Category: Corporate & Sovereign Strategy

Mexico’s troubled supermarket operator CCM has hired Credit Suisse to advise on its debt restructuring, it says, for which it will present a plan “in the next few weeks.” CCM is in negotiations with creditors following its default earlier this month, as it facing MXP1.2bn in October maturities. Credit Suisse underwrote a May 2005 $200m 10-year bond for CCM, which was done as part of a liability management exercise.

Declining oil prices and the continued global markets mayhem could prompt some marginal sovereigns to throw in the towel. But Merrill Lynch, for one, does not expect Ecuador to default. “We do not believe that the country’s ability to pay is at risk. If oil prices fall below $75/barrel, Ecuador will have to start dipping into reserves,” says Merrill. Crude slumped under $75 to close at $74.54 Wednesday, lowest in 13 months, according to Reuters. “We expect the government to continue servicing the ‘12s, ‘15s and ‘30s,” it adds. Although an internal government report recommended stopping paying those bonds as they were considered “illegitimate” debt, President Correa appears unsupportive of defaulting, the shop adds.

Investment and research firm B. Riley reiterated its “buy” rating on Puerto Rico bank Oriental Financial Group, although it is expected to record a $5m loss on derivatives in Q3 due to the fall of Lehman. “Given the bankruptcy filing of Lehman, Oriental believes that the recoverability of this counterparty exposure is in doubt,” says analyst Joe Gladue. However, he says, “the $5m write-off associated with Lehman counterparty risk will only cause a minor reduction to Oriental’s regulatory ratios” and that the bank “will be able to strengthen these ratios modestly in the third quarter, even after taking the write-down associated with the Lehman counterparty issue.” The analyst projects a $21 per share target. The stock closed Tuesday at $17.11.

Selecta Sementes, a Brazilian agriculture company specializing in soy and corn seeds, is restructuring some $500m in bank debt it has taken out with local and international banks, say people close to the company. Selecta was preparing to do an IPO earlier this year and had planned to use proceeds from the equity offering to pay down various kinds of debt taken out with a large number of banks. When the IPO did not materialize, the company was apparently stuck without funding, and defaulted on some of its debt, says a person close to the situation. The company’s finance director Hugo Braga has recently left and is in the process of being replaced, according to a Selecta official. The Goias-based company has hired Rothschild to advise the debt restructuring, seen lasting at least another 6 months.

A wave of defaults is set to hit banks that have made loans to the Brazilian agriculture and farm companies, predict local restructuring experts eyeing the sector. “There will be lots of defaults in the coming several months that will spur a negative cycle for the agriculture sector, with banks unwilling to lend and borrowers unwilling to pay,” Glauco Abdala, founding partner of restructuring and consulting firm Galeazzi Associados, tells LatinFinance. The executive says that over the past four years, abundant credit has led banks of all kinds, including mid-market banks, large Brazilian banks and European lenders, to extend dollar-denominated credit to agriculture companies with USD revenues. But with dollar funding costs going through the roof, banks have reduced their ability to lend, making it difficult or impossible for companies to rollover debt. “Companies will pay their suppliers and their employees before they pay down their debt with a bank that refuses to lend them more money,” says Abdala. While larger institutions like Bradesco, Itau, Santander and HSBC have deeper pockets to weather defaults, smaller mid-market banks like Daycoval, BicBanco and Fibra are most vulnerable since they are likely to get squeezed on both ends with defaults on one hand, and zero access to dollar lines on the other, says Abdala. Last week Fitch placed Daycoval, BicBanco, Panamericano, Pine and Tricury on review for downgrade, citing liquidity pressures on funding. S&P put Daycoval and Indusval on review for downgrade, citing similar reasons.

