Fitch: Mexican Banks' Exposure to a Default of ICA Is Manageable

NEW YORK & MONTERREY, Mexico--(BUSINESS WIRE)-- The likelihood of a Dec. 30 default by Mexico's largest infrastructure and construction company, Empresas ICA (ICA), means that several of Mexico's top banks could take significant, but manageable, provisions on their loans to ICA in the first two quarters of 2016, says Fitch Ratings.

Six of Mexico's seven largest banks have a total of about MXP12.3 billion (USD726 million) of exposure to ICA, including direct loans and indirect exposures. Some of these loans may cross-default when ICA formally enters an interest payment default, which the company has confirmed will occur at the end of a 30-day grace period next week. The company has signaled that it does not plan to declare bankruptcy. Mexico's government is willing to speed some payments it owes to ICA, although a bail-out is not on the table.

The ultimate impact of an ICA default is not expected to threaten rating changes on any of the large Mexican banks.

ICA missed a USD31 million coupon payment on its 8.875% 2024 notes on Nov. 30, partly to preserve liquidity and start negotiations with creditors. Although ICA's credit position has been deteriorating over the past two years, banks have not created additional reserves, relying on certain guarantee schemes in loan terms. The banks exposed to ICA believe that mortgages on the properties, payment rights and other claims on receivables from infrastructure projects, among others, make the guarantee schemes robust.

The loans granted by banks to construction businesses have generally good levels of collateral. Credit reserves required by the local regulator (CNBV, the National Banking and Securities Commission) are often low, so necessary provisions if ICA defaults could significantly affect the profitability of exposed banks over the first two quarters of 2016. Recovering the collateral, if required, could be a lengthy process.

Fitch considers the direct and indirect exposure of commercial banks to ICA as manageable due to the moderate size of the exposures relative to capital. We estimate that ICA's loans represent between 1% and 6% of the large banks' core capital. All six of the major banks in Mexico exposed to ICA have strong capital positions.

Fitch believes that the systemic impact of an ICA default to be relatively low; the MXN12.6 billion of loan exposure equals 0.2% of total system assets and 1.6% of total common equity as of September 2015; likewise, nonperforming loans could increase to approximately 3.20%, up from the 2.86% reported in September 2015.

The ICA exposure highlights why Mexican banks aim to reduce concentrations of risk for larger borrowers, recalling how Mexican banks also saw widespread exposure to defaults from Mexico's largest homebuilders in 2013.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151223005580/en/

Fitch Ratings
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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