skipped fares on the Santiago bus system during the second quarter, the transportation ministry said Aug. 1. While riders are supposed to swipe a prepaid card at the front of the bus, it’s possible to jump in through the rear doors as passengers are getting off.

Antonia Besares, 60, a maid in north Santiago, said she occasionally skips payment. It’s partly out of frustration over the long wait times, she said.

“I only do it sometimes when there are lots of people,” she said in a telephone interview. “It makes me angry. You wait at a bus stop for 20 minutes and eight come past, but they don’t stop.”

Alsacia had $70 million of cash at the end of April, according to an Aug. 6 report by Daniel Sensel, an analyst at JPMorgan Chase & Co. The company has a $38 million bond payment due on Aug. 18, Chief Financial Officer Leopoldo Falconi said in a telephone interview yesterday.

“The company doesn’t have problems making that payment in August,” he said.

Seeking Waivers

Alsacia is asking investors to waive an acceleration of debt payments that would otherwise be triggered by the covenant breach, according to an e-mailed statement yesterday. The company will also ask its creditors to approve a reduction in the amount of deposits it must keep in an operation and maintenance account.

“The second waiver could be interpreted as indicating that liquidity will be tight” through 2015, according to an Aug. 6 report by JPMorgan’s Sensel. He cut his recommendation on the bonds to the equivalent of sell from hold.

Under the terms of the notes, Alsacia must deposit 1.1 times its debt-payment requirements in a special bank account. The company said in its Aug. 5 statement that it had missed that target as of July 31.

The company is also in negotiations with the government to receive an increase in the payments it receives per passenger, according to JPMorgan.

Compensating Losses

Alsacia will begin the bondholder consultations next week, with decisions expected in 30 days, Falconi said.

“The business in itself remains profitable in the long term,” he said. “The concession contract we have through 2018 creates fluctuations in income that are compensated for by the contract itself. Those fluctuations can provoke the breach of some financial ratios in the short term but they don’t affect long-term profitability.”

The bus fares are set by a government-appointed panel. When customers board, the fares are routed to a central administrator, which forwards payments to the bus operators under the terms of the concessions. There’s an additional government subsidy to compensate for losses caused by a lack of ridership.

Last year, Transantiago buses transported a total 1.04 billion passengers, 5 percent less than in 2011 and a 13 percent decline from 2010, according to the Metropolitan Public Transport Directorate. At Alsacia and a sister bus operator, ridership fell 4 percent last year, Falconi said.

Shareholder Support

“It’s a very difficult business,” Diego Torres, the head of corporate bond research at MCC Securities Inc. in Santiago, said in a telephone interview. “We haven’t seen any support from shareholders so it will have to do with the company’s ability to negotiate with the government.”

Closely held Alsacia is owned by Global Public Services SA, a Panamanian company owned and controlled by Carlos and Javier Rios and members of their family, according to a prospectus for the bonds. Carlos Rios, who earned a doctorate in economics in Paris and later worked as a waste-management executive in Bogota, serves as Alsacia’s president and chairman of the board.

Alsacia is one of seven operators of the city’s Transantiago system, which was set up in 2007 to put all public transportation, including buses and subways, under an integrated management and payment system.

Concession Renegotiation

Under an agreement renegotiated in 2011, the city will pay Alsacia an aggregate $64 million over the life of the contract that ends in 2018, Anguiano said.

Alsacia had a net loss of 5.28 billion pesos ($10.3 million) in 2012, narrower than the 9.79 billion peso loss the prior year, according to its annual report.

“The concession agreement is looking pretty negative for them,” Anguiano said. “They have to renegotiate.”

Although the government has offered to partly compensate bus operators for the decline in receipts, the payments are “insufficient to mitigate the overall situation,” she said.

Alsacia’s Falconi said the company has a “coverage reserve account” of $19 million that can be used to make debt payments.

The company expects cash flow to be positive in 2013 when debt payments are excluded. “After debt payments it isn’t positive, so we will use the coverage reserve account,” he said.

Fitch Watch

The yield on Chilean 10-year fixed-rate bonds in pesos fell four basis points, or 0.04 percentage point, to 5.24 percent at 11:00 a.m. The peso weakened 0.2 percent to 515.52 per dollar.

Chile’s five-year credit-default swaps, contracts insuring the nation’s debt against non-payment, climbed one basis point to 93 basis points at 11:01 a.m. in New York.

Alsacia’s new grade from Fitch, which was lowered from BB, is five levels below investment grade. The rating remains on “watch negative,” reflecting concern over future earnings as well as uncertainty about the outcome of discussions with bondholders over the waivers and with officials over contract renegotiations, Fitch said in a statement today.

The contract that went into effect last year “made revenue much more dependent on passenger demand,” Fitch analyst Astra Castillo said in a phone interview yesterday. “The government and the bus operators must have thought this would be a positive, but since then passenger demand has been falling.”

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