Mexican Paper Meets Scissors

Bonds in Mexican paper and packaging company Corporacion Durango have tumbled into the low 40s – implying a high probability of default – down around 40% since the start of July. Distressed experts are heard positioning in the $520m 10.5% of 2017 – which was sold at par in October 2007 – in the hopes of a snap back or ample recovery if the company defaults. It was quoted at 42.75-43.75 Monday, up slightly from 42.50-45.00 Friday, in sporadic flow. The dive from the mid-70s July 1 is attributed to offloading by hedge funds needing cash but struggling to find a bid. On October 5, the company is scheduled to make a $26.5m coupon payment on notes due 2017. “I don’t think [bond prices] reflect any logical recovery value,” says Jim Harper, head of corporate research at BCP Securities, which has a strong buy recommendation on the bonds. “I expect them to make the [October 5] payment,” he adds. Durango ended June 30 with $35m in cash and marketable securities and $12m of short-term debt, according to Fitch, which rates the firm CC, implying 31%-50% recovery in the event of a default. Payment of the coupon is in the balance. “It has nothing to do with Ebitda this quarter – they have enough cash already – but rather their outlook for the business,” says a US-based distressed investor who asked not to be identified. He adds that if the owners see costs moderating and price increases sticking, Durango may well muddle through. But if 2009 looks bleak, it may choose to restructure. “Recoveries through a restructuring should be over 80 cents in PV of debt with more equity added in,” estimates the analyst. Durango launched the struggling B+ rated 10NC5 issue last year via Merrill Lynch to refinance debt. It was seen as something of a comeback for the company, which has since hit hard times. “We expect results to remain weak,” says Miguel Rincón, Durango’s chairman and CEO in a Q2 earnings statement.