Mexican Homebuilder Restructurings Highlighted at EMTA Seminar
Responding to restructuring announcements in the sector, EMTA held a Special Seminar on the challenges facing Mexican home building companies on Thursday, May 16, 2013. The event was held at EMTA’s New York City headquarters and drew an overflow audience of 135 EM corporate bond market participants. Credit Suisse, Deutsche Bank, JPMorgan and Nomura provided support for the program.
Panel moderator Jonathan Prin of JPMorgan Asset Management requested that speakers provide context for the current financial difficulties. Credit Suisse’s Jamie Nicholson acknowledged that general conditions for the industry would appear positive to the casual observer – Mexico had stable housing prices, growing employment, and a good macroeconomic background. However, she stated, many Mexican homebuilders suffered from inadequate financial management and a lack of ability to handle working capital, even in a generally positive environment.
Deutsche Bank’s Denis Parisien added that a shift in the composition of demand also proved harmful, as many of those Mexicans with long employment histories who could tap larger Infonavit savings accounts for home purchases had already become homeowners. “More working capital was required to get new, younger, lower- income clients in; they couldn’t just rely on the low-hanging fruit of the original buyers,” he reasoned, and there is more demand for used homes now than was the case in the past.
Despite the announced and potential restructurings in the sector, Jacob Steinfeld (JPMorgan) argued that a viable business model still existed. Corporations needed to return to the “low leverage models these companies had years ago.”
With Geo and Urbi already announcing restructuring moves, Prin polled the audience for expectations of whether Homex would avoid a similar fate; a simple show of hands revealed that attendees predicted the company would also not be able to honor its debts. Alex Monroy of Nomura detailed a number of challenges facing the company, including the lack of cash, as evidenced by the relatively small dollar amounts that prompted lawsuits by Credit Suisse and Barclays, the “probable insufficiency” of the firm’s prison deal with Inbursa and potential delays in its closing (“especially since the other banks might not appreciate that probably only Inbursa would get paid”). He concluded, “it would basically be almost impossible for Homex not to restructure; frankly, if the other firms restructure, they will be in a better competitive stance than those companies that don’t.”
For Nicholson, it was “still a substantial unknown” if Homex could “make a go of it.” Parisien underscored that “time could be bought, but it really depends on how banks see Homex as a creditor—do they see it as an ongoing concern that they want to keep doing business with?” Monroy further cautioned investors that , “the fact that Homex had to obtain a bridge loan with a [government] SHF guarantee shows that the banks are not willing to deal with the level of uncertainty right now.”
In light of the trouble facing its competitors, Prin questioned speakers if Javer’s bonds were appropriately valued in the low 90s. “The company has presented a better liquidity position than it really has; they might muddle through, but the debt might be a bit rich at 92,” responded Monroy. Steinfeld went further, specifying Javer was “a sell at current prices,” and expressed concern at the company’s 1.2 interest coverage. Adopting a more positive stance, Nicholson rationalized that, with no short-term debt and only a bond due in 2021, the company had “time to navigate and be nimble.” She recommended that investors monitor the company’s integration post-merger, as well as its cash flows.
In a worst case scenario for troubled companies, several speakers emphasized that it would be difficult to predict recovery values. “Typical liquidation analysis does not work in Mexico…it would take a long time and be very complicated,” according to Monroy. Pushed, he ventured that creditors would recover no more than ten cents on the dollar. Nicholson hypothesized that projects and developments could be sold so that a smaller scale entity would survive.
Steinfeld stressed that the analysis being provided by the Street served a purpose in showing “how bad it will be, and bringing people to the table.” While liquidation on this scale had not occurred recently, he estimated that there was “a very big possibility that it could happen to at least one of the companies in this sector.” He surmised that entering Mexico’s bankruptcy procedures (ley concurso) with such low cash levels wouldn’t be a rational outcome until each company reached a restructuring agreement with its banks, including a new money component; bondholders would then be asked to take a large hair-cut in order to finalize the deal.
Several panelists suggested that, as part of any restructuring deal at Urbi, creditors might best serve themselves with a change in the firm’s management team. “We are not sure current management can do the job,” opined Nicholson.
Prin asked what investors could have done better to avoid having overpriced homebuilder bonds. In Parisien’s opinion, “too many people bought into this sector indiscriminately. How many people tried to poke holes in the stories?” Monroy added that many investors might have incorrectly concluded that the sector was in line with sovereign objectives, and subsequently assumed some level of government support. “Maybe that is why there was a lot of indiscriminate buying,” he surmised.
EMTA SPECIAL SEMINAR ON THE MEXICAN HOMEBUILDER SECTOR
Thursday, May 16, 2013
EMTA
360 Madison Avenue, 17th Floor
(on 45th St. between Madison and 5th Avenues)
New York City
This special Seminar will focus on recent developments in the Mexican homebuilding sector.
Topics will include:
8:45 a.m. - Registration
9:00 a.m. - Panel Discussion
Challenges in the Mexican Homebuilder Sector
Jonathan Prin (JPMorgan Asset Management) – Moderator
Jamie Nicholson (Credit Suisse)
Denis Parisien (Deutsche Bank)
Jacob Steinfeld (JPMorgan)
Alex Monroy (Nomura)
Additional support povided by Credit Suisse, Deutsche Bank, JPMorgan and Nomura.