May 3 (IFR) - The rapid demise of Mexican homebuilders and
the losses inflicted on foreigners holding US$2.5bn of their
debt has further dented the reputation of the country's
high-yield borrowers. And the ricochet effects may have a
broader impact on the reception of other junk names seeking
funding in the international bond markets.
"It's unhealthy for all players in this market when Double B
issuers in a strategically important sector such as housing and
from a veteran EM country such as Mexico can literally earn a D
rating in a matter of weeks," said Robert Abad, an EM portfolio
manager at WAMCO.
Difficult and lengthy restructurings could be on the cards
for Urbi Desarrollos Urbanos and Corporacion Geo
, which have entered grace periods after missing coupon
payments on their debt. Asset sales may have bought Homex some
time, but it is likely to face debt renegotiations as well, said
"The fact that 58% ofdebt is held by long-term
bondholders makes it difficult to simply reduce debt by imposing
a haircut on creditors," said Benjamin Theurer, senior analyst
at Barclays Capital in Mexico City.
" might result in a significant increase in its cost of
financing but also make it a lengthy process as a whole."
An unexpected restructuring announcement from Geo earlier
this month shocked many investors and intensified the sell-off
in the homebuilder sector as the buyside raised broader
questions about transparency.
"You thought you knew what was going on at Geo," said one
investor. "All analysts thought the problem was with Urbi. So
you suddenly realise you know nothing about these credits."
In some cases, homebuilder bonds have plummeted a good 50%
over the past month, causing considerable pain among investors
who are now re-examining their exposure to lower-grade names.
Geo 2020s are now being quoted at 42.00-48.00, falling from
the 87.50 seen in early April. It is a similar story for Urbi
2022s which are trading at 28.00-33.00 versus a 62.50 mid-market
price just a month ago.
"Everything is basically priced in with Urbi," said a New
York-based trader. "It's not going anywhere, really, until we
find out what happens with the restructuring."
Such troubles have some accounts once again thinking about
the pitfalls of investing in Mexican high-yield credits,
stirring memories of glassmaker Vitro's lengthy and polemic debt
restructuring. Indeed, a homebuilder version of the so-called
Vitro premium, or an added cost for Mexican junk names looking
to raise cross-border funds, may be a possibility.
"We should expect investors to apply a 'Geo-tax' to future
Mexican high-yield issuers on top of the Vitro premium," said
"This is unfortunate given the substantial progress issuers
in this space have achieved in lowering their cost of borrowing
relative to other EM countries."
The sector is seen as a victim of the government's change in
policy towards homebuilding in Mexico.
"Geo's first-quarter results were below our expectations,
largely due to a slow start in the subsidies programme and to
ongoing challenges related to aligning our company's strategy to
adapt to recent changes in Mexico's National Housing Policy,"
said Luis Orvananos Lascurain, Corporacion GEO's CEO, in the
Indeed, Mexico's new president Enrique Pena Nieto's
alterations to the Mexican Housing Policy will now funnel more
subsidies to vertical urban development rather than single
family urban sprawl, which had been the government's policy over
the past decade.
This has not helped these three companies as they already
own a vast amount of land in those areas, digging the hole
deeper as cashflows tighten.
"Instead of projecting an aura of control over the
initiative, the ambiguity of their housing policy message
sparked a wave of risk aversion through the investor and banking
community," said Abad.
"It's important to bear in mind that the homebuilder
business model is very capital intensive. It relies heavily on
working capital lines from banks to support project development
and, in varying degrees, subsidies to support end-buyer demand
for new homes."
A version of this story will appear in the May 4 edition of
IFR Magazine (www.ifre.com), a Thomson Reuters publication
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