Sergio Camacho, CEO of Unifin Financiera, was tired of questions about the financial health of his firm, Mexico’s largest non-bank lender, until his patience ran out.
Unifin was doing well, he snapped, and his business would grow and prosper. “The market has been irrational,” Camacho told an investor impatiently after interrupting him during the company’s earnings call last month. “No matter what they do, they are not reacting to the fundamentals of the company.”
Just 17 days later, the company stopped payments on its $2.4 billion in foreign bonds and told creditors it would start talks to restructure the terms of the debt. With this, he unmasked the biggest of all mistakes and false hopes in the crisis that has plagued the business of non-bank lenders in Mexico: the problems that arose a year ago in one company, and then shortly after in another, were contained. and it did not spell the same fate for the other dominant players in the industry.
The decision surprised investors and analysts who had been reassured by Unifin’s management assurances and strong financial numbers, at least compared to other struggling non-bank lenders.
“To put it mildly, Unifin leaves us stunned, surprised,” said Rafael Elías, managing director of corporate credit strategy for Latin America at Banctrust in New York. “We asked the company specifically why they thought bond prices were falling, if there was any particular reason. Management told us that ‘the drop in bonds was surely related to general market conditions’”.
On Tuesday, S&P Global Ratings officially declared Unifin in default.
Unifin joins Alpha Holding and Credito Real in a financial collapse that nearly wiped out a total of $5 billion in bonds. All kinds of conflicts put companies and their bondholders in trouble: both Alpha and Crédito Real scared investors by revealing their accounting problems. But in the end, the collapse was accelerated by a surge in interest rates in Mexico and the United States, further insulating companies from the easy money they depended on.
“This can completely drive investors away from the industry,” said Omar Zeolla, an analyst at Oppenheimer. “Until now, we thought that Alpha and Crédito Real were isolated cases. But the Unifin announcement makes this an industry problem.”
Credito Real defaulted on a Swiss franc bond in February, less than a year after doubts about the sector were raised when Alpha Holding revealed a $200 million accounting error. Crédito Real followed up with a disclosure of its own: Non-performing loans were approximately 82% higher than disclosed in a previous presentation. But Unifin, which leases equipment to small and medium-sized businesses, has not reported any such review.
Unifin’s unexpected default sent its bonds and stocks plummeting on Tuesday. Dollar bonds due in 2023 shed 44 cents to just 11 cents and its Mexican stocks tumbled 89%. The picture is not far removed from the deterioration in Real Credito and Alpha bonds, which are now worth pennies on the dollar.
Natalia Corfield, director of corporate credit research for Latin America at JPMorgan, said in a note Tuesday that Unifin’s move could be linked to a possible inability to refinance debt, or very strict conditions to do so. The company’s leadership may also have realized that its business was unsustainable with the current capital structure, or there could also be accounting problems, he wrote.
An outside company representative said its decision to stop paying its debts came after last-minute financing plans were canceled after lenders demanded payment on renewable lines.
There were several reasons to have more faith in Unifin’s commitment and ability to pay bondholders. Aside from his insistence that he should not be blamed for the sins of his peers, he has also taken strategic steps, from agreeing to a $500 million credit facility with Credit Suisse and finalizing a deal to extend the maturity of his unsecured bond. from 2022 to May 2024. The Unifin representative said the company had only used $300 million from Credit Suisse and had decided not to take the other $200 million.
But the risks were also there. The company’s dollar bonds have been the focus of attention since their peers cast doubt on the market in mid-2021, and began to fall seriously as Credito Real moved closer to default.
The Real Credit and Alpha sagas are also far from over. Both are involved in bankruptcy proceedings, and Crédito Real announced on Tuesday that it had “successfully negotiated” the settlement of its obligations with some creditors. On Tuesday, the company also made its first appearance in US bankruptcy court in Delaware.
The former chief executive of Credito Real, who stepped down last year, pushed the company into liquidation last month, setting the stage for a legal fight over how best to pay creditors the $2.5 billion debt owed. Dollars.
Alpha’s bankruptcy proceedings have largely stalled while a solution is sought in Mexico.
All three companies were market darlings, offering bond buyers lucrative yields while slashing small loans (and charging double-digit interest rates) to millions of traditionally unbanked people across Mexico. However, Unifin is the largest of the bunch. This is disorienting investors, who are now looking through the rubble for clues about the future of the industry.