Bloomberg News

Sinatra Haunt Renovation Plans Lifting ICA Bonds: Mexico Credit

July 05, 2012

Sinatra Haunt Renovation Plans Lifting ICA Bonds

Dollar bonds issued by ICA, Mexico’s largest construction company, have rallied in the past month. Photographer: Susana Gonzalez/Bloomberg

Incoming Mexican President Enrique Pena Nieto’s vow to improve the country’s highways, ports and plazas is making builder Empresas ICA SAB (ICA*)’s bonds a buy to Grupo Financiero Interacciones SA and Corp. Actinver SAB.

Pena Nieto signed and notarized more than 200 pledges in cities across Mexico during the campaign, with about 75 percent of the promises focusing on infrastructure. The program, which includes plans to renovate a stretch of Acapulco, the Pacific beach resort once frequented by Frank Sinatra, will boost a construction industry already benefiting from quickening economic growth, said Alejandro Hernandez, who helps manage about $1 billion of assets at Interacciones.

Dollar bonds issued by ICA, Mexico’s largest construction company, have rallied in the past month. Yields on the company’s notes due 2021 dropped 73 basis points in that period to 9.78 percent, compared with a decline of 60 basis points for similarly rated corporate debt in the region, according to data compiled by Bloomberg and Credit Suisse Group AG.

“The infrastructure industry is going to grow under the new administration,” Hernandez said in a phone interview from Mexico City. “ICA is a solid, strong company.”

ICA’s bonds due 2021 have returned 5.2 percent in the past month, extending this year’s gain to 11.5 percent. The bonds yield 726 basis points, or 7.26 percentage points, more than similar-maturity Mexican government debt, down from 749 a month earlier, according to data compiled by Bloomberg. Standard & Poor’s rates the construction company BB-, three levels below investment grade and four levels below Mexico.

Veracruz Highway

ICA stock has rallied 23 percent in the past month to 24.78 pesos yesterday, while rival OHL Mexico SAB (OHLMEX*) added 17 percent. Promotora y Operadora de Infraestructura SAB, a Mexican toll highway operator, rallied 20 percent in the period.

Pena Nieto rolled to victory in the July 1 vote, bringing the Institutional Revolutionary Party, or PRI, back into power for the first time since its 71-year rule was broken in 2000. Preliminary results from the Federal Electoral Institute show Pena Nieto captured 38.2 percent of votes, compared with 31.6 percent for second-place finisher Andres Manuel Lopez Obrador, of the Democratic Revolution Party, or PRD.

In addition to fixing up Acapulco, where Sinatra and his Rat Pack hung out during the 1950s, Pena Nieto’s pledges include building a passenger port in Puerto Vallarta, highways in the state of Veracruz and a dam in the state of San Luis Potosi. With a government debt burden that’s less than half that of the U.S. and Germany, Pena Nieto has room in the budget to carry out his plans, according to Hernandez.

Europe’s Crisis

Pena Nieto, a 45-year-old former governor of the state of Mexico, also promised during the campaign to increase tax collection, boost formal employment and allow more private investment in the oil industry.

Eduardo Sanchez, a party spokesman, didn’t respond to a phone call seeking comment.

The Mexican economy expanded 4.6 percent in the first quarter from a year earlier, the fastest pace since the third quarter of 2010.

ICA bonds are also gaining as investors move money back into higher-yielding assets after European leaders reached an agreement on June 29 that alleviated concern the region’s banks will fail and deepen the debt crisis, said Guillermo Rodriguez, who helps manage $5.5 billion of debt at Corp. Actinver SAB.

“I’ve seen more demand,” Rodriguez said in a telephone interview from Mexico City.

ICA’s Debt

ICA’s potential gains from increased spending by Pena Nieto are in part offset by a projected slide in expenditures under President Felipe Calderon until he hands over power in December, said Nuria Jorba, a credit analyst at Union Bancaire Privee. The company’s rising debt levels will also limit gains in the bonds, she said.

“It will continue to have significant leverage,” Jorba said in a telephone interview from Zurich. “If the government has this program of increasing the infrastructure expansion, the company will not benefit until next year.”

ICA, based in Mexico City, said in its first-quarter report that revenue growth would slow in the second half of the year because there will only be “a moderate level of new contract awards” during the period.

The company’s debt increased 2 percent in the first quarter to 50.9 billion pesos ($3.8 billion) compared with the end of 2011. Net debt, or total debt minus cash, rose 4 percent as total cash fell 7 percent to 10.1 billion pesos.

Yield Spread

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose three basis points to 201 basis points at 7:10 a.m. in Mexico City, according to JPMorgan Chase & Co.’s EMBI Global index.

The peso appreciated 0.2 percent to 13.3062 per U.S. dollar. It’s up 4.7 percent this year, the most among the 16 most-traded currencies.

The cost to protect Mexican debt against non-payment for five years rose one basis point to 126 basis points yesterday, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Yields on Mexican interbank rate futures contracts due in December, known as TIIE, were little changed at 4.75 percent.

Infrastructure Law

Mexico’s infrastructure spending rose to an estimated 5 percent of gross domestic product last year from 3.2 percent in 2000, according to Federico Patino, the investment banking director of Banobras, a government development bank. He said a public-private partnership law, signed by Calderon earlier this year in a bid to provide greater legal security for investment, will help push infrastructure spending to at least 6 percent of GDP in the coming years.

“The trend will continue,” Patino, whose bank specializes in financing infrastructure projects, said in a telephone interview from Mexico City. “We’ll see more spending by the government, but above all, we’ll see more private sector participation.”

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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