Grupo IDESA S.A. de C.V. 'CCC-' Ratings Placed On CreditWatch Negative On Its Announcement Of Debt Exchange Offer

  • Mexican petrochemical producer and distributor Grupo IDESA S.A. de C.V. (IDESA) announced an offer to exchange its outstanding $300 million 7.875% senior unsecured notes due December 2020, for 9.375% secured notes due 2026.
  • In our view, the proposed exchange is distressed given the timing of the transaction relative to the maturity date, but it is not tantamount to default because it does not imply a loss of value to investors.
  • On March 24, 2020, S&P Global Ratings placed its 'CCC-' issuer credit rating on IDESA on CreditWatch with negative implications. At the same time, we placed our 'CCC-' issue-level rating on the company's senior unsecured notes due 2020 on CreditWatch negative. Our recovery rating on the notes remains unchanged at '4'.
  • The CreditWatch negative reflects the uncertainty surrounding the completion of the transaction, along with the high risk of non-payment of the company's $130 million bank loan that matures on June 20, 2020, if the company does not accomplish the exchange of its current notes.
MEXICO CITY (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above.
We consider the proposed exchange for the outstanding senior unsecured notes due 2020 won't be tantamount to default if the company achieves the exchange of the notes at par value. On March 23, 2020, IDESA offered the bondholders of its outstanding 7.875% senior unsecured notes due 2020 an exchange of those notes for new 9.375% senior secured notes due 2026.
Our ratings on IDESA reflect our view that the exchange offering won't be tantamount to default, if successful under the proposed terms and conditions in the early tender.
According to our criteria, we treat exchange offers as tantamount to default when they meet two conditions: if they're distressed rather than purely opportunistic; and if the investor will clearly receive less value than the promise of the original securities. We consider IDESA's offering as distressed, rather than opportunistic, given that the outstanding $300 million notes' mature on Dec. 18, 2020.
However, in our view, the new notes offering doesn't imply a loss of value to investors, because we believe that the par-for-par exchange, with an increase of 150 basis points in the coupon rate, with the same periodicity and higher seniority ranking with a security package, would compensate for the six years-and-tenor extension.
The offer has an early tender date on April 3, 2020, and a final expiration date on April 17, 2020. Bondholder consents that are received prior to the early expiration date would receive par value, plus a 1% premium. Consents received between April 3 and the final expiration date would receive 96% of par value under the exchange. Any transaction that closes at a discount below par value would lead us to reassess whether the exchange is tantamount to default, considering that investors could end up receiving less value than the promise of the original securities.
Continued concerns about a payment default in the next three months. We believe IDESA faces an elevated risk of a payment default on its $130 million bank loan maturing June 20, 2020, if the company does not accomplish the exchange of its current notes, or unless unanticipated events improve its weak liquidity position over the next three months, or the company is able to refinance the loan. Moreover, the company's operational performance has continued declining, resulting in a funds from operations (FFO) deficit in the last 12 months, further worsening its liquidity profile. In our view, the company's progress on refinancing the loan remains uncertain.
We expect to resolve the CreditWatch negative placement once the transaction is completed, reflecting the possibility of a downgrade if the company exchanges its notes under par value. We also expect to have more visibility about the company's ability to meet the $130 million obligation related to the loan due June 20, 2020.
IDESA is a Mexican company that produces, stores, distributes, and commercializes several petrochemical and chemical products used as raw materials to manufacture everyday products. The company operates through its petrochemicals, distribution, and logistics business units; its 50% stake in the Cyplus Idesa and Tonalli Energía joint ventures; and its 25% equity interest in Braskem-Idesa.
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