Mexico's Cydsa Selling Assets to Avoid Default on $200 Mln Bond

Mexico's Cydsa Selling Assets to Avoid Default on $200 Mln Bond

By Thomas Black

Monterrey, Mexico, Aug. 29 (Bloomberg) — Cydsa SA, a chemical, textile and packaging-materials maker, is selling assets and slashing costs to raise cash to pay a $200 million bond coming due in June 2002.

The bonds are trading at about 45 cents on the dollar, pointing to investor concern the company won't be able to raise enough capital to pay their debt and hinting that creditors may be unwilling to refinance the bond.

“The bottom line is they have to deal with this Eurobond,” said Jim Garvey, a research analyst with the special situations group at Banc of America Securities in New York. ``The market is saying they can't because the bonds are trading in the 40s.”

Cydsa, like many of Mexico's industrial companies, is struggling to keep up with debt because creditors are reluctant to roll over loans and bonds as profits drop amid weak exports and slumping prices, Garvey said.

A 10-month drop in U.S. industrial output has hurt demand for Mexican commodities, such as chemicals, textile fibers and steel, forcing companies, including Cydsa and steelmaker Hylsamex SA, to sell assets to repay debt.

The peso, which has gained 5.3 percent against the since the beginning of the year, has reduced the competitiveness of Mexican companies in international markets. The growth of Mexican exports dwindled to 1.7 percent for the first six months of this year compared with 24 percent for the same period last year.

For Sale

Cydsa already sold its company headquarters in the wealthiest area of Monterrey to cement maker Cemex SA and its waste-water treatment unit to Tyco International Ltd., which helped it reduce debt to $482 million from $620 million in June last year.

Cydsa now has $80 million in cash and plans to beef that up by selling more assets, said Fernando Trevino, director of corporate financing.

“There are several assets up for sale with a lot of value and if they are carried out there will be absolutely no need” to miss a debt payment, Trevino said.

The company has more real estate and “non-productive” assets, such as a Rayon and cellophane factory the company no longer operates, that it wants to sell, Trevino said. It also shut a unit that makes knitted sweaters.

Cydsa is also in debt talks with its banks, mainly Grupo Financiero BBVA Bancomer SA and Citigroup Inc., because it broke financial covenants, Trevino said.

Analysts said the company is unlikely to get creditors to refinance the $200 million bond when it comes due because profits have been sinking for the past five years, which boosts its risk. Earnings before interest, taxes, depreciation and amortization — known as Ebitda — dropped to $81 million last year from $197 million in 1997. In the first six months of this year, Ebitda fell by a quarter to $30 million.

Trevino said prices and demand on its products probably won't begin to recover until at least the first quarter of next year.

Dollar Link

Cydsa performed well in the three years following Mexico's December 1994 peso devaluation because the weak currency allowed it to undercut competitors' prices for its chemical, textiles and fibers products. That advantage was reversed as the peso has gained about 8 percent against the dollar since the beginning of 1999, while Mexican inflation was 25 percent in the same period.

About 65 percent of Cydsa's sales are linked to the dollar, but most of its costs are tied to the peso, Trevino said.

The worldwide oversupply of chemicals and textiles caused Luis Garcia, a portfolio manager at the Monterrey-based investment house Investra Consultores SA, to sell about a $100,000 worth of Cydsa bonds last year at 77 cents on the dollar. With the U.S. and Mexican economies slowing, company debt is becoming too risky, Garcia said.

“We prefer to play with spreads on sovereign bonds without losing sleep than to hold corporate debt,” Garcia said.

Pulsar Internacional SA, which owns interest in vegetable seeds, construction and marketing, defaulted on about $400 million of debt in May. Steelmaker Hylsamex said it's looking to sell assets, including a controlling stake in the company, as its Ebitda barely covers the interest expense of its $1.37 billion debt.

Cydsa is taking the right steps to head off default by selling assets, said Banc of America Securities' Garvey. But the company has given scarce information on what's up for sale and how much it expects to gain from asset sales, which has hurt the bond price, he said.

“Is there value there? Absolutely,'' Garvey said. ``It's just hard to determine the value without a full due diligence.”

©2001 Bloomberg L.P.