Worst-of-the-Worst Debt Is Bouncing Back With Growth in Mexico

(Bloomberg) -- As Mexico’s economy rebounds from its biggest recession in almost a century, investors are piling back into the debt of the worst affected companies, in the worst affected industries. 

Defaulted bonds sold by hotel chain Grupo Posadas SAB, broadcaster TV Azteca SAB and flagship airline Grupo Aeromexico SAB are all among the top ten returning notes over the last three months, landing investors gains of at least 13%.

Each company is benefiting from the turnaround of Mexico’s fortunes, driven mainly by an economic boom in the U.S., the nation’s biggest trading partner. The defaulted debts are spearheading a rebound across Mexican corporate bonds, which have returned 3.3% on average over the past three months, according to Bloomberg’s emerging-market bond index. That’s the fourth best return in the index, handily outstripping the 1.7% average gain.

“The situation that we’re seeing right now is above the most optimistic scenario we expected during 2020,” said Luis Gonzali, a senior portfolio manager at Franklin Templeton in Mexico City. “We see a strengthening of fundamentals for most Mexican corporate bonds.”

The bonds still remain under pressure, however, and investors who held the bonds near the end of 2019 have a long way to go to recoup their losses. When the pandemic hit, bonds cratered, with Mexico’s tourist industry bearing the brunt of the slowdown amid lockdowns and border closures.

Cancun’s Beaches

The strongest pandemic rebound happened with Grupo Posadas, a hospitality chain that runs hotels and resorts from Mexico City to Cancun. The company’s $393 million in debt due in 2022 plunged to a low of 28 cents on the dollar in May last year, but has since surged to 83 cents.

The credit has been bolstered both by an agreement with bondholders to extend the bond maturities and an influx of tourists to Mexican beaches, particularly travelers from the U.S. In the first half of 2021, about 7.2 million international tourists flew into Mexican airports, up from just 5 million in the same period last year, according to the Tourism Ministry.

That’s also helped Aeromexico bonds, which sank to just 21 cents on the dollar in Aug. 2020. The company is poised to emerge from a Chapter 11 bankruptcy process, and has seen its passenger figures climb. In August, the company transported 1.5 million passengers, up from just 644,000 the year earlier, though still under the 1.8 million passengers in 2019.

Of course, it wasn’t just tourist-reliant industries that suffered. TV Azteca, Mexico’s second largest broadcaster, saw its 2024 notes drop as low as 42 cents on the dollar in February as clients trimmed advertising spending. They have since rebounded to 59 cents. Mexico’s economic recovery paved the way for a rebound in domestic publicity revenue, which surged 66% in the second quarter from the previous year.

Alpha Woes

Cautionary tales abound. Key among them is Alpha Holding SA, a non-bank lender that defaulted after disclosing a $200 million accounting error that prompted it to pull its financial statements. The lender has had much less success navigating its default than peers, and announced last month that it would sidestep U.S. courts and file for bankruptcy proceedings in Mexico.

“We don’t rule out that there are some companies that could continue to be troubled,” said Templeton’s Gonzali.

Still, with the U.S. and Mexico both in recovery mode, things may be looking up for Mexican companies, providing a boost to the hardest hit among them.

Elsewhere in the market, Mexico’s corporate bonds climbed on average, joining gains in sovereign peso-denominated bonds. The nation’s dollar-denominated bonds slipped.

Short-dated TIIE swap rates declined slightly this week, with the curve pricing a little more than 60 basis points of hikes before year-end. With three Banxico meetings left, that means at least two 25 basis-point rate increases are fully priced in and opinions are divided about a third. Economists in the biweekly Citibanamex survey also see a similar amount of hikes in the rest of 2021. The next important local catalyst for swap rates will be the September bi-weekly inflation, scheduled for release on the 23rd.

Next week will be light on data releases. Mexico will report August ANTAD same-store sales figures and weekly international reserves numbers up to Sept. 10.

WHAT TO WATCH:

• Sept. 13: ANTAD same-store sales
• Sept. 14: International reserves

BOND SALES:

• Total Play Telecomunicaciones has mandated a roadshow
• Bachoco files to establish 10b-peso debt shelf
• Coca-Cola Femsa to sell 10b pesos of bonds on Sept. 21
• Volaris to sell 1.5b pesos in local bonds on Oct. 6
• Volkswagen Leasing to sell 2b pesos of bonds on Sept. 22
• Toyota Financial Services Mexico to sell 2b pesos of bonds on Oct. 7
• Fovissste to sell 10b pesos of local bonds on Oct. 1
• Cetelem to sell 2b pesos of local bonds on Sept. 21

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