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November 2001

Hit hard by US slump





       
Ford: cutting production will hit its
Mexican supplier
On his recent state visit to the US, Mexican president Vicente Fox bathed in the warm glow of Mexico's new friendship with its northern neighbour. George W Bush tried out his Spanish and everyone else agreed that ever-closer economic ties between the two nations were the new future for Mexican economic growth.
But following the September 11 terrorist attacks on New York and Washington, Mexico is being hit hard by the US slump and Mexican companies are beginning to wonder if such a friendship with the US is worth having. The large industrial sector exports nearly 90% of its products to the US and slowing sales north of the border have been aggravated by a strong Mexican peso.
The Latin American corporate bonds market is not making life any easier. Markets were sent reeling in the immediate aftermath of the attacks, as much of the investor optimism that had been propping up the US economy was erased.
Corporate spreads on the JPMorgan Latin Eurobond Index (LEI) widened 190 basis points to 906bp over US treasuries from September 10 to September 28. More dramatically, Mexico's close links with the US meant the Mexican corporate sub-index on the LEI widened 207bp to 868bp over treasuries in the same period.
As a result, companies such as glass producer Vitro, cement maker Cemex and shipping company Transportación Maritima Mexicana are having a tough time getting investors to buy their debt.
"Nobody wants to buy after what happened with Sanluis Corporación," says Robert Schmeider, head of corporate fixed-income research at Santander Central Hispano Investments in New York. "The market is pretty pitiful right now."
Sanluis, a Mexican car parts manufacturer, became the first Latin American company to default on its debt following the financial turmoil sparked by the terrorist attacks. Sanluis missed an $8.85 million coupon payment on a $200 million Eurobond maturing in 2008, citing the negative outlook for automotive sales in the US. Indeed, the Mexican automotive industry association Amia estimates a 7% to 10% decline in exports of autos over the next three months. US car maker Ford, which takes a little over 20% of Sanluis's sales, has already said it will cut production by 10% over the same period because of the expected continued slowdown of the US economy.
Since the Sanluis default, all eyes have been on Grupo Alfa, a heavily indebted Mexican conglomerate. Hylsa, its troubled steel subsidiary, was already facing a liquidity squeeze, with $280m in debt amortizations next year. According to conglomerates analysts, the risk-averse debt markets will make it increasingly difficult for Hylsa to refinance its debt. At the same time, contracting markets at home and abroad mean the company will be unable to generate sufficient cashflow to make its debt payments.
"We should expect more companies to default in the next six months given the current economic climate," says Juan Villanueva, head of Latin American credit research at Merrill Lynch.
Cemex, the world´s third-largest cement producer, has already cancelled a $300 million bond issue that was ready to go to market on the eve of the attacks. América Movíl, Latin America's largest mobile phone operator, has shelved a $500 million bond issue.
According to Gerhard Herrera-Pahl, emerging markets fixed-income analyst at IDEAglobal consultancy, the lack of liquidity for Mexican companies is unlikely to improve until the US economy recovers.
"The surge of patriotism in the US following the attacks mean investors there are keeping their money at home. The usual money lenders are not only risk-averse but are keen to do their bit by supporting US companies rather than Mexican ones," says Herrera-Pahl.
Ratings agency Fitch blackened the already gloomy picture by downgrading Latin American airlines and warning that it might do the same for the region's economies.
Nevertheless, market watchers say there is money out there for Mexican companies. "The capital markets are not completely closed, although the cost of borrowing is almost certain to increase significantly in the short and medium term," says Villanueva at Merrill Lynch.
Analysts say prospects for prising the bond market open again lie with Mexico's well-capitalized companies, such as Cemex. Indeed, Cemex's $300 million bond could be a bellwether for the corporate bond market.
"A lot of people are looking at Cemex to see if it can get the issue done," says Schmeider at Santander Central Hispano. "Cemex is a much stronger credit and one of Mexico's world-class companies. If Cemex can focus investors' attention on its issue, that might bring confidence back to the market and start the ball rolling again," he says.
Meanwhile, Mexican companies thirsty for cash are turning to the local markets to issue in peso-dominated bonds. América Movíl is set to issue around Ps2.5 billion ($250 million) in bonds this month, and Televisa, Mexico's media empire, is also considering a Ps4 billion offering.
"Interest rates in Mexico are at historical lows and that makes the Mexican market a very attractive alternative," says Manuel Güereña, director of Latin American corporate ratings at rating agency Standard&Poor's.
The peso market does have its drawbacks, however. "It is not deep enough to support all the companies in Mexico and only the highly rated companies can really issue here," Güereña says.
Ultimately, the smaller Mexican companies such as electronics retailer Grupo Elektra and TV Azteca, Mexico's number two broadcaster, are most likely to suffer from the lack of capital. With no easy access to credit, they will need to rely on a strong balance sheet and good cashflow generation to weather the downturn, analysts say. Expansion plans will be limited.
Elektra is already rethinking a $500 million, five-year development programme amid the worldwide economic slowdown. "This year growth has been tenuous, and in the coming year it will not be very high,'' chief financial officer Alvaro Rodriguez said recently.






I was walking the dog the other day when I bumped into a neighbour, who was retired. He’d just seen the news about the stock markets plummeting. He started talking about it and asked what I did. I told him I was a fund manager. He said: ‘I’m sorry’

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