Mexican Companies Reap the Whirlwind of Default

As the number of Mexican companies defaulting on international debt continues to rise, the country's second and third-tier companies are losing their access to capital. As a result, firms like shipping and rail concern Transportacion Maritima Mexicana (TMM) are coming under increasing scrutiny as the next possible restructuring stories.

Last week, Mexican bondholders were floored by a two-punch combination, as Grupo Dina SA offered yet another tender to buy back debt, this time at a sharp discount to market value, while construction company Bufete Industrial SA officially announced it would miss a $100 million Eurobond payment.

"What this will do is it will pretty much guarantee that the Bufetes of the world - and the next big candidate for default, TMM - virtually cannot get money," said John Liegey, chairman and CEO of The Weston Group.

Bufete's default was not a big surprise to bondholders, as the company's low cash levels - $30 million at the end of the first quarter - had the market abuzz with rumors of default for over a month. But Dina's tender to repurchase $164 million worth of "busted" convertible bonds due in 2004 for a mere $97 million, combined with the busmaker's refusal to make a $6.56 million coupon payment on the bonds in order to weaken their market value, has investors steaming.

Dina's offer is perceived to be particularly pernicious as the company is sitting on roughly $80 million in cash from the recent sale of its U.S. bus operations. While these heavy-handed tactics are not likely to push bondholders into a buyback, Liegey said, they are going to tighten the liquidity crunch on Mexico's more beleaguered credits.

"A Mexican issuer called me up concerned about Bufete and Dina and asked me what this meant," said Anne Milne, head of Latin American corporate debt at ING Barings. "I told them - This is bad news for you guys."

Middle-tier credits such as paper and pulp producer Grupo Industrial SA, which has a $150 million Eurobond maturing in 2001 and Internacional de Ceramica SA, which will have to make a $90 million Eurobond payment in 2002, will find it extremely difficult to refinance their debt, she said. The events of last week bode even worse for TMM. The company has to contend with some $70 million worth of short-term loan payments this year and a $150 million Eurobond that matures next October with only $50 million to $60 million in cash.

"We do not foresee any problem paying back the debt," a TMM spokesperson said. "We will be selling assets which should bring in $150 million to $200 million, and most of that will be used to pay down debt."

But if the company's recent sale of three container ships for 45% of their book value is any indication, TMM is unlikely to bring in more than $100 million through asset sales, said Ike Michaels, managing director at the Weston Group. Additional sales of company offices and jets are not likely to bring in much additional funds, he said. "Yes they are selling assets, but it's quickly becoming a fire sale, and that won't get value."

Nevertheless, the very fact that TMM is making a concerted effort to address its obligations sets it apart from the likes of Grupo Dina. "I'm very comfortable with management," said Manuel Rubiralta, associate director of corporate ratings at Standard & Poor's in Mexico. "I don't think a default would be because of willingness to default; it would be because market conditions and the company would deteriorate to the point where funds would drop to nothing." Such a scenario is unlikely in the short-term, Rubiralta said, and TMM will keep its BB- rating for now.

The company does have one ace up its sleeve, Milne added: it owns a 50% stake in Transportacion Ferroviaria Mexicana (TFM). Shares in this profitable railway in Northwestern Mexico could be used as collateral or sold outright in order to refinance debt. But TMM would only take such action as a last resort, she said, as the company is currently seeking a strategic investor to help purchase the Mexican government's remaining 20% stake in TFM. - Matthieu Wirz