In Chile, Default Jitters Grow for a Car Dealer Hit by Peso Drop

Traders are bracing for a bond default from Chilean car dealer Automotores Gildemeister SA’s bonds after a plunge in the peso drove up the cost of importing vehicles just as sales slumped.

The company’s $400 million of notes due in 2021 have sunk 6.6 cents to 36 cents on the dollar since March 30, when Gildemeister disclosed a 2014 net loss of $137 million, marking a twofold increase from a year earlier. In two days alone this week, bondholders were hit with losses of 11 percent.

Gildemeister, which sells Hyundai vehicles through more than 100 dealerships, has seen its sales tumble as economic growth fell to the slowest in five years, sapping demand for cars in Chile and Peru, its two main markets. While the company raised prices, it couldn’t fully pass along the higher cost of imports as the peso weakened. Gildemeister had tripled its debt load during the past four years to finance an expansion amid a consumer-spending boom in Chile.

“They’re really struggling,” Jim Harper, the head of corporate research at BCP Securities LLC, said by phone from Greenwich, Connecticut.

Prices, Calls

As recently as mid-2013, the bonds were trading above 100 cents on the dollar. At the current price level of 36 cents, the securities yield more than 30 percent. A default would mark the first on Chilean corporate bonds since August, when Santiago bus operator Inversiones Alsacia SA skipped a payment.

An external press representative for Gildemeister declined to comment.

Additionally troubling to investors is the company’s failure to hold a conference call to discuss fourth-quarter results and projections for 2015, according to Soummo Mukherjee, an analyst at Itau BBA Securities.

The last two times the company posted quarterly results, it held conference calls with investors the same day.

Sales of Hyundai vehicles in Chile dropped 35 percent in February from a year earlier, based on the latest data from the country’s car-dealer association. Gildemeister, which doesn’t break out sales by specific automakers, is the exclusive seller of Hyundais in the country.

The peso weakened 13 percent last year amid expectations for higher interest rates in the U.S., which would reduce the appeal of higher-yielding emerging-market assets, and as Chile’s central bank embarked on rate cuts to spur economic growth. Also, prices fell for copper, the country’s biggest export.

‘Weaker Fundamentals’

The decline in the peso contributed to a 12 percent increase last year in Gildemeister’s costs for vehicles and other products it sold. The peso rose 0.3 percent Thursday to 615.6 per dollar at the close of trading, trimming its loss this year to 1.5 percent.

“The results were clearly negatively affected by the currency and the weaker fundamentals for car sales,” Mukherjee said by phone from Santiago.

The bonds are trading around the 35 to 40 cents per dollar range that Itau estimates would be the recovery level in a restructuring, Mukherjee said.

Gildemeister is paying the price for overexpanding.

The company bought a factory in the Brazilian Amazon in 2011. Then in 2013, it opened a $60 million corporate headquarters in Santiago with an eight-story waterfall and a helipad. In a 2013 interview with La Tercera, Chief Executive Officer Ricardo Lessmann said the waterfall was part of a temperature-control system and saved the company money.

‘Pretty Close’

Lessmann holds 30 percent of Minvest SA, the holding company for Gildemeister, according a bond prospectus.

As such, he was one of the biggest recipients of shareholder payouts by Gildemeister. In 2012 and 2013, Gildemeister generated net income of $22.2 million and increased borrowing by $356 million -- all the while paying $83.8 million in dividends to Minvest.

Lessmann declined to comment, according to the Gildemeister press representative.

There was some good news in the fourth-quarter results. Gildemeister cut inventories 23 percent to $396 million and reduced cash outflows to $11 million in 2014 from $199 million in 2013.

Gildemeister had $90 million of cash at the end of 2014, down from $92.2 million at the end of 2013. Current financial liabilities were $134 million, down from $177 million a year earlier, led by a $43 million decline in bank loans due in 12 months or less. Financial liabilities due in more than a year rose 9 percent in 2014 to $767 million after the company obtained a $65 million loan from Corpbanca at 5.35 percent.

“A restructuring looks pretty close,” Jaime Achondo, the head trader at Finanzas y Negocios SA, said from Santiago.

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