Mexican companies slash debt as peso rallies

MEXICO CITY, Aug 3 (Reuters) - Many Mexican companies, from dominant telecom provider America Movil to bottler Femsa, cut debts in the second quarter, helped by a stronger peso, although they are unlikely to rush to return money to investors or increase investment.

The reduced leverage is helping Mexican companies with earnings in pesos and debts in foreign currencies rebound after the surprise election of U.S. President Donald Trump dragged the peso to a record low in January. This ratcheted up debt-servicing costs in dollars, which could squeeze profits.

Fears Trump could scrap the North American Free Trade Agreement have since receded, lifting the peso. But companies may sit on their cash for now, concerned that Trump could revert to a harder line on trade with talks on renegotiating the accord starting this month.

The peso appreciated nearly 4 percent in the second quarter after jumping nearly 11 percent in the first quarter, according to Reuters data, the strongest performance this year among world currencies.

For Mexican firms with much of their earnings in pesos and substantial debt in dollars and other foreign currencies, the peso’s appreciation bolstered existing debt-reduction efforts.

America Movil, for example, shrank its net debt from 629.7 billion pesos ($34.7 billion) in December to 550.8 billion pesos ($30.4 billion) in June.

The drop in the company’s outstanding debt “reflects first and foremost our debt reduction efforts, but also the appreciation of the Mexican peso versus other currencies,” America Movil Chief Financial Officer Carlos Garcia Moreno said during a call with analysts on July 19.

Asked whether investors could expect more share repurchases in light of America Movil’s reduced debt, Garcia Moreno suggested the company was working toward that aim. But first, he said, the company - controlled by Mexican billionaire Carlos Slim - wants to further reduce its debt-to-profit ratio.

“Once we are able to (do) that, I think we are open to further uses of our cash,” he said on the call.

A lighter debt load could open the door to additional capital expenditures or returning cash to investors because it reduces the portion of cash flow companies must devote to servicing debt.

But many companies, mindful that the peso’s gains could prove transitory, will proceed with caution, analysts predicted.

“I think the great majority are conscious we’ve had a historic appreciation of the peso,” said Intercam analyst Alik Garcia. “So they’re taking a more conservative position.”

Firms in Mexico’s main stock index, excluding financials, have more liabilities in dollars than assets: about $68 billion versus roughly $25 billion, Garcia said. This explains why a weaker dollar helps their balance sheets more than hindering, he added.

Companies which have more assets than debt in dollars, such as low-cost airline Volaris and retail and banking company Elektra, do not benefit from the trend, Garcia noted.

Bottler and retailer Femsa cut its total debt by 1.3 billion pesos from the end of 2016. The company cited the stronger peso “as applied to our U.S. dollar denominated debt position.”

Mexican broadcaster Grupo Televisa also slashed its debt burden in the quarter, as did Mexican cement maker Cemex, state-run oil company Pemex and pharmaceutical company Genomma Lab Internacional.

Cemex has most of its debt in dollars and has been waging an aggressive campaign to slim down, trimming the load by $676 million in the quarter.

The peso was only one factor, analysts said.

“I think the reduction of debt has been primarily brought about by the corporate strategy,” said Ramon Ortiz, an analyst at Actinver.

$1 = 18.143 Mexican pesos on June 30 Reporting by Julia Love; Editing by Christian Plumb and David Gregorio