Fixed Income Analysis /
Mexico

Grupo IDESA: Mixed 2018 results, refinancing risk persists; reiterate Sell

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    30 April 2019
    Published by

    Grupo IDESA, S.A. de C.V. (IDESA) only reported its Q4 18 and 2018 results this month. Its main business, CyPlus Idesa, produced c33 ktons of sodium cyanide, with a utilisation rate at its plants of 83%. Its second main business, Braskem Idesa, operated at a utilisation rate of 77% during the year, producing c799 ktons of polyethylene, of which c67% was sold in the domestic market. 

    On a consolidated basis, Idesa reported sales of US$544mn at the end of 2018, c4.0% lower than the US$569mn reported in 2017. On the positive side, better cost management in 2018 resulted in the company reporting gross profit roughly 11% better than the US$43mn reported in 2017. Similarly, adjusted EBITDA at the end of 2018 came in at cUS$43mn, compared to US$31mn a year ago.

    Where we saw greater weakness was on the company’s balance sheet: cash at the end of 2018 was US$26mn, compared to US$41mn a year ago; short-term debt was US$45mn in 2018, compared to US$39.5mn in 2017, and long-term debt was US$475mn in 2018, compared to US$457mn a year ago. As a result, total debt (US$520mn)-to-adjusted EBITDA (US$43mn) was 12.1x, compared to debt-to-EBITDA in 2017 of 15.8x. Although the almost 4-turns improvement in EBITDA was positive, we continue to believe that the company’s level of debt is unsustainable and this was one of the main reasons why in December 2018, Standard & Poor’s downgraded Idesa’s foreign currency long-term rating to CCC+ from B. Fitch rates the bonds CCC.

    When we initiated coverage of Idesa on 4 January 2018, the company’s US$300mn, 7.875% bonds due 2020 were trading at cUS$95.162 (ALLQ) to yield c9.79% at that time. The price of the bonds has dropped substantially, to cUS$69.912 (ALLQ) to yield c33.17% (G-Spread 3,083 bps; Z-Spread 3,072 bps). We believe that current levels show investors’ worries that: 1) the company might not be able to generate enough funds to pay its bonds; 2) it has a US$131mn credit line with Banco Inbursa that matures in 2020, the same year as the bonds, and that is senior to them; and 3) that there is a risk that the company might not find an affordable window to refinance its debts in the capital markets.

    Since we believe that these concerns have not dissipated, and that the bonds are senior unsecured, we are of the opinion that the bonds could have additional downside, particularly as the repayment dates approach (next year). We would like to see a substantial improvement in operations and financial performance that could suggest, if not easy, at least some reasonable access to fresh capital in order to service its upcoming maturities. 

    We believe that Inbursa could be sympathetic to giving Idesa an extension to its credit line (that has been drawn completely), given that Inbursa is one of Idesa’s main shareholders with c19% ownership. Nevertheless, the US$130mn (original amount) bond PIKs and even if extended, the principal, will continue to grow.

    However, and most importantly, we believe that even with an Inbursa credit line extension, Idesa will still need to refinance its US$300mn bonds. But we still cannot see a viable avenue for the payment of the bond without some kind of restructuring.

    Therefore, even at current prices – and acknowledging that some investors might find the current yield an appropriate compensation for the above-mentioned risks – our view is that there is more downside potential. 

    As a result, we reiterate our Sell recommendation.