Mexico Bracing for Massive Default That Could Set Off Global Debt Bomb

By Mac Slavo

via Wolf Street:
In August, the bonds of Mexico’s biggest construction company, ICA, had the dubious honor of being the worst performing corporate bonds across all emerging markets. At a time when emerging economies are slowing down and the total debt exposure of EM corporations has never been higher, this was no mean feat. […]
Yesterday the company’s shares plummeted 22% on news that it would use a 30-day grace period to make a $31 million interest payment that was due this week. Today its shares, which have lost more than 75% of their value since January, fell a further 8% to 3.76 pesos, their lowest point in 21 years.
To make matters worse, the builder recently hired corporate restructuring specialist Rothschild & Co. as financial adviser, fuelling speculation that it will soon seek debt relief.
[…]If ICA does fail to pay, it would be Mexico’s biggest bond default since the tumultuous days of the Tequila Crisis 20 years ago.
The revenue reported by the company, which depends on the government for a majority of its contracts, has sharply declined this year amidst infrastructure spending cutbacks, while the weaker peso has exacerbated the company’s leverage ratios.
As WOLF STREET previously reported (here and here), many Mexican corporations are acutely vulnerable to a strengthening dollar and rising U.S. interest rates. The sudden rise in central bank-engendered liquidity after the outbreak of the Global Financial Crisis enabled Mexico’s biggest companies to borrow from the international markets in much larger amounts and for much longer periods than at any other time in history. And the slide of the peso against the dollar has significantly increased the amount of leverage at some companies.

This wave is characterised by rock-bottom commodities prices… This triple whammy has its roots in the response to the first two waves of crisis — the banking collapse and European sovereign-debt crisis — and it is all part of the so-called debt supercycle of the past few decades.
Central banks all rushed to lower interest rates in response to the first two debt-fueled crises, encouraging investors to lend in emerging markets such as China for a decent return.
Now that interest rates are looking as if they might go up, lenders are heading for the exits and investors are pulling out of commodities, which are closely linked to the fate of the emerging economies.

The Bank of International Settlements notes that the external debt in Mexico is the fourth highest of 17 emerging economies. The three economies ahead of Mexico are Chile, Malaysia and Peru. So serious is the problem that the Bank of Mexico just released a carefully worded alert on the potential dangers of excessive dollar-denominated corporate debt.
[…] Companies that have sharply increased their foreign currency-denominated debt are meanwhile advised to pay close attention to the risks they face, especially if most of their revenues are denominated in pesos.
In the case of ICA, almost all of the company’s contracts are denominated in pesos, while $1.35 billion of its debt is denominated in dollars. That’s the debt it’s now struggling to pay.
[…] This explosion of dollar-denominated debt was not just the result of the strengthening dollar; many companies were also desperate to take advantage of exceptionally low interest rates by applying for more debt with favorable conditions. In a perversely ironic twist, out of fear that the Fed may be about to take away the ZIRP punch bowl, some of Mexico’s biggest corporations embarked on one last dollar-borrowing binge.