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Credito Real’s Swiss bond matures as traders brace for default

The company’s troubles mirror the painful decline of shadow lenders in Mexico following rival Alpha Holding SA’s bankruptcy filing just six months ago. Even if Credito Real – which had $80 million at the end of the third quarter – catches up with this week’s payment, investors are already betting on a default later, with its six-year dollar bonds trading at 21 cents and yielding 55%.

“The possibility of the company being doomed is high,” said Rafael Elias, managing director of Latin American business credit strategy at Banctrust & Co. in New York. He said Credito Real will “likely” make payment on the Swiss bond, but will likely default on $249 million of notes that mature in July 2023.

He estimates that investors could recover on average about 29 cents on the dollar for the company’s nearly $2 billion in foreign bonds if it defaults this week.

Credito Real did not respond to a request for comment. The company said in a statement Jan. 26 that it is working to secure a credit facility and is considering strategic alternatives to generate cash to pay off debt.

Credito Real became the darling of investors a few years ago when it entered the Mexican financial system with payday loans to civil servants and retirees, transactions too small and difficult to manage to interest the big banks. It became the 12th financial institution in the country in terms of loans. And just 13 months ago, investors were so enthralled that they eagerly funded $500 million in new bonds and sent the price up 107 cents on the dollar.

Those same ratings have since plummeted, a sign of the severity of the industry’s downfall. In addition to the Alpha Holding bankruptcy, foreign securities due in 2029 of another Mexican lender, Unifin Financiera SAB, have fallen to 65 cents on the dollar as pessimism sets in and the Mexican economy stumbles in recession.

Unifin, with $493 million in debt maturities this year, will now have to slow lending or it could be the next company to face default, analysts at Bank of America Corp say. and Barclays Plc, both of whom are optimistic that Unifin has the ability to come up with a funding strategy.

Unifin’s financial position is strong and it has many options to make payment for an obligation due in August, an outside spokeswoman said in an email to Bloomberg News. The company has extended its debt maturity profile 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 around 82% larger than disclosed in an earlier filing. The company said this was due to a large loan, over $30 million, made from its small business portfolio.

Luis Maizel, co-founder of LM Capital Management in San Diego, Calif., said the disclosure of the large loan had cast doubt among investors.

“It wasn’t supposed to be their business plan,” he said. “Credito Real was supposed to be small loans.”

The company sought to raise funds by selling assets. It sold a portfolio of US small and medium-sized business loans for $45 million in December and announced in October that it had sold a portfolio of small businesses in Mexico for 1.5 billion pesos ($73 million). This deal, however, was subject to regulatory approval and Credito Real did not comment further on the status of the process. The company is also looking to sell a non-controlling stake in its US used car lending unit, Credito Real USA Finance.

But as Swiss bond maturities approached, investors were discouraged by the lack of progress. Concerns were heightened on January 26 when the company released a statement saying the funding was secure before announcing it had been sent in error.

S&P Global Ratings and Fitch Ratings both downgraded Credito Real’s credit rating last week, citing Switzerland’s impending maturity and lack of money to repay it.

“His rollover risk has increased significantly,” S&P analysts Erick Rubio and Jesus Sotomayor wrote in a Feb. 4 note. “Credito Real’s continued inability to complete some of the plans to obtain funds over the past few months has seriously impaired its financial flexibility.”

Repayment doubts have made the lender’s dollar debt the worst-performing corporate notes in emerging markets this year, according to a Bloomberg index, with 2028 notes shedding 62% against an average decline of 3.5%.

Its shares, meanwhile, fell to a record low on Tuesday, leaving the company with a market value of less than $60 million. They have fallen more than 90% since peaking in late 2015.

Credito Real belongs to the family that controls the household appliances manufacturer Controladora Mabe SA. They started the business out of what had been a small finance operation that provided loans to customers who purchased Mabe products.

Now, Credito Real focuses on payday loans, with a smaller portion of its business related to small and medium-sized businesses, as well as microfinance and auto loans in the United States.

Founding family member Eduardo Berrondo said in a Jan. 12 letter that he was stepping down from the board after recent discussions “about the principles, values ​​and philosophy that have governed the decisions of those who chair and run the business, which differ significantly from the principles, values ​​and philosophy that govern my personal and professional life.

According to Omotunde Lawal, head of emerging market corporate debt at Barings UK Ltd. in London, if Credito Real ultimately fails to meet its obligations, this will have repercussions for the Mexican non-bank consumer finance industry.

“Alpha’s default has already caused some contagion in the industry last year,” she said. “If Credito Real defaults, it will certainly put pressure on remaining issuers like Unifin.”

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