(Bloomberg) -- The retail arm of Mexican billionaire Ricardo Salinas’ Grupo Elektra is seeking to sell bonds amid risks that a rating downgrade on existing notes could trigger early repayments.
Nueva Elektra del Milenio is looking to sell notes maturing in seven years in a transaction that’s expected to price on Friday, according to people familiar with the matter. Initial price talk is for a yield around mid 12%, said the people, who asked not to be identified because they’re not authorized to speak about it.
Proceeds will be used to refinance existing $325 million in notes due in 2028, one of the people said. BCP Securities and Jefferies are handling the offering, the people added. The 2028 jumped almost 7 cents to trade at 99.7 cents on the dollar amid thin trading, according to Trace data.
According to the 2028 bond documents, if Fitch Ratings downgrades the notes to BB- or below, the principal would become due. The firm cut Elektra’s rating to BB in March, just one notch above that level, citing concerns about corporate governance practices at Grupo Salinas.
Market concerns mounted further on Monday when S&P Global Ratings assigned a BB- rating on Nueva Elektra del Milenio with a negative outlook due to risk from tax claims as well as a slowing economy.
Under the preliminary indenture of the new notes, only rating downgrades by S&P Global Ratings or Moody’s Ratings to B- and B3, respectively, or below, would trigger early repayment, according to the document reviewed by Bloomberg.
The existing bond’s structure is backed by the remittances sent to Mexicans and channeled through Nueva Elektra stores. That system has worked well for investors, said Alexis Panton, an analyst at BNP Paribas, but they may pause at jumping at the deal due to the risk that new lower-cost money transfer systems will eat away at Elektra’s market share.
Some 50% of remittances sent to Mexico, set to reach around $65 billion this year, are received at Elektra stores, according to the company.
“Extending maturities definitely extends tail risk,” Panton said.
Salinas may use leftover cash from the new issuance to repay any of the “penalties that are piling up,” according to Cesar Fernandez, a partner at Alpha Credit Advisors Ltd., who holds the 2028 notes.
Elektra is facing multibillion-dollar tax claims from the Mexican government that go back a decade or more. The country’s Supreme Court postponed hearings on two cases regarding the claims this month.
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