During the first half of 2022, companies on the Mexican Stock Exchange (BMV) have significantly reduced their debt, as higher financing costs, the economic slowdown, high interest rates and inflation push companies to be more conservative and have greater efficiencies in their operations.
The consolidated net debt of the companies that are part of the S&P/BMV IPC (excluding banks), the main index of the BMV, fell 14.5% in the last semester. A figure in line with the Janus Henderson Corporate Debt Index, in which the Mexican companies included reduced their corporate debt by 22.4% in the last year.
When companies issue debt, they commit to maintaining certain financial indicators (known as ratios) at certain levels. Net debt is a key indicator for investors, as it is commonly used to calculate company valuations. For example, one of the best known ratios is the net debt/Ebitda ratio, which measures a company’s ability to pay
The main Mexican issuers that reduced their net debt during the first half of the year were Volaris, with 94.8%; Televisa, with 41%; América Móvil with 29.8%; Liverpool, with 19.2%, and Genomma Lab, with 13%. On the other hand, Grupo Aeroportuario del Centro Norte (OMA) multiplied its debt seven times and Grupo México four times.
“All the Mexican companies in the index reduced their indebtedness. América Móvil, which contributed the most to the decline, had a solid cash flow and reduced its investment activity. In fact, the company sold assets and used the proceeds to buy back shares and reduce debt,” said Ales Koutny, portfolio manager at Janus Henderson.
Koutny added that debt can be a powerful tool for economic growth and profitability when used properly. A debt reduction can be a good thing or a bad thing. On the positive side, companies can reduce their debt due to excess profitability, which reduces the need for debt. On the downside, it may be due to a lack of attractive investment opportunities.
Juan F. Rich, director of stock market analysis and strategy at Ve por Más, pointed out that companies in Mexico have had very healthy levels of leverage (net debt/Ebitda), since it went from 2.7 times in the first half of 2020 to 1.77 times in the second quarter of 2022. Rich explained that this was due to the recovery of the operating part (higher Ebitda) with significant efforts in the face of the pandemic and inflation.
According to data from the Janus Henderson Annual Corporate Debt Index, falling corporate debt and leverage was a feature throughout Latin America, with the region outperforming the rest of emerging markets and bringing its share to 29.2% of total corporate debt. of emerging markets at the end of the first half of 2022, down 1.2 percentage points from 30.4% in 2021.
In the report, analysts at Janus Henderson expect borrowing to shrink further as higher funding costs and an economic slowdown push companies to be more conservative. Global net debt is estimated to shrink by $270 billion (-3.3%) in constant currency, to $7.9 trillion by this time next year.
“Companies around the world wisely chose to borrow from the abyss that the pandemic has opened up in global economic activity. These debts were meant to be temporary, and they were, as evidenced by the increased focus on reducing debt to short-term over the past year,” Seth Meyer and Tom Ross, fixed-income portfolio manager at Janus Henderson, mentioned in their report.
After the problem caused by Covid, unforeseen events can completely stop the activity of a company, such as what happened in the tourism sector, so specialists recommend that it is essential to have cash balances to cover a few months of expenses while income they are null.
“To ensure that leverage is not an issue and that companies are in control of their debt, it is necessary to prepare their investment plans for the future based on different potential scenarios,” Koutny added.
Interest rates, a risk
High interest rates could be a risk for both companies that issue variable-rate debt and those that issue fixed-rate debt. Experts point out that the only difference is how quickly companies are affected by it.
In the case of variable rate debt, each payment date becomes a challenge for companies. This is especially challenging for companies with high leverage or low profitability, where excess interest payments may put the company out of business until a restructuring takes place, or if not possible, the company may end up being liquidated.
Variable-rate debt tends to be issued primarily by companies with lower credit ratings, which are typically more exposed to these risks.
For debt at a fixed rate there are also risks. A higher interest rate affects new debt issues, since it discourages them, if the rate is higher than the profitability of the company. Also, higher rates increase the demand for safe assets (such as government bonds), so companies would have trouble finding adequate demand for their debt.