Grupo Kaltex, S.A., (KLTXMX) reported marginally stronger Q2 19 results mainly on the back of lower cotton prices, lower sales expenses from a steep reduction in personnel and positive FX result (negative a year ago). However, we reiterate Sell on the company’s bonds because we do not see a way in which Kaltex can make its principal payment in 2022 without refinancing or restructuring its debt.
We believe that refinancing the bond, at least at this point, would not be possible mainly due to the cost of debt implied by where the bonds are trading. The US$320.0mn, 8.875% senior secured bonds due 2022 (B-/CC) are currently trading at cUS$73.34 (ALLQ) to yield c22.87$ (g-spread 2,141bps; z-spread 2,130bps). At these levels, the company will not be able to access the capital markets and refinancing with banks would also be prohibitive.
Even under an optimistic scenario where we assume the Q2 19 EBITDA (US$24.7mn) level becomes sustainable, the roughly US$100mn (theoretical) EBITDA per year that would result from maintaining the Q2 level, would still be insufficient to pay the principal. This implies that Kaltex would become insolvent and must seek an exchange that would probably require a haircut, a maturity extension and perhaps a lower coupon. Hence, we see restructuring as inevitable.
In Q2 19, the company reported net revenues of US$229.01mn (US$242.67mn in Q2 18) and EBITDA of US$24.70mn (US$17.73mn in Q2 18). The increase in EBITDA was mainly due to: (1) lower COGs (US$189.89mn in Q2 19 versus US$199.95mn in Q2 18) from a reduction in the cost of cotton; (2) a reduction in sales expenses (US$10.28mn in Q2 19 versus US$21.98mn a year ago) mainly from personnel reductions. The company also reduced capex drastically to US$1.26mn in Q2 19, compared with US$8.03mn a year ago.
Despite these improvements, cash on the balance sheet remained low at US$13.59mn, lower than the US$16.05mn in Q2 18 and US$21.35mn at the end of 2018. At the company’s Q2 19 results conference call, management said that in order to pay the US$14.20mn coupon due on 11 October, it will use some of its cash but will need to do some factoring, selling a portion of its US$202.87mn in accounts receivable at a discount.
We believe Kaltex is in a tight liquidity position and at risk of becoming insolvent when the bonds come due in 2022. We therefore reiterate our Sell recommendation on the bonds.