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.”