Dollar-Debt Blows up in Mexico, Pushes Biggest Construction Firm toward Abyss

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The oil connection.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

After weeks of false promises, rampant speculation, and furious denials, Mexico’s biggest construction company, ICA, finally admitted that it will not pay the $31 million in interest outstanding on $700 million worth of bonds. The company’s shares plunged 24% to 3.93 pesos on the news, its biggest one-day rout since 1999.

“ICA has made this decision in order [to] preserve liquidity, prioritize ongoing operations, and fund projects currently under development,” the firm said in a press release. “Over the next 30 to 60 days, with the help of its financial advisors, Rothschild and FTI Consulting, ICA will work on a cost-cutting and restructuring plan.”

If ICA fails to make payments on all of its $1.35 billion in overseas notes, it will become the biggest corporate bond defaulter in Mexico since Moody’s Investors Service began tracking the data in 1995, just after the eruption of Mexico’s Tequila Crisis.

Acute Vulnerability

The company’s travails began long ago but were recently magnified by political problems at home and economic forces overseas. Its revenues have sharply declined this year amidst infrastructure spending cutbacks by a fiscally challenged government, while the weaker peso has exacerbated the company’s leverage ratios.

ICA is among a number of Mexican corporations that are acutely vulnerable to a strengthening dollar and rising U.S. interest rates. The sudden rise in central bank-engendered liquidity after the outbreak of the Global Financial Crisis enabled Mexico’s biggest companies to borrow from the international markets in much larger amounts and for much longer periods than at any other time in history. And the slide of the peso against the dollar has significantly increased the amount of leverage at some companies.

Almost all of ICA’s contracts are denominated in pesos, while $1.35 billion of its debt is denominated in dollars. That’s the debt it’s now unable to pay. According to Bloomberg, the company’s total debt is 57 billion pesos, 10.75 times its earnings before interest, taxes, depreciation and amortization.

For many Mexicans, the collapse of this emblematic company will be a sad day in what has become a sore year for the nation’s economy. Since the 1950s ICA has been at the leading edge of Mexico’s industrial and urban transformation, building motorways, hydroelectric dams, drainage systems, waste treatment plants, railways, subway systems, stadiums, port facilities and a number of airports, including Mexico City’s Benito Juarez, which will soon be replaced by a new multibillion dollar airport being built on the city’s outskirts by a consortium led by ICA!

The Oil Connection

Like any successful large-scale infrastructure company, ICA has furnished close ties with government. After all, that’s where most of its contracts come from. The problem for ICA and many other domestic construction firms is that Mexico’s government has grown increasingly short of funds – no surprise given that the country’s cash-strapped oil giant PEMEX usually provides between 30% and 35% of public revenues.

Mexico’s sweeping energy reform will drastically reduce that amount – and quite possibly very quickly [read… Brilliantly Timed Oil Reforms Push Mexico into Fiscal Meltdown].

Some experts fear that the sudden jolt from functioning for over seven decades as a national oil monopoly to having to survive as a private company in a fiercely competitive global oil market at a time of weakening global demand for energy and plummeting oil prices could be so severe that Pemex’s very existence may be on the line. While foreign companies are given huge fiscal incentives to invest in Mexican oil fields, Pemex is being overburdened with taxes, at a time when its revenues are plunging along with the price of oil.

Pemex’s shrinking fortunes have meant that the government has had to raise taxes as well as drastically cut back on large-scale infrastructure projects, cutting off vital cash flow to companies like ICA. The biggest blow came in September this year when the new governor of the state of Nuevo Leon, Jaime Rodriguez, decided to cancel a controversial project to build an aqueduct in Monterrey worth close to $1 billion.

Little Sympathy from Government

Perhaps if ICA had been a foreign multinational it could have filed a private lawsuit — commonly referred to in the impenetrable jargon of modern globalism as an Investor-State Dispute Settlement (ISDS) — to claw back the potential future profits it had lost as a direct result of the Mexican government’s actions. However, such privileges only exist for foreign investors, not domestic companies.

Even for many of the infrastructure jobs ICO has already finished, payment is not forthcoming, the company complains. Meanwhile, many of ICA’s providers have launched lawsuits over its and the government’s failure to pay them. Each time a company goes under, a vital link in the business food chain is severed.

As its cash flow has slowed to a trickle, ICA’s dollar-denominated debt has continued to grow, largely on the back of a weakening peso. In the crucial weeks ahead the fate of the company will depend on its ability to keep the few operations it has up and running as well as find common ground with its creditors on ways to restructure its debt.

It’s unlikely to get much in the way of help or sympathy from Mexico’s current government whose loyalties seemingly lie elsewhere — primarily with the Spanish construction giant OHL which, despite being embroiled in all manner of corruption scandals, continues to boss the infrastructure concessions business in Mexico. Raul Murrieta, Mexico’s deputy minister of infrastructure, ruled out a government rescue of ICA. “It’s going through a bad patch,” he said. By Don Quijones, Raging Bull-Shit.