Following the demise of Durango, Mexican retailer Controladora Comercial Mexicana (CCM) was poised Thursday for default, according to S&P, which axed the rating to CC (negative) from BBB minus. “The rating action reflects our uncertainty that the company will be able to refinance or pay down its October maturities, particularly [Thursday’s] scheduled payment of MXP400m of short-term debt obligations,” says S&P analyst Juan Pablo Becerra. “Comerci’s first attempt to roll over the aforementioned obligation was unsuccessful,” says the agency, which notes that CCM has October maturities of about MXP1.2bn. “Although Comerci had cash and equivalents of $102 million as of June 30, 2008, and its refinancing needs appeared to be manageable, we believe that market-to-market fluctuations may have led to margin calls that have compromised the company’s liquidity,” says the agency. Moody’s chopped CCM to Caa3 (negative) from Baa2. Fitch meanwhile cut CCM to BB (negative) from BBB minus, including $200m senior notes due 2015 and MXP3bn senior notes due 2027. CCM is one of the largest Mexican food retailers, with revenues of $5.05bn for the 12 months to June 30, says Fitch. The firm had made no statement on the debt payment to the bolsa as of late Thursday.

As expected, Corporacion Durango has filed for bankruptcy protection in Mexico after missing Monday’s coupon payment on 10.5% coupon senior notes due 2017. The Mexican paper company blames the markets and its own industry outlook, but the meltdown has been a long time coming. Analysts say the default is more about bad management and an unwillingness – not inability – to pay. The company filed for protection in Mexico, with an auxiliary process in the US, and plans to restructure $1.52bn in debt, including $509m in public obligations and around $1bn in liabilities at subsidiaries. Durango says that because it is a holding company without any industrial activities, the debt process will neither affect operations of its subsidiaries, nor its clients, suppliers or employees. PriceWaterhouseCoopers, Rothschild and White & Case are understood to be the company’s advisors – the same group as in the last workout – and a creditor committee is being formed. Durango’s bond was trading at 25-35 Monday, down from 37-42 Friday, according to a US-based trader. The $520m 10.5% of 2017 was issued in October 2007 at par via Merrill Lynch. Durango was hoping to put a messy 2004 restructuring behind it by repurchasing some notes this year. As the first big LatAm corporate default in several years, Durango could mark the start of a new cycle of troubled firms throwing in the towel. Some may now also conveniently blame the global markets maelstrom. Others on the distressed funds watch list include Argentina’s Mastellone Hermanos, Impsa and Autopistas del Sol; Brazil’s Gol and Bertin; Colombia’s Transtel and Mexico’s Desmet, Industrias Unidas, Iusacell and Satmex. Desmet, which was recently trading in the mid-20s, has a November payment that looks unlikely to be met.

Slow-motion train wreck Corporacion Durango (CODUSA) could be the first big LatAm corporate default in several years, potentially marking the start of a new cycle of firms going under. The Mexican paper maker is unlikely to meet today’s $27m coupon payment on its bonds, according to S&P, which Friday cut the credit to CC from CCC minus, and kept the outlook at negative. “The rating action reflects our expectation that CODUSA may not meet the next scheduled payment on its notes,” says S&P analyst Jose Coballasi, speaking of the commitment due today. The agency notes that Durango’s financial flexibility is very tight and says the rating reflects a highly leveraged financial risk profile and problems associated with the paper industry’s cyclicality. “These negatives far outweigh the company’s leading position in the containerboard and packaging industry in Mexico, and its vertical integration,” says S&P. According to the agency, it had $35m in cash and equivalents as of June, less than it needed to get through Q3. However, other analysts note that the firm could still cover the coupon. “They have the cash so it’s all about willingness,” says a LatAm corporate analyst familiar with the credit. “I’d be a little surprised if [CEO] Miguel Rincon wanted to gain the reputation of being a double-defaulting debtor, especially when he has the cash on hand to make the coupon and buy another 6 months to sell off some assets and see the price increases or cost declines impact his bottom line positively,” says another. Both asked not to be identified. Durango issued the $520m 10.5% of 2017 in October 2007 at par, via Merrill Lynch. It was trading at 37-42 Friday, according to a US-based trader. Durango was hoping to put a messy 2004 restructuring behind it by repurchasing bonds this year. The firm did not respond to requests for comment. Other companies on the distressed funds watch list include Desmet, Vitro, Province of BA, TGS and Transtel.