To Vultures, Mexico a Different Animal

If Mexico is no longer a place for investors per se, it should at least be a decent hunting ground for speculators--what with treasury bill interest rates of 50%-plus and some stock prices one-fifth their levels of a year ago.

Or maybe not.

Wall Street’s “vultures,” who usually flock to such market train wrecks, were largely underwhelmed Tuesday by the details of the U.S.-led bailout plan for Mexico’s economy.

The dearth of deep-pocketed speculators willing to buy Mexican stocks and bonds, even with the bailout program now in place, was reflected in the 4.9% plunge in the Mexican Stock Exchange’s Bolsa index Tuesday to a 19-month low of 1,679.19.

So where are the U.S. vultures--or “distressed securities” specialists, as they prefer to be called?

Many of these savvy players say they’re interested in Mexico, but are simply in no hurry. They say the extreme risks now inherent in Mexican investments may not be fully reflected in the securities’ prices, despite the extraordinary price declines already witnessed.

While you don’t expect these players to tip their hands, their stated reluctance to become active bidders for Mexican assets seems to ring true. Individual investors who are eager to buy Mexican securities may want to take note, because without the presence of a large group of aggressive vulture investors, a devastated market may still be searching for a bottom.

U.S. vulture investors, a disparate group of institutional money managers and wealthy individuals, made a collective fortune buying American junk corporate bonds in 1990 when their prices plummeted, the result of wild selling by panicked pension funds, banks and mutual funds. Some of these same vultures profited handsomely by buying commercial real estate in the late 1980s and early ‘90s at fire-sale prices.

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Mexico, however, is a different animal, the vultures argue. The simple fact that Mexico operates under a different legal system is a huge barrier for them, many U.S.-based distressed-securities buyers say. By definition, vulture investing requires a knowledge of the bankruptcy process. Many vulture investors who understand U.S. bankruptcy law say they have only begun their reading on the Mexican process.

“I think there are certainly going to be opportunities there, but this is a much different experience from what we know,” said one large U.S. vulture investor who asked not to be named.

Even in cases of major Mexican companies where the odds of bankruptcy appear to be quite low--and where the companies’ stock prices are down as much as 80%--U.S. vulture fund investors say compelling values are hard to find.

Michael Conelius, vice president at Rowe Price Fleming in Baltimore, notes that the Mexican austerity program that will be required by the U.S. aid package formalized Tuesday means that, in all likelihood, “the Mexican economy is now set for a severe recession.”

Predicting 1995-96 earnings or losses for companies in that environment would be difficult enough, Conelius says, but the job is made far worse by the uncertainties still surrounding the peso’s value and the probable level of Mexican interest rates going forward.

If you can’t intelligently guess where the peso will finally settle or how quickly Mexican rates will come down, you can’t expect to come up with corporate earnings or cash-flow estimates that are anything more than ballpark guesses. Ergo, assigning a value to Mexican stocks based on traditional earnings yardsticks may as well be a dartboard exercise.

Adam Holiber, analyst at D.A. Campbell Co. in Los Angeles, says it’s conceivable that phone giant Telmex could earn $4 per U.S.-traded share in 1996. But with the stock now at $29, some investors may view it as still too expensive given the unknowns, he concedes.

Mexican bonds, on the other hand, at least have an attached income stream upon which a vulture investor can begin to assign value. And indeed, U.S.-based distressed-securities buyers are much more interested in Mexican bonds than they are Mexican stocks, says Wilbur Ross Jr., senior managing director at Rothschild Inc. in New York.

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But if 50% yields on short-term Mexican treasury bills sound alluring, analysts caution that that return is paid in pesos--which have lost 40% of their value since mid-December. If inflation reaches the 30%-plus rate that some economists now are forecasting for Mexico in 1995, further devaluation is almost a given.

As for dollar-denominated Mexican bonds, such as the long-term “Brady” bonds backed by U.S. Treasury securities, some American vulture investors say the 13% cash yields on those securities, while more than five percentage points above long-term U.S. T-bond yields, aren’t adequate for a country that has become as politically unstable as Mexico. If President Ernesto Zedillo were to fall, what would follow?

It’s possible, of course, to imagine Mexico’s markets reviving without the help of U.S. investors. But it’s a stretch to suggest that stock and bond prices could rise substantially--and stay up--without the same inflow of dollars that made for their heyday just one year ago.

Martin Whitman, a veteran New York-based distressed-securities investor, may sum up the attitude of many U.S. vulture investors today. What he’d like to find in Mexico, he says, isn’t a theoretically cheap stock, but a partner with whom he can make direct investments in badly devalued assets. That is a long-term, time- consuming process. It’s not a recipe for a fast turnaround in prices of tradable Mexican securities.

* WILL IT WORK? Aid package will have limited economic benefits. D7

Main story, related stories: A1, A10

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Still Falling

Prices of key Mexican stocks traded in the United States are at or near their 52-week lows, which in some cases as much as 80% below last year’s peaks.

Stock: Coca-Cola Femsa

52-week high/low: 38.38/14.38

Tuesday close/change: 14.75/-0.88

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Stock: Grupo Maseca

52-week high/low: 30.25/10.75

Tuesday close/change: 12.63/-0.50

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Stock: Grupo Televisa

52-week high/low: 73.75/17.38

Tuesday close/change: 17.63/-1.25

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Stock: Grupo Tribasa

52-week high/low: 40.25/7.38

Tuesday close/change: 7.63/-0.88

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Stock: Empresas ICA

52-week high/low: 34.50/6.25

Tuesday close/change: 6.75/-0.13

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Stock: Mexico Fund

52-week high/low: 40.25/15

Tuesday close/change: 15.25/-0.63

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Stock: Telmex

52-week high/low: 76.13/28.13

Tuesday close/change: 29/-1

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Stock: Trans Maritima

52-week high/low: 12/4.63

Tuesday close/change: 5/-0.13

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Stock: Vitro

52-week high/low: 27.75/9.25

Tuesday close/change: 9.88/-0.25

All stocks trade on NYSE.

Surging Cost of Credit

Annualized yields on 91-day cetes--the Mexican equivalent of three-month Treasury bills--are expected to reach 50% or higher at today’s weekly auction, as investors continue to demand sky-high returns to hold peso-denominated securities. Weekly yields on 91-day cetes:

Feb. 22, 1995*: 50%

* Estimate

Source: Bloomberg Business News