|
Vitro fact box
|
For a company that was on the distressed debt list only three years ago, 2007 marks the end of an era. At the start of the year Mexican glass-making company Vitro issued the now second biggest high-yield corporate bond by an emerging markets borrower, raising $1 billion. The deal was the final part of a major debt refinancing initiative to improve Vitro’s debt capital structure.
“These guys are golden right now,” says an enthused banker. Vitro is a classic turnaround credit story. From a debt-ridden struggling company, it has sold off non-core assets, honed its capital structure, cleaned up its books and focused on two core niche businesses – the flat glass and the glass container industries. The $1 billion deal marked the last step in Vitro’s turnaround as it refinanced all debt, except its 2013 bonds. The successful deal is seen as a ripe reward for the management’s hard work over the past two years. Michael Schoen, managing director and head of Latin American debt capital markets at Credit Suisse, who worked on the deal says: “Vitro is a first-rate company but its refinancing issues were persistent. This deal finally allows management to focus fully on running the business.”
A rocky past
Recent success has been that much sweeter in the light of past problems. In 1995 Vitro had a finger in every pie, with 26 core business holdings, and debt spread between the banks and the markets in several short-term maturities. A year later the company was hit hard by Mexico’s economic crisis and the strains of this dispersed company structure showed.
“In 1995 the Mexican financial system collapsed and today 60% of the financing to the private sector comes from suppliers,” says Alvaro Rodríguez, Vitro’s chief financial officer. “So since then, the big companies have had to lend to suppliers and to clients – Vitro was no exception. With this, we, like others, maintained high debt leverage.”
The North American Free Trade Agreement was another defining step. “We all signed up to Nafta and, with entry, a whole new set of rules came into play,” says Rodríguez. “Increased competition, high leverage, increased input prices and changing market cycles occurred almost simultaneously and all together hit us hard – it was a perfect-storm kind of situation.”
José Coballasi, an analyst at Standard & Poor’s concurs. “Vitro has had a lot to deal with over the years – the strengthening of the peso, cyclical weaknesses in the glass container industry and the spike in natural gas prices,” he says. But internal weaknesses meant that Vitro took too long to adjust to new external pressures and to implement leverage reduction measures. It is this poor capital structure that analysts feel was at the heart of the financial instability.
But Rodríguez defends Vitro. “A company is like a human being,” he says. “If the environment changes suddenly then you have a hard time until you have adapted. That’s what happened to Vitro – the economic competitive environment changed and it has taken us time to adapt.” However, only in the past two years has Vitro stepped up and addressed the issues correctly with financial plans and targets being set, and achieved.
In mid-2005 Vitro formulated a financial plan that aimed to establish a company with lower capital costs, long-term funds, higher cashflow generation and a solid growth path. Liquidity improvements were also high on the agenda. Finally, Vitro is seeing improvements. Leverage decreased from 4.3 times in the third quarter of 2005 to 3.3 times at the end of 2006 and the consolidated ebit margin increased from 6.7% to 7.5% over the same period.
The plan also outlined the sale of assets. In March and June 2006 the sale of 51% stakes in Quimica and Vitrocrisa were completed, generating $20 million and $103 million, respectively. Short-term debt has been reduced and capital stock has been increased through an equity injection of a $50 million rights offering on September 27 2006. The offer was strongly subscribed to by current shareholders.
In December Vitro finalized the sale of real estate that was occupied by its Vimex subsidiary. The deal closed for $100 million and enabled Vitro to reach its 2006 goal of raising $300 million needed to help pay down company debt and strengthen the company’s financial position. Now the January bond deal marks the cost reduction and streamlining of debt to the holding company.
Largest corporate bond ever
The bond, initially projected to raise $750 million, was increased to $1 billion because of high demand and better liquidity opportunities. The deal was led by Credit Suisse, Lehman Brothers and Morgan Stanley and attracted more than $7 billion from more than 100 orders spread between the five-year and 10-year non-call five bonds. The $300 million five-year deal priced at 99.008, with an 8.625% coupon to yield 8.875%, down from an expected 9%. The $700 million 10-year non-call five also priced well, at 98.04, with a coupon of 9.125% to yield 9.375%, tighter than the 9.5% that was expected. The deal priced on January 24 and was rated B2/B.
 |
|
“There was a very positive feel about the company at the turn of the year and this deal finally closes the book on our rocky past” Alvaro Rodríguez, Vitro |
The bonds traded up to 102 the day after pricing but by January 26 the 10-year bond was trading at around 100.8, while the five-year bond was at around 100.65. But, despite healthy trading, some fund managers have their doubts. They have questioned how well understood the Vitro story is, saying people bought into the deal because it was high yield, and not because they understood this credit particularly well. Rodríguez defends the deal’s success: “I always look at the facts – the bonds are trading up from their starting price. There are always going to be believers and non-believers, and that is good because that’s what creates a market. I think the way our bonds are trading shows people do believe in us.” Schoen adds: “The fact that the deal was priced at a relatively attractive yield didn’t hurt but you can’t sell $1 billion on spread alone. Investors wanted to own this credit.”
Whether demand was high because investors wanted a high yield credit, or whether it was because the sold-out investors returned and bought in again, either way this was a success. After a global roadshow the paper ended up 65% in US accounts and 25% in Europe, with the remaining 10% going to Asia. Most of the notes went to US institutional investors but European and Asia retail investors also came in on the deal. “Almost everyone we saw on the roadshow came in – they overwhelmingly accepted our story,” says Rodríguez.
The proceeds are to be split between four payments. First, they will be used to clear bonds that mature this year, which are held at the holding company level. Second, a maturing loan, due in 2007 held by Vitro Envases Norteamerica (Vena) will be cleared. Third, about $180 million of commercial paper will be cleared. Finally, the funds will pay for the tender of Vena’s 10.75% notes due in 2011. A final $100 million will be kept as cash to help liquidity. The deal reduced Vitro’s debt costs by 300 basis points.
“Over the last two years we have delivered on the promises we made,” says Rodríguez. “There was a very positive feel about the company at the turn of the year and this deal finally closes the book on our rocky past.”
When asked what the motivation was for this focused drive of recent years, Rodríguez says: “There was no one catalyst. The external pressures on us improved, and internally a new management team has been established that has worked hard to achieve this.” He realizes that with the new team came an appreciation that something needed to change: “We are a 100-year-old company that had always focused on manufacturing efficiency, but today there is a new mindset,” he says. “Although it sounds obvious, we are now driven by market demand. We have learnt to become more market focused. This company has survived some hard times and I think it has emerged stronger than ever in 2007.”
Brighter future
The positive trend in financial performance and the reduction of refinancing risk were both reasons cited by S&P’s Coballasi: “We felt that recent actions deserved an upgrade to B. Nevertheless Vitro continues to face several challenges. It has to contend with volatile energy prices and the competitive flat-glass environment. Also the company is still highly leveraged, but we are expecting an improvement in Vitro’s key financial ratios and think that by 2008 the company will be able to post a positive free operating cashflow generation.”
A revamped financial structure, reduced debt and growing margins can only indicate a bright future, especially since many lessons have been learnt. “Now financial discipline will be closely monitored, we will continue to deliver on our promises and retain credibility within the markets,” says Rodríguez. “Finally we can focus on the business and not on the refinancing of endless debt.”
Ten years ago fund managers thought Vitro would go under, now it has the lowest leverage levels, the highest margins and the cleanest capital structure from that period. The Vitro of today is smaller, more streamlined and in much better financial shape. In the words of one banker: “This is a company that has been through a lot. Its future now looks bright.”
