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Most Upgrades Since 2007 Fueled by Rising Exports: Mexico Credit

July 05, 2011

July 5 (Bloomberg) -- Mexican companies are winning the most credit-rating upgrades versus downgrades since 2007 as a surge in the nation’s exports boosts sales.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings raised the ratings and outlooks of Mexican companies 23 times while lowering them 16 times in the first six months of the year, according to data compiled by Bloomberg. The ratio is the highest since the second half of 2007, when it was more than 7-to-1. In Russia, the ratio was about 3-to-2 in the first half of 2011 and it was more than 10-to-1 in Brazil.

U.S. demand for everything from cars to oil helped fuel an increase of 25 percent in Mexican exports in May from a year ago. Companies will probably continue to receive rating increases as a weakening in the U.S. expansion that has driven up yields on Mexican debt in past month proves temporary, said Miguel Angel Aguayo, a fixed-income analyst at Grupo Financiero Banorte-IXE. The average yield on corporate debt rose 25 basis points since June 1 to 6.37 percent yesterday, according to JPMorgan Chase & Co.

“We can expect in the next quarters also to see new upgrades,” Aguayo said in a telephone interview from Mexico City. “It may not be at the speed we saw them in the first semester of this year.”

Moody’s raised Kansas City Southern de Mexico SA’s credit rating by one level in June to Ba2, two levels below investment grade, after boosting it in May, citing the prospect for higher sales and profits. The country’s largest rail company said net income rose to $33.5 million in the first quarter from $11.1 million a year ago as sales increased 14 percent.

‘Taking Advantage’

The yield on Mexico City-based Kansas City Southern de Mexico’s dollar bonds due in 2020 fell 47 basis points this year to 6.04 percent, according to data compiled by Bloomberg. Similar-maturity government bonds yield 4.04 percent.

William Galligan and Ginger Adamiak, Kansas City, Missouri- based investor relations officers with Kansas City Southern, didn’t immediately respond to phone calls and e-mails sent outside of regular business hours.

“It’s about taking advantage of the situation the country is in,” said Marisol Vazquez Mellado, chief financial officer of Grupo KUO SAB, in a telephone interview from Mexico City. “Companies have been capitalizing on it -- the companies that started putting in the work and did it correctly.”

CFO’s View

S&P lifted the ratings of Grupo KUO, a maker of auto parts, to BB from BB-, on June 24. The Mexico City-based company’s sales rose 13.5 percent in the first quarter to 6.3 billion pesos ($542.6 million).

The upgrade reflects KUO’s efforts to trim leverage, Vazquez Mellado said. KUO cut its ratio of net debt to earnings before interest, taxes, depreciation and amortization to 1.69 times in the first quarter, from 1.92 times in the fourth quarter of 2010.

Mexican exports totaled $31.1 billion in May after touching a record in March, according to the national statistics institute. The U.S. buys 80 percent of exports from the country, which is Latin America’s second largest economy.

“It’s natural that better economic performance in the U.S. as well as Mexico has had a positive effect on the corporate sector,” Jose Coballasi, an analyst at Standard & Poor’s in Mexico City, said in a phone interview. “The ratings actions we’re seeing are upgrades that reflect fundamental questions of each of the companies.”

Default Swaps

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose four basis points to 126, according to JPMorgan.

The cost to protect Mexican debt against non-payment for five years was little changed at 106, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The peso fell 0.4 percent to 11.6355 per U.S. dollar at 5 p.m. New York time.

Yields on futures contracts for the 28-day TIIE interbank rate due in January rose one basis point to 4.95 percent, indicating traders expect the central bank to raise the rate in February. Mexican central bankers led by Governor Agustin Carstens held the lending rate at 4.5 percent last month, the only major Latin American country to keep borrowing costs unchanged in the past year.

Ratings companies are unlikely to continue raising the credit rankings of Mexican companies as growth in the country’s economy slows amid a flagging recovery in the U.S., said Araceli Espinosa, a corporate debt analyst at Scotia Capital in Mexico City.

U.S. Outlook

Mexico’s economy grew 2.4 percent in April, the slowest pace since December 2009. Federal Reserve officials last week cut their 2011 and 2012 growth forecasts for the U.S. economy, the destination for about 80 percent of Mexico’s exports. The world’s biggest economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections.

“The U.S. economy is in a slow recovery and as a consequence, Mexico will be slow too in economic activity,” Espinosa said in a telephone interview.

‘Another Look’

Industrias Penoles SAB, Mexico’s largest silver producer, had its rating raised to BBB, the second-lowest investment grade, from BBB- by S&P on June 2. The Mexico City-based company’s first-quarter sales jumped 51.8 percent to 20.8 billion pesos.

Celia Ortega, a Penoles investor relations officer, didn’t return an e-mail and a telephone message seeking comment.

The yield on Penoles’s dollar bonds due in 2020 fell six basis points in the past month to 5.12 percent, according to data compiled by Bloomberg.

“The companies’ flows, their balance sheets are changing,” Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA in Mexico City, said in a telephone interview. “That makes the ratings agencies take another look at them.”

--Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin in Mexico City at; Benjamin Bain in New York at

To contact the editor responsible for this story: David Papadopoulos at

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