Empresas ICA: The 5 errors that contributed to Default

“Those who cannot remember the past are condemned to repeat it”

 George Santayana.

 

We evaluate some of ICA’s debt metrics from 2012 to the 3Q15 to see what went wrong with the company’s debt management.

Error # 1. Not linking borrowed debt to a source of payment.

Between 2013 and 2014, ICA almost doubled its debt at the holding level, increasing it from 25.6% of total debt to 44.1%. Debt at the corporate level had no direct source of payment and relied on the inflows from already-leveraged subsidiaries.

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Error #2. Not matching the currency of debt to that in which ICA sold stuff.

ICA’s holding level debt was issued in USD even though practically all of ICA’s consolidated subsidiaries have its revenue stream in Mexican pesos.  By 2014, more than half of ICA’s debt was foreign-currency denominated.

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Error #3: Not hedging. If you still want to borrow in other currency HEDGE! Otherwise, the cost of debt is not fixed despite a fixed rate.

Even though ICA has positions on several FX derivatives contracts, we have not seen a significant positive impact from derivatives valuation or interest income that could offset interest payment and FX losses. In spite of the lower rate environment that we have lived in for the past years, ICA’s new and foreign debt issuances resulted in a higher debt yield–almost doubling in 2015 compared to the previous year.

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Error #4: Having a consistently overleveraged structure is never a good idea (if not a Ponzi Scheme) !

As of 3Q15, ICA reached the highest Liabilities-to-Equity ratio since 2012. The ratio was even higher than in 2012 when a debt intensive project of hydroelectric plant La Yesca was on ICA’s balance sheet.  ICA’s high level of debt left the company more vulnerable to adverse economic conditions and reduced its financial flexibility.

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Error #5: Above all things, watch your interest payment coverage.  

If all of your operating flow goes to pay interest payment, there is no turning point… you are long gone. ICA’s net interest payment in the 12 months through 3Q15 was virtually the same as its EBITDA generation and resulted in missing its interest payment for the 2024 global notes.

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The End?

Source: Company´s  quarterly reports at  ICA and LATAM PM.