Oct 5 (IFR) - Cement company Cemex's resounding success and
the better-rated SanLuis's failure in tapping the bond markets
last week proved an interesting study in how investors are
making clear distinctions between Mexican single-B names,
especially those emerging from recent restructurings.
Market memories are notoriously short, but investors are not
buying junk debt indiscriminately. They are clearly asking for
suitable compensation or pushing back entirely on entities that
have a history of restructuring or voluntary defaults, even when
credit metrics are improving.
A Mexican court ruling that allowed glassmaker Vitro
to use inter-company debt to push through an
unpopular restructuring plan is fresh in mind, not to mention
losses from other recent bankruptcies in the country. Arguably a
Vitro premium is alive and well - or at least the buyside is
pricing in shareholders' past behavior as well as the risks of
fighting for creditors' rights in local courts.
"With every high-yield Mexican company, whether or not it is
fundamentally sound, we will have in the back of our minds the
Vitro case," said one investor.
Names like Durango trade in the mid teens and some investors
were also asking for double digits from SanLuis,
as it pushed for sub 10% pricing last week.
Cemex, on the other hand, trades in the single
digits after winning praise for addressing the issue of
inter-company loans when it laid out the terms of its recent
refinancing proposal with banks in late June.
At the time, it said any inter-company claim would be
subordinated and, in the event of local bankruptcy proceedings,
called "consurso mercantil", bank lenders would ultimately
control the voting rights of such claims. This was seen as a nod
to concerns over precedents set in the Vitro ruling.
CEMENTING THE DEAL
While such wording may not be embedded in its bond
covenants, Cemex (B-/B+) clearly benefits from such gestures.
Also taking advantage of positive momentum created by its recent
refinancing, and growing demand for high-yield names generally,
Cemex was able to generate a US$7bn book Thursday before pricing
a rare new-money 10-year that arguably paid just for its
maturity extension or even came inside its curve.
"Cemex doing a 10-year is a strong statement to the market,"
noted one rival banker. "They haven't done a 10-year for new
cash since they were investment-grade."
By getting investor attention with whispers in the mid to
high 9s, leads were able to tighten guidance to 9.375%-9.500%
before pricing at par to yield at 9.375%. The outstanding 2020s
were being spotted at anywhere from the high 8s to 9%, leaving a
good 37.5bp differential between the two bonds. A final new
issue premium was seen at anywhere between negative 20bp to
Either way, the trade was largely seen as a success, as
proceeds from the larger-than-expected US$1.5bn offering only
serve to give the highly leveraged credit more breathing room.
Alongside the planned IPO of its South and Central American
operations, that reduces anxiety about its ability to meet a
US$1bn debt payment due next March.
The recently completed refinancing of its financial
agreement also allowed it to extend close to US$6.7bn in debt
maturities from 2014 out to 2017, according to BTG Pactual,
further adding to the company's more optimistic outlook.
The new bond is also comparatively well collateralized, with
essentially all its operations guaranteeing this instrument -
except for the Central and South American units that are
expected to be floated later this year.
This includes US operations Cemex Corp, which is now finally
starting to turn a profit. "Cemex is the largest cement producer
in the US and about third to a half of the value of the
company," said an analyst.
All this heightens comfort levels and should in theory bring
some added value to this particular instrument versus others
along the Cemex curve.
"It is significant. I think the difference is worth about 10
cents," said a corporate debt analyst.
"The reality is, if Cemex went into bankruptcy, you have a
serious amount of assets in the US - and you can file in the US
courts - and there is nothing a Mexican court can do."
However in a more bullish environment such as this one,
investors are less inclined to make such distinctions. Indeed,
the 2018s, with fewer guarantees, are trading at a tighter 8.9%
versus a 9.10% seen on the 2018s that have similar guarantees to
the new bond. Leads were JP Morgan, Barclays, RBS, Credit
Agricole-CIB, HSBC and ING.
NOT EVERYONE WINS
Car-parts manufacturer SanLuis Rassini (Ba3/B/B+) suffered a
different fate after it was forced to postpone Tuesday its
issuance of new 10-year non-call five bonds, despite improving
Accounts were already clearly suspicious of a company that
had twice restructured its debt, but a broader distrust among
market veterans already bitten by past defaults in Mexico meant
SanLuis faced a particularly tough audience.
In the end, the company could not adhere to its goal of
freeing itself from restrictive covenants on debt it was looking
to refinance and, at the same time, achieve pricing of 10% or
SanLuis had complied with requests to impose stricter debt
incurrence restrictions, and even raised price guidance to 10%
from initial whispers of high 9s, but investors remained on the
fence, mostly because of the company's history. Bank of America
Merrill Lynch and JP Morgan were leads.
"They added the leverage covenants as we suggested, but we
are still highly sceptical," said one investor.
"The car business should be doing well. US car sales have
been going up and a big chunk of imports are from Mexico, and
SanLuis is well positioned to [benefit from that]. However, we
don't have much confidence," the investor said.
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