Credito Real’s Swiss Bond Comes Due as Traders Brace for Default
Sydney Maki and Michael O'Boyle
Wed, February 9, 2022, 4:00 AM
(Bloomberg) -- Over the past decade, Credito Real SAB was the rising star of a booming new business in Mexico: cutting small loans -- and charging double-digit interest rates -- to the millions of traditionally unbanked all across the country.
Now, with its cash hoard shrinking, Credito Real faces a moment of truth. It either pays off 170 million Swiss francs ($184 million) of bonds due by the end of Wednesday, or goes the way of a smaller peer in the non-bank lending industry that has already fallen into default. Investors are bracing for the worst, having pushed the price of the notes down to 61% of par value. As recently as two weeks ago, they traded above 90%.
The company’s troubles reflect the painful decline for shadow lenders in Mexico following a bankruptcy filing from rival Alpha Holding SA just six months ago. Even if Credito Real -- which had $80 million on hand at the end of the third quarter -- scrapes together this week’s payment, investors are already betting on a default further down the line, with its dollar bonds due in six years trading at 21 cents.
“The possibility that the company is doomed is high,” said Rafael Elias, managing director of Latin American corporate credit strategy at Banctrust & Co. in New York. He said Credito Real will “probably” make the payment on the Swiss bond, but will likely default on $249 million of notes that come due in July 2023.
He estimates that investors may recoup an average of about 29 cents on the dollar for the company’s almost $2 billion of overseas bonds if it defaults this week.
Credito Real didn’t respond to a request for comment. The company said in a statement on Jan. 26 that it was working to obtain a credit facility and considering strategic alternatives to generate cash to pay the debt.
Credito Real became a darling of investors just a few years ago by staking out a niche in Mexico’s financial system with payroll loans to government employees and pensioners, transactions that were too small and difficult to manage to interest big banks. It grew to become the nation’s 12th-largest financial institution by loans. And just 13 months ago, investors were so enthralled that they eagerly funded $500 million of new bonds and sent the price to as high as 107 cents on the dollar.
Those same notes have since collapsed in a sign of just how badly the bottom has fallen out of the industry. In addition to Alpha Holding’s bankruptcy, overseas securities due in 2029 from another Mexico lender, Unifin Financiera SAB, have slumped to 65 cents on the dollar as pessimism takes hold and the Mexican economy stumbles into recession.
Unifin, with $493 million in debt maturities this year, will now need to slow down loan origination or it could be the next company to face default, according to analysts at Bank of America Corp. and Barclays Plc, both of which are optimistic that Unifin has the ability to come up with a funding strategy.
Unifin’s financial position is solid, and it has plenty of options to make a bond payment due in August, an outside spokeswoman said in an email to Bloomberg News. The company has extended the maturity profile of its debt and reduced short-term refinancing risks, she said.
Doubts about the industry arose last year after Alpha Holding disclosed a $200 million accounting error. Credito Real followed with a revelation of its own, telling investors that its portfolio of non-performing loans was about 82% greater than disclosed in an earlier filing. The company said it was due to one large loan, of more than $30 million, made from its small business portfolio.
Luis Maizel, co-founder of LM Capital Management in San Diego, California, said the disclosure of that big loan has sown doubts among investors.
“That was not supposed to be their business plan,” he said. “Credito Real was supposed to be tiny loans.”
The company has sought to raise cash by selling assets. It sold a U.S. small- and medium-sized business loan portfolio for $45 million in December, and said in October it sold a small business portfolio in Mexico for 1.5 billion pesos ($73 million). That deal, however, was subject to regulatory approval and Credito Real hasn’t commented further on where the process stands. The company has also been seeking to sell a non-controlling interest in its U.S. used auto-loan unit, Credito Real USA Finance.
But as the deadline for the Swiss bond approaches, investors have been discouraged by a lack of progress. Worries were compounded Jan. 26 when the company released a statement saying that the funding was secured before announcing that it was sent in error.
S&P Global Ratings and Fitch Ratings both cut Credito Real’s credit rating deeper into junk last week, citing the looming Swiss maturity and lack of money to pay it off.
“Its refinancing risk has increased drastically,” S&P analysts Erick Rubio and Jesus Sotomayor wrote in a Feb. 4 note. “Credito Real’s persistent inability to complete some of the plans to obtain funds during the past few months have weakened severely its financial flexibility.”
The doubts about repayment have made the lender’s dollar debt the worst-performing corporate notes in emerging markets this year, according to a Bloomberg index.
Its shares, meantime, tumbled to a record low Tuesday, leaving the company with a market value of less than $60 million. They’ve fallen more than 90% since hitting a peak in late 2015.
Credito Real is owned by the family that controls home-appliance manufacturer Controladora Mabe SA. They created the company from what had been a small financing operation that provided loans to customers who bought Mabe goods.
Now Credito Real focuses on payroll loans, with a smaller portion of its business tied to small- and medium-sized businesses, as well as microfinance and car loans in the U.S.
Eduardo Berrondo, a member of the founding family, said in a Jan. 12 letter that he was resigning from the board after recent discussions “on the principles, values and philosophy that have governed the decisions of those who preside over and direct the company, which differ significantly with the principles, values and philosophy governing my personal and professional life.”
If Credito Real ultimately fails to make good on its obligations, it will have ripple effects across Mexico’s non-bank consumer financing industry, according to Omotunde Lawal, head of emerging-market corporate debt at Barings UK Ltd. in London.
“The Alpha default already caused some contagion in the sector last year,” she said. “If Credito Real defaults, that will certainly put pressure on the remaining issuers like Unifin.”
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