Empresas Bond Default is coming to a Theater near You


On November 30, ICA missed its $31 million interest payment Standard & Poor’s and Moody’s Downgraded ICA bonds Mexican government ruled out any possibility of a government backed rescue plan Although the management said they will use the 30-day grace period to pay back the loan, we are not confident that the payments will be made at the end of the grace period

Company Overview

Empresas ICA SAB is a Mexican holding company of its various subsidiaries. These subsidiaries are engaged in a range of construction projects, including infrastructure facilities, building housing, industrial and other urban constructions. Empresas ICA SAB’s interest spans from building airports to highways. It also takes part in various public works projects by the Mexican government. As of 2014, Empresas ICA SAB had an annual revenue of $2.2 billion. But, Empresas ICA SAB is a highly leveraged company with long term debt to equity ratio of 4.02 and has a market capitalization of only $121.5 million.

Possible Loan Default Translated into Loss of Investor Confidence

On November 30, Bloomberg reported that Empresas ICA SAB (NYSE:ICA) missed its interest payment of $31 million on the $700 million of its notes. Empresas ICA SAB management said they would pay the interest within the 30-day grace period. Due to missing the interest payment, on December 2, two of the major credit rating agencies, Standard & Poor’s and Moody’s downgraded ICA rating. Standard & Poor’s downgraded Empresas ICA SAB to CC from CCC, indicating that the company is currently highly vulnerable. On the other hand, Moody’s downgraded Empresas ICA SAB’s long-term corporate credit rating to Caa3 from B3, which indicates that the bonds of Empresas ICA SAB is of “poor quality and very high credit risk.” ICA price Figure 1: Empresas ICA SAB Stock Price Declined by 84.1 Percent ((YTD)) As a result, investor confidence went down and the stock price plummeted to $0.78 per share, the lowest since 2009. At the start of 2015, Empresas ICA SAB’s stock was trading at $4.5, which means, year-to-date, the stock price is down around 84.1%.

Factors that Triggered the Possible Default

USDMXN_chart Figure 2: USD/MXN Year-to-Date Price Chart Since January, the Mexican Peso depreciated around 20% against the US Dollar. The problem is that almost half of the debt of Empresas ICA SAB is denominated in foreign currencies and 85% of its backlog is denominated in the Mexican Peso. In Q3 2015, Empresas ICA SAB made a net loss of MXN$ 2.6 billion, which was almost MXN$ 1.9 billion more compared to its Q2 2015 loss of MXN$ 740 million. The Chief Financial Officer of Empresas ICA SAB, Gabriel De La Concha Guerrero, explained during the Q3 2015 earnings call that “Financing cost rose sharply because of the depreciation of the peso. These increased interest expense then generated an exchange loss of MXN3 billion. Exchange losses accounted for all our net loss in the quarter and in the first nine months of 2015.”

Mexican Government Will Not Bailout Empresas

Empresas ICA SAB is one of the largest construction companies in Mexico and if they end up defaulting, it will be the biggest corporate bond default in the last two decades in the country. The day Empresas ICA SAB missed the interest payment, the Deputy Minister of Infrastructure of Mexico, Raul Murrieta, met with the Chief Executive Officer Alonso Quintana to discuss the situation. A lot of investors were expecting that the Mexican government will intervene and may bail out the company. Raul Murrieta once again met with Alonso Quintana on December 2, but ruled out the possibility of a government backed rescue plan, saying that it is not “legally possible.” He sounded sympathetic, but inept when he commented that “It’s [Empresas ICA SAB] going through a bad period,” and “It’s a company that we hope stabilizes.” When a minister leaves a company with billion dollar revenue to hope, that gives a clear message that the Mexican government will not pour money to save this company.


Although utilizing the 30-day grace period does not mean that Empresas ICA SAB is certainly going to default, there is a high possibility that they will. Especially, after the government of Mexico sent a clear message that they are not interested to participate in any kind of rescue program, the hopes are fading fast. Carlos Legaspy, a money manager at InSight Securities Inc that holds Empresas ICA SAB bonds maturing in 2017, 2021, an 2024, told Bloomberg that he does not think that Empresas ICA SAB will pay within the grace period. “Do I think they’re going to pay within 30 days? No,” he told Bloomberg. “The 30 days are not going to make any difference,” he added. On the other hand, Rafael Elias, the Head of Emerging Market Strategy at Cantor Fitzgerald, commented that there is a high probability that creditors of Empresas ICA SAB would be forced to settle for a “haircut.” If you have a stake in Empresas ICA SAB, as a creditor or as a stockholder, and thought that this company is turning things around like it did several times over the last two decades, then this time around, you might be proven wrong.