But even the central bank of Mexico is fretting about explosive dollar debt. Read…  It Begins: Investors Brace for Mexico’s Biggest Corporate US-Dollar Bond Default in 20 Years

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  7 comments for “Dollar-Debt Blows up in Mexico, Pushes Biggest Construction Firm toward Abyss

  1. Nick Kelly
    December 20, 2015 at 1:48 am

    Note: The piece makes sarcastic reference to ‘the impenetrable jargon of modern globalism as an Investor-State Dispute Settlement (ISDS)’

    which actually seems pretty penetrable to me, and then ironically goes to describe exactly why any foreign outfit doing business in Mexico needs such a ultra-national legal framework.
    As the piece makes abundantly clear- the Mexican government can’t be trusted.
    It’s high time the Left stopped getting its knickers in a twist over the fact that corporations have good reason to be afraid of governments.
    The only sad fact is that locals who are screwed by corrupt governments don’t have similar recourse.

    • Don Quijones
      December 20, 2015 at 6:18 am

      Let’s not be naive, Nick: ISDS is not about protecting companies from governments. It is about elevating the rights of a very privileged clique of companies above the rights of once-sovereign people (and also domestic companies) in their own nations. It’s as simple as that. ISDS is about driving the final nail through the coffin of national sovereignty.

      Do you honestly believe that all foreign companies will have the same means to sue the government of, say, Canada, Mexico or even the United States in a private court of international law in the World Bank headquarters in Washington? Do you think the ISDS charter is to protect the rights of small and medium size companies because most small German family businesses certainly don’t. Do you know, per chance, how much arbitration lawyers charge per hour?

      You could perhaps make a case for corporations being able to sue countries in an international court of law for expropriation, but only if those same countries are able to sue the same corporations for the bad things they sometimes do, like cause irreperable damage to the natural habitat. I recently wrote about a Canadian mining company that was suing the government of the improverished nation of El Salvador for daring not to grant it a mining license after the company had helped pollute over 90% of the nation’s water supply, an act of wanton destruction that is not punishable according to the new framework of international law, for one simple reason: ISDS is not a two-way process: the rights — and the power they confer — only flow in one direction.

      • Nick Kelly
        December 20, 2015 at 6:33 pm

        Thanks for replying: I find it hard to believe that a company can pollute as you say and have no accountability under national law. As far as I can see mining companies are constantly being sued for their errors- as they should be if genuine and not a backdoor expropriation or shakedown.
        This is the reason the stock of the mining companies with the recent dam breach sold off- they are on the hook for billions but Brazil doesn’t need international law to hold them accountable.
        I will concede that Brazil is a more powerful adversary than El Salvador.
        Didn’t a major outfit have to shut down a mine after investing billions because of pollution concerns?
        Here is my point: I agree that it can be problematic for a poor country to obtain redress, but it is possible. I don’t know if that Ecuador tribe won any money but they had their day in a North American court.
        But without something like ISDS it is impossible for a company to obtain redress if a regime decides to unilaterally change royalty rates, or simply expropriate as several Latin American countries have done.
        I support fairness for both sides.
        BTW: a few years ago a Canadian hotel management company entered a long term joint partnership with a Moscow hotel, which given typical Russian service was failing.
        After some time and a lot of work- the hotel operation was turned into a money maker.
        Then the ‘partner’ showed up with a lot of muscle, literally threw the Canadians out and took over.
        Applications to a Russian court were laughed off.
        But this was unusual in that the Canadians were well connected to their government which interceded at the highest level- Harper took it up with Putin. (This was before Ukraine)
        Eventually the Russian partners got a phone call: settle with the Canadians or go to jail.
        But of course Russia is more the rule than the exception when it comes to having no real legal system.
        Without some kind of trans or ultra- national legal recourse, investment in these regimes is risky at best.

    • Gil Obrero
      December 20, 2015 at 6:27 am

      Oh no no no no.

      That I cannot agree with.
      This corruption pure and simple and it is designed to make taxpayers pay for the mistakes.
      If multi nationals want to do business with foreign corporations or governments then they should be forced to either take out insurance or bite the bullet.

      Thee is no possible way if I was taxpayer in any country would stump up to cover the corrupt thieves losses.
      Governments are sovereign in my book and a government like an act of god can change its mind at the whim of the voters.

      I would blow up any foreign corporations facilities rather than pay for their stupidity by not insuring the risks they decide to take on themselves.
      You cannot pass that off on the taxpayer and or me and expect to get away with it.

      Let them price contrasts including insurance costs for risk and then see how many decide to compete in Mexico

  2. Lou
    December 20, 2015 at 4:18 pm

    and the rothschilds will come in and do what they do. buy, buy, buy when there is blood in the streets.

  3. Red Flag
    December 20, 2015 at 7:57 pm

    I have no sympathy for any company who involves The Red Shield mafia in its business……..I agree with the above comment, the people need to make it impossible for this company to exist.

  4. dtgomas
    December 20, 2015 at 11:13 pm

    If I’m not mistaken, didn’t Pastor David Wilkerson prophecy this very thing happening in His book the Vision.

Comments are closed.