Bloomberg News

Elektra’s Debt Is a Buy to Invesco After Rout: Mexico Credit

October 04, 2011

Oct. 4 (Bloomberg) -- Grupo Elektra SA, the Mexican retailer owned by billionaire Ricardo Salinas, is posting bond losses that are double those of peers in the region, a sign to Invesco Inc. and Precise Securities the debt is a bargain.

Yields on Elektra’s dollar bonds due in 2018 jumped 377 basis points, or 3.77 percentage points, since they were issued on July 28 to 11.38 percent yesterday, according to data compiled by Bloomberg. The average yield on securities sold by Latin American retailers rose 171 basis points during the same period to 7.91 percent, Credit Suisse Group AG data show.

Elektra’s underperformance is unwarranted because the Mexico City-based company has posted four straight quarters of profits and weathered Mexico’s recession in 2009, said Jack Deino, who oversees about $1.8 billion in emerging-market debt at Invesco. While Elektra has been a laggard in the bond market, the company’s stock is the best performer in the country’s benchmark index this year.

“Elektra is a true and tested business,” Deino, who holds Elektra bonds, said in a telephone interview from New York. “It’s been through several crises unscathed and grown successfully.”

Elektra’s bonds yielded 760 basis points more than similar- maturity Mexican government dollar bonds yesterday, compared with 515 a month earlier, according to data compiled by Bloomberg.

Fraud Settlement

Some investors demand a higher yield premium on the company’s bonds because it’s owned by Salinas, said Gaston Guerrero, who helps manage about $300 million of emerging-market debt at Precise Securities. Guerrero, who said he’s considering buying Elektra’s bonds, attributed the slump in the securities to Europe’s debt crisis, which is prompting investors to dump higher-yielding emerging-market assets.

Salinas, whose father founded Elektra, ranked No. 112 on the latest Forbes magazine list of the world’s richest people with a net worth of $8.2 billion and also owns broadcaster TV Azteca SAB. He agreed to pay a fine to settle charges he reaped improper profits from undisclosed loan deals, according to a September 2006 statement from the Securities and Exchange Commission.

Salinas, 55, didn’t admit or deny the allegations when he agreed to their settlements, according to the SEC.

“The Salinas complex has always traded wide because of management issues,” Guerrero said in a telephone interview from San Diego. “We’re evaluating the possibility of establishing a position at the current levels.”

Yield Gap

Dan McCosh, a spokesman for Salinas and Elektra, declined to comment, citing a policy of not making remarks about market performance.

Debt due in 2018 sold by TV Azteca yields 8.47 percent, or 290 basis points less than that on Elektra’s securities. The companies share a BB- from Fitch Ratings that’s three levels below investment grade.

The yield gap between the companies should be no more than 80 basis points, Invesco’s Deino said. Investors may demand a bigger premium from Elektra because they are unable to evaluate the retailer’s earnings on a stand-alone basis, he said. Elektra consolidates its results with those of the company’s consumer credit lender, Banco Azteca.

Elektra’s revenue climbed 25 percent to 14.2 billion pesos ($1 billion) in the second quarter. It had about 13.7 billion pesos in cash.

Default Swaps

Elektra’s stock soared 87 percent this year, compared with a decline of 14 percent for Mexico’s benchmark IPC Index.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose two basis points to 278 at 5:26 p.m. New York time, according to JPMorgan’s EMBI Global index.

The peso rose 2.1 percent to 13.7439 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years rose five basis points to 220, 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.

Yields on futures contracts for the 28-day TIIE interbank rate due in January 2012 fell eight basis points to 4.69 percent.

The yield on Elektra’s bonds may rise further if European leaders are unable to ease the region’s sovereign debt crisis, deepening the global sell-off in emerging-market assets, said Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA.

‘Fall More’

German Finance Minister Wolfgang Schaeuble opposed moves to increase the scale of the euro rescue fund, damping speculation of a breakthrough in Luxembourg talks to quell the debt crisis.

“Everything is subject to Europe -- that we don’t see a catastrophic event,” Hernandez said in a telephone interview from Mexico City.

Elektra, which targets low-income consumers, posted a 4.9 billion peso profit in 2009 during Mexico’s recession, when Latin America’s second-biggest economy shrank 6.1 percent.

“At the end of the day, it’s a good business,” Invesco’s Deino said. “They just have tons of cash on their balance sheet and they’re a retailer. At these levels, that’s been the baby being thrown out with the bath water.”

--With assistance by Crayton Harrison in Mexico City. Editors: Lester Pimentel, Jonathan Roeder

To contact the reporter on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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