As far as bond traders are concerned, Empresas ICA SAB’s missed interest payment this week is just a prelude to what’s likely to be the biggest default in Mexico in at least two decades.
On Monday, the builder said it will use a 30-day grace period to make a $31 million interest payment on $700 million of its notes. The announcement triggered a tumble in the $1.35 billion of overseas bonds issued by Mexico’s largest construction company, leaving the securities down 68 percent this year.
“Do I think they’re going to pay within 30 days? No,” said Carlos Legaspy, a money manager who oversees about $330 million at InSight Securities Inc. and holds ICA bonds due in 2017, 2021 and 2024. “The 30 days are not going to make any difference.”
ICA declined to comment on speculation that the company may default.
The builder reported its biggest net loss in 14 years in October in the wake of government cutbacks to infrastructure projects that account for almost 90 percent of its pipeline. If the company halts payments on all its notes, it would eclipse glassmaker Vitro SAB as the biggest corporate bond defaulter in Mexico since Moody’s Investors Service began tracking the data in 1995.
With ICA also weighed down by record leverage following the peso’s 11 percent tumble this year, creditors are likely staring at a painful restructuring process. The currency slipped 0.1 percent Wednesday to 16.5386 per dollar as of 7:42 a.m. in New York.
Bondholders may recoup between 10 percent and 30 percent of their money, according to Standard & Poor’s recovery ratings. S&P cut ICA’s grade to CCC+, the fifth-lowest junk level above default on Nov. 13.
There’s a “a strong possibility of creditors being forced to take a haircut,” Rafael Elias, the head of emerging-market strategy at Cantor Fitzgerald, said in a note to clients on Tuesday.
Mexico’s government is in talks with ICA about payments and other issues, Raul Murrieta, the deputy minister of infrastructure, said in an interview. Murrieta said he met with Chief Executive Officer Alonso Quintana on Monday and expects to meet with him again Wednesday.
“It’s a company that we hope stabilizes,” Murrieta said. “It’s going through a bad period.”
The Mexico City-based builder, which hired Rothschild & Co. as a financial adviser in October, has struggled to shore up its finances as a collapse in oil prices prompted the government to cut spending. The peso’s 11 percent slide in 2015 has swelled the company’s obligations, with its debt reaching 10.75 times its earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.
The bonds also took a hit in June after a candidate who had pledged he’d cancel ICA’s contract to build a $1.1 billion aqueduct was elected governor of Mexico’s Nuevo Leon state.
InSight’s Legaspy said negotiations between ICA and bondholders have the potential to become “contentious” after the company waited until the last minute to say it will use the grace period.
It “is not the best way to start a friendly negotiation or a restructuring,” he said. “It’s extremely frustrating. It shows that they’re kind of flying a little bit by the seat of their pants and that’s always not comforting.”
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