Monday, 25 January 2016

A safe bond yielding 6% in less than 2 months: too good to be true?

First of all the link:

As you can see this bonds yield 6,75% per annum and are trading at 95% of par value, and are to be repaid in 18 March 2016, the coupon is paid half yearly. Accrued interests are currently 2,436%. So, you would pay 97.436€ today to receive 103.375€ in less than two months (54 days), approximately 6,1% (approximately 49% compounded annualized yield).

So the return is great. What about the safety?

This is a Mota Engil SGPS bond. They are a construction company with lots of sub-companies.
They have about 1600M in debt with parent company warranty. This emission represents only a very small part of their total debt.
They have loads of short term debt that are part of their normal activity.
They have a huge business in Latin America and Africa (especially in Angola), since it is a construction business they might have difficulty collecting.

However, they released a statement last week saying:
1- Their collections were positive in last quarter 2015 in most countries where they have activity, resulting in a significant debt reduction
" the receivables flow was positive in the three regions (Europe, Africa and Latin America), which allowed for a significant decrease of the consolidated debt level between the period ending in September 2015 and the period ending in December 2015"
" it is important to highlight that almost all countries have contributed to this trend, mainly Mozambique, Mexico, Poland, but also Angola, Czech Republic and Portugal."
2- They have continued with their policy to extend maturities and reduce debt cost
"Mota-Engil has been executing the refinancing of its debt in line with its plan and strategy, having closed several operations during the fourth quarter of 2015 and during the first days of 2016. Accordingly, Mota-Engil financial strategy mainly focuses at decreasing the debt cost and extending the debt maturity."
3- They maintain their strategic objectives
"from a strategic standpoint and as previously stated, it is worth mentioning that the focus on the waste collection and treatment businesses will allow the segment to grow and to expand in the international markets (namely with new operations in Latin America and in Oman). Besides, the disposal of highly mature assets (namely in transportation concessions and ports) has been proceeding successfully."

a) It is important to mention that this waste collection business was acquired in Q2 2015 and has already been paid for (and is included in the debt mentioned above, a good part of the non guaranteed debt is also in this company)
b) The mature businesses are
       i) transportation and ports business: sale to Yildirim agreed. Will result in a debt reduction of 330M (275 equity + 55 debt)
       ii) Ascendi: An investment of 300M for 50% of some concessions by Ardian is expected to close this month. Additionally, they are in negotiations to sell Ascendi final proposals planed for the end of this month and a conclusion reached in February. Mota Engil owns 60%, expects to sell at least 40% (and ideally maintain the remaining 20% as a strategic partnership for their construction business). Santander apparently values Ascendi at 326M, and BPI values it at over 600M€. If they were cash starved they would agree to sell the 60% which would mean approximately 200M (according to portuguese newspapers)
       ii) Indaqua: said to be in advanced negotiations with closing expected to the end of this month. They own 50,06% (a control position) which are seeking to sell. (according to portuguese newspapers). The non controlling half is held by Falanx (german), which bought it in 2014 for 52M. Obtaining the same 52M for the controlling 50% seems reasonable

So the say they reduced debt last quarter and they are selling assets which should result in a near term cash receival 585M to be used in reducing debt. So the likelihood of missing payment on this bond seems reduced.

a) New government in Portugal says they are monitoring Yildirim transaction. It is hard to believe they would interfere but not impossible
b) New government in Portugal is canceling some deals by the last government. One of them involves a Mexican company which is arguing their investment is contemplated in bilateral deals between the two countries. Mexico is a key market for Mota Engil
c) New government in Portugal and general investment feeling globally is weak this month. The proposals for Indaqua and Ascendi might be lower than expected or deemed inappropriate
d) They might have difficulty in collecting receivables

It seems unlikely all this risks would pose a problem for a small bond due in 55 days

Disclaimer: I could not buy this bond. Asked for it and was informed that my broker did not currently trade bonds. So I have no positions. This is not an investment recommendation. Do your own due diligence. Always read the introduction post

edit: spelling

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