Bond investors are bracing for a potential default by Mexico’s largest payroll lender.
Bonds for Credito Real SA CREAL -32.30% B de CV lost almost half their value in recent days over uncertainty about its ability to repay a 170 million Swiss franc bond, equivalent to $184 million, that falls due on Feb. 9.
If the company misses the payment it would mark a victory for hedge-fund managers who questioned its accounting practices last year and bet bonds and share prices would drop. It would also be a blow to international banks, ratings firms and the auditor that helped Credito Real borrow about $2 billion in international markets since 2016.
Credito Real is working with Goldman Sachs Group Inc. to raise an emergency loan and prevent a default. A spokesman for Credito Real didn’t respond to requests for comment.
A missed payment by Credito Real could hurt the Mexican economy, which is highly dependent on nonbank lending to provide credit to consumers and small businesses. AlphaCredit Capital SA de CV, another large payroll lender, filed for bankruptcy in Mexico last year after disclosing large accounting errors.
BNP Paribas SA, Goldman Sachs and other banks sold $500 million of bonds for Credito Real in bond markets with relative ease in January 2021. The company touted itself to sustainability-conscious bond buyers as a lender to Mexico’s underbanked poor and the U.S. International Development Finance Corporation, or DFC, lent it up to $100 million. Galaz, Yamazaki, Ruiz Urquiza SC, a local unit of global accounting firm Deloitte Touche Tohmatsu Ltd., audited the lender’s financials, as well as those of AlphaCredit.
BNP Paribas and other banks sold hundreds of millions of dollars of bonds for Credito Real in bond markets with relative ease in January 2021.
Photo: GONZALO FUENTES/REUTERS
A spokesman for BNP and a spokeswoman for Goldman Sachs declined to comment. A spokesman for Deloitte said the company doesn’t comment on client matters. A spokeswoman for DFC didn’t respond to requests for comment.
Market sentiment soured last spring after Credito Real disclosed that almost half of assets it had been reporting as loans consisted of accrued interest, indicating that it was struggling to collect from borrowers, analysts said. Hedge funds including Millennium Management LLC and Bybrook Capital LLP wagered the company’s stocks and bonds would fall, known on Wall Street as short selling, as did investment bank Stifel Financial Corp. , according to people familiar with the matter.
Management told analysts on subsequent earnings calls that its collection levels and sources of capital were strong. The company has also said short sellers had waged a campaign to paint its operations in a negative light.
Banks including JPMorgan Chase & Co. and Bank of America Corp. maintained neutral recommendations on Credito Real bonds. Fitch Ratings and S&P Global Ratings kept their credit ratings of the company in the relatively high double-B category through most of 2021.
However, the company in November said during a private call with analysts that improved profit margins in the third quarter of 2021 were because of a previously unreported accounting change. Credito Real later disclosed that more than half of the improved figures from its payroll loan portfolio came from changes in foreign-exchange rates.
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With the Swiss franc bond coming due and only around $80 million on its balance sheet, Credito Real said in December it was actively working to sell assets and raise additional debt. The company sold one of its U.S.-based subsidiaries for $45 million but hasn’t completed the planned refinancing.
Bond prices, which had been falling steadily through 2021, plunged in the past two weeks, delivering paper gains to the short sellers. A Credito Real bond due in 2023 fell to 39 cents on the dollar on Feb. 4 from around 72 cents in late January, according to Advantage Data Inc.
S&P Global Ratings and Fitch Ratings have each cut Credito Real’s ratings three times since the middle of November, citing the growing risk of a default in February.
Analysts from JPMorgan and BofA Securities continue to say Credito could refinance the Swiss bond in time.
Natalia Corfield, head of Latin America corporate research at JPMorgan said in a Jan. 27 note to clients that there was still a possibility that Credito Real avoids default by raising new debt, but added that “this could have been done earlier and in a smoother way.”
“Hold your breath,” she wrote.
Write to Matt Wirz at [email protected] and Alexander Saeedy at [email protected]
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