Mexico Faces Its Biggest Corporate Default In Two Decades As Construction Giant Misses Bond Payment

Tyler Durden's picture

Back in August, we said that "Something Is Very Wrong At Mexico's Largest Construction Company...

"Let’s say, for argument’s sake, that you’re a big company in an emerging market and suddenly, a commodities crash for the ages and a "surprise" devaluation by the world’s engine for global growth and trade sends your country’s currency into a veritable tailspin," we wrote. "If that were the case, just about the worst possible situation you could find yourself in would go something like this (adapted from Bloomberg): "Eighty-five percent of [your] backlog is denominated in the [home currency], which plunged to a record low this week [and] almost half of [your] debt is in foreign currencies, mostly dollars."

That was the situation facing Empresas ICA SAB which had just spooked bond investors by selling a key 3% stake in an airport operator for $56 million in order to pay down debt.

Well, after turning in its worst quarter in nearly a decade and a half in October, Empresas ICA SAB missed an interest payment this week in what Bloomberg says is "just a prelude to what’s likely to be the biggest default in Mexico in at least two decades." Some $31 million in debt service payments came due on Monday and the company elected to utilize a 30-day grace period to try and make the payment.

"Under the terms of the indenture governing the 2024 Notes, the use of the 30-day grace period does not result in an event of default," the company said, cheerfully. 

Carlos Legaspy, a money manager who holds ICA bonds due in 2017, 2021 and 2024, wasn't as optimistic: "Do I think they’re going to pay within 30 days? No. The 30 days are not going to make any difference." Here's a look at the 2024s:

And the 2021s and 2017s:

And as for the equity, well, no luck there either: 

Moody's is disgusted. "The use of the 30-day grace period does not constitute an event of default in itself, however, it reflects the precarious liquidity of the company and is a likely precursor to more formal refinancing process or distressed exchange," the ratings agency said on Wednesday, on the way to downgrading ICA to Caa3, from B3. Here's more: 

The negative outlook reflects the ongoing uncertainty as the company enters this new phase of negotiations with its creditors, payment risk on upcoming interest and debt maturity payments, and the possibility that missed coupon payments beyond grace period results in a more formal debt restructuring filing. The outlook also entails the possibility that recovery for bondholders will not be commensurate within the Caa3 rating, leading to further downgrades. For example, recovery could be affected if the company launches a distressed exchange resulting in lower than anticipated recovery or if as a result of a distressed sale of assets the company is not able to raise cash enough to cover outstanding debt.

S&P, who apparently concurs with Carlos Legaspy's assessment of ICA's prospects, also cut the company by three levels on Wednesday, noting that there's a "high probablity" that the 30-day grace period will not help when it comes to avoiding default. 

"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," Bloomberg goes on to say, adding that "the peso’s slide has swelled the company’s obligations." Here's how ICA compares to previous defaults in Mexico:

"If ICA does not make payment within 30 days, it would be considered an event of default," BoAML reminds us, before noting that what you're likely to get is a cross-default on the 2017s and 2021s (shown above). For any BofA clients who may be concerned, don't worry, your broker apparently has enough sense to avoid defaulted bonds: "we're underweight on ICA's bonds on liquidity concerns."

In the end, it will be haircut time for creditors and this will go down as just one more example of what happens when the EM growth story shrivels up and dies. We'll close with another quote from Carlos Legaspy, who is aggravated at ICA's handling of the liquidity crunch: 

“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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Theta_Burn's picture

Carlos Slim could sort this out no problemo..

0b1knob's picture

I wonder how much they owe CAT?   Will the dead CAT bounce?

uhland62's picture

Not that I know who Carlos Slim is, but if he's into white powder and green leaves, you could well be right.

There is a very credible theory out there that some business people have sidelines loaning money. Sounds straight forward but what it is is financing shipments.

When you see for instance a haul of 100 million Dollari that's the street value. For the financiers it was a 33 million package that had to be found to get the stuff to where uniform put their hands on. In all probability, it would have been several cashed up business people, construction entrepreneurs not excluded, who supply finance. When the goods do not reach their destination, the financiers have lost.

With a bit of delay you then find higher share sales (people needing to stay flush for day to day life after a loss) and surprise company collapses of those who do not have enough assets to make up for the loss. When was the last time they pocketed a big haul of nine digit figures in Mexico? Maybe two months ago, or three? 

There are no surprises in life, only missing links in the chain of information. 

wanderer9641's picture

Carlos Slim is Mexicos version of Bill Gates - communications instead of computers - the money value is very close.

Francis Marx's picture

All they have too do is call yellen. She will loan them at the new  december rate till they get back on their feet..

NoDebt's picture

I was going to say something snarky like "Dude, they're in Mexico" but then I realized you might have stumbed on a genius idea.  Direct bank bailouts at home in the US would be difficult for the US voting public to accept (again).  But if the Fed did it through other foreign central banks to foreign companies upside-down on their dollar-denominated loans they might just get away with it.  An INDIRECT bail-out of US banks through their foreign loan exposures.

AND, AND it would continue to perpetuate the dollar as the world reserve currency.  These types of indirect bail-outs would be like heroin.  Every central bank around the world would quickly find themselves neck-deep in doing dollar-denominated transactions.  They'd never be able to stop.

Why jump through all the hoops of bailing out our puny and problematic domestic banks where many eyes are watching when you could bail out the whole planet one third world shithole at a time where few eyes are watching?

You may be on to something.  Something evil, but genius evil.

Hype Alert's picture

Wow, like Mexico.  Who would have seen that coming.

NoDebt's picture

Doing the defaults that Americans just won't do.

ebworthen's picture

Holy Bean Burritos Batman! 

"CAT" got your tongue?

silverer's picture

So it's all good, right?

rsnoble's picture

Fuck Mexico! Living in rural US, it's hard to fathom such a shithole.  Let alone the ones we have here.

booboo's picture

Look Michael, if you want to comment, comment!. But linking your website in every thread is getting...well, thread bare. If you need some money just ask for it, hell, set up a go fund me account.

Vlad the Inhaler's picture

Time to order some chips and guac, it's starting to get good!

rsnoble's picture


silverer's picture

Ay, ay, ay, ay, nosotros sin dinero!

chairman of the bored's picture

Yes,boboo,quite tacky...he's just trying to drive traffic.Then again,love King World...the site totally sucks,but the interviews are some of the best on the web(I'm 65 yrs old and easy to entertain!)

Midnight Rider's picture

Hope these aren't the guys who were going to build The Wall for us.

jez's picture

"It shows that they’re kind of flying a little bit by the seat of their pants"


How do you fly "a little bit"? And what is "kind of flying"?

Or has Mr Legaspy been misquoted, and is he saying that a little bit of the seat of Empresas' collective pants is doing the flying?

And how little is "a little bit"? If, let's say, seven per cent of the seat of MY pants was able to pilot an aircraft, then that would mean that the entire seat of my pants would be able to pilot 14 aircraft simultaneously. I'm sure I'd be able to find a way to monetise that.

Tyler, we need DETAILS. We need 'em bad.