Mexico’s Deadly Teacher Protests Mask Threat to Payroll Lender

  • Eight dead in clashes as union fights threat to teachers’ jobs
  • As much as half Credito Real’s revenue is loans to teachers

Mexico’s government wants to fire educators who fail new evaluations. That may be bad news for bondholders of payroll lender Credito Real SAB, which gets as much as half of its revenue from teachers.

The lender paid almost 3 percentage points more than similarly rated emerging-market companies Wednesday when it sold $625 million of bonds due 2023 to yield 7.4 percent. Education workers account for half Mexico City-based Credito Real’s payroll borrowers.

President Enrique Pena Nieto pushed for new legislation to be able to dismiss teachers who fail annual tests of knowledge and ability.

“Our concern would be a massive layoff of teachers that could then stop paying,” said Ingrid Ortiz, an analyst at S&P Global Ratings. “What we’re monitoring and looking out for is whether this will result in a default by some teachers, if the delinquency rate will begin to rise.”

Education Minister Aurelio Nuno has said the government will be auditing payrolls in four states, including Oaxaca, the biggest state in Credito Real’s payroll portfolio. More than 3,000 have been fired for failing to show up to work to attend protests instead.

Teachers are furious about the changes. Eight people died and more than 100 were injured in Oaxaca last month during clashes between the police and the CNTE teachers’ union. Elsewhere protesters have blocked roads and last month even cut off access to Mexico City’s airport. The government says reversing the education overhaul isn’t an option.

S&P has a negative outlook on Credito Real’s rating of BB+, one level below investment grade. Yields on its bonds due in 2019 slid to 5.71 percent on Thursday, the lowest since September 2014, after Credito Real offered to buy them back. Mexico’s peso rose 0.9 percent Monday to 18.431 per dollar at 1:51 p.m. in New York.

Even if teachers pass the evaluations, they may face layoffs. Close to 30 percent of the more than 1 million teacher positions in the country have “irregularities,” according to a study led by research group The Mexican Competition Institute. This means the Education Ministry is paying teachers whose schools may have closed down, who are getting double payments or are being paid more than they should be, among other administrative errors.

In a phone interview, Credito Real Chief Financial Officer Carlos Ochoa said the lender doesn’t expect massive layoffs as a result of the new legislation and there hasn’t been a rise in delinquencies so far.

The need for credit by this segment of the population “existed before the education reform and it will continue to exist after, so our efforts will remain focused on this," Ochoa said.

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