Durango Default Predicted

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.