Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

    Tellimer Research
    16 January 2020
    Published byTellimer Research

    In Focus: Grupo Posadas initiation – High-quality company struggling with industry headwinds; Hold 

    Grupo Posadas (POSADA) is one of Mexico’s leading hospitality chains. It owns, manages and franchises hotels and vacation properties across the country, catering to a very diverse range of tourists through its well-established portfolio of brands. 

    At end-Q3 19, Grupo Posadas had total debt of cUS$389.42mn, mostly comprising its outstanding US$392.605mn (of an originally issued amount of US$400mn) 7.875% senior unsecured bonds due 2022 (B2/B/B). The bonds trade at cUS$92.277 (ALLQ) to yield c11.57% (g-spread 998bps; z-spread 993bps). 

    Although this yield might seem attractive to some investors given the company’s quality, tourism in Mexico has been struck by a number of headwinds in recent times: 1) the security situation; 2) gasoline shortages, affecting tourism and business travel; 3) the algae problems in the Caribbean, which have hit occupancy rates in places like Cancun; and 4) the stagnant economy, which has undermined travel in general. These factors have been reflected in the company’s declining EBITDA, occupancy rates and cash. In addition, the government has cut its spending on tourism promotion. 

    The security situation and economic stagnation remain sources of concern, but the other headwinds should dissipate in 2020. Moreover, sales of vacation properties have been growing, and the company’s expansion plan is impressive. There were seven new openings in the first nine months of 2019 (1,921 rooms) and, as of end-Q3, 14 were planned for Q4 19. Grupo Posadas expected to conclude 2019 with 190 properties, up from 175 at end-18, and to open another 32 hotels over the next three years. This expansion program should enable Grupo Posadas to maintain a stable stream of revenues through the tourism slump. 

    We believe there is a real possibility that tourism will continue to perform below its potential in Mexico in the short and medium terms, as some of the headwinds will probably persist, and we could see EBITDA and liquidity deteriorating slightly in Q4 19 (even if there is a slight sequential improvement, there could be a substantial drop from Q4 18). However, we expect a gradual but steady recovery to start in Q1 20, expectations of which could be confirmed when the company reports its guidance for 2020 during the Q4 19 results conference call on 27 February. 

    Because 1) we might see additional downside in the price of the bonds (albeit not substantial, in our view) and 2) we await the materialisation of this recovery, we begin coverage of POSADA with a Hold recommendation.

    Read the full report here

    Recap of the week’s key credit developments 

    Province of Buenos Aires (BUENOS): The province launched a consent solicitation on 14 January seeking to extend the forthcoming principal repayment of its 10.875% notes due 2021, which is otherwise due on 26 January 2020. The second of the bonds’ three annual principal repayments, amounting to US$250mn, is due. This will leave only US$250mn remaining next year. An interest of US$27mn is also due. However, faced with cashflow constraints, as previously warned by the new Governor Axel Kicillof in December, the province is seeking consent to defer the repayment to 1 May. The proposed amendment requires the support of 75% or more of holders under the bonds’ collective action clause (CAC). The deadline for consent solicitation is 22 January (5pm, Central European Time). The news came after stories had circulated only last week that suggested the Federal Government was ready to provide financial assistance to the province, but which was later denied by Finance Minister Guzman over the weekend. Still, holders had been preparing for the worst, with the announcement on 12 December of the formation of a negotiating group of creditors.

    Pakistan (PKSTAN): On Monday, Fitch affirmed its B- long term foreign currency rating for Pakistan. Fitch’s rating reflects the high external financing requirements, low reserves, weak public finances and weak governance indicators, according to the statement. Fitch cites reduced external vulnerabilities due to policy changes and financing from the IMF programme. 

    Sri Lanka (SRILAN): On Tuesday, S&P changed its outlook on Sri Lanka’s long term foreign currency rating of B to negative from stable. S&P believes that new tax cuts could have negative impacts on fiscal and debt sustainability. The agency said that over the next two-to-three years, the fiscal path could diverge from fiscal consolidation. Fitch also had similar concerns, as the new government of President Gotabaya Rajapaksa initiated a range of tax cuts aiming to stimulate the economy. 

    Lebanon (LEBAN): Plans to swap debt held by domestic investors into longer dated bonds were halted on Wednesday, after rating agencies indicated they would consider the move a ‘selective default’. The central bank had wanted Lebanese banks to voluntarily swap their holdings of a US$1.2bn eurobond maturing on 9 March for longer dated bonds, as the government struggles to control its debt crisis. 

    Access Bank (ACCESS): The bank has denied speculation that the Group Managing Director was arrested by the Economic and Financial Crimes Commission (EFCC). According to Access Bank, management was invited for a meeting by the EFCC, to discuss a company called Slok Nigeria. Access Bank inherited a loan to Slok Nigeria, and its underlying assets, as part of the Diamond Bank transaction. The EFCC also has a claim on Slok Nigeria assets, and therefore called Access Bank management in for a meeting. Access Bank states that issues related to Slok Nigeria ‘have been resolved.’ We do not think news about Slok Nigeria should cause concern among Access Bank bondholders. Separately, Access bank has received ‘no objection’ from the Central Bank of Nigeria to its plans to set up a banking subsidiary in Cameroon. The issuer still requires approval from the regulatory authorities in Cameroon. This news comes after Access Bank acquired a lender in Kenya (in 2019) and is in line with the issuer’s stated strategy of becoming a leading African, rather than Nigerian, bank

    Lebanese banks: We commented on Lebanese banks in our outlook report for 2020. It is not clear whether plans to restructure sovereign bonds held by the banks will be permanently shelved, given the challenges faced by the sovereign – authorities may just seek ways around the rating (and other) implications of this. Focusing on the banks’ bonds, the concern may be that if the banks are asked to extend the maturities on sovereign bonds, any NPV losses incurred may be shared with bank bondholders. As stated in our 2020 outlook report, indicative prices on the Lebanese banks’ bonds already appear to assume there will be burden sharing in some form. We note that the banks’ ratings at some agencies have already been cut to ‘selective’ or ‘restricted’ default as lenders were ordered to pay only half of the interest on FC-denominated deposits in foreign currency. The other half was to be paid in LBP.