Bonds for Mexico’s Denim Maker Kaltex Proving Unfashionable

(Bloomberg) -- Caught between a drought in Texas and a war in Ukraine, one of Mexico's largest denim and textile producers is up against the clock to avoid a default.

Bonds from Mexico's Grupo Kaltex, which supplies denim and other fabrics to clothing names such as Levi Strauss & Co. and Vera Wang, have cratered nearly 40 cents since mid-February as the company failed for the second time to refinance its $218 million in notes due April 11. A week ahead of the maturity, the notes are valued at 60.5 cents on the dollar -- suggesting some investors are starting to see default as an increasingly likely prospect.

Kaltex -- also a supplier for VF Corporation, which owns The North Face brand -- is struggling to keep its finances in check as cotton prices hit decade highs. The company tried to refinance its upcoming debt payment with an asset sale last November that didn't find enough demand. In mid-February, it launched a buyback offer for the dollar notes but again failed to attract enough creditor support.

“Kaltex is vulnerable to price swings in the commodity sector,” said Joe Bormann, an analyst at Fitch Ratings. “There's a high probability of a distressed exchange situation.”

The Mexican textile producer, which had about $28 million in cash as of Sept. 30 last year, said it is pursuing “all available alternatives” to address the upcoming debt payment. It has already sold assets, including its Milano stores for $80 million in the first half of 2021 and its Revman International subsidiary for another $66 million, which it used to pay down bonds last year.

A company spokeswoman didn't respond to emails and calls seeking comment.

Cotton futures soared more than 20% this year amid forecasts for dry weather looming over West Texas, the biggest-producing region in the world's biggest exporter. Prices were also pressured higher by concerns farmers are switching to more profitable grains, as the Ukraine war sent prices of competing crops like corn and wheat surging even more.

Read More: Cotton Sees a Historic Rally as Drought Strikes Top Shipper U.S.

Fitch cut Kaltex's rating to CC from CCC shortly after the flopped bond buyback attempt and now expects the company to embark on a debt exchange, with recovery values for bondholders seen between 31 and 50 cents on the dollar. A month later S&P Global Ratings followed suit, downgrading the firm by one notch to CCC- on increased risk of default in the near term.

To be sure, the bonds are not yet trading at default levels, suggesting the market sees a possibility the company can still resolve the payment issue before the deadline.

Kaltex is led by chief executive officer Rafael Moises Kalach Mizrahi, whose family founded the company in 1925 and also controls and operates Circle K Convenience stores in Mexico. In the past, the family has granted financial support to its companies through cash injections, according to people familiar with the matter.

“Absent any refinancing completion, we believe Kaltex won't have sufficient funds to pay,” S&P analysts wrote in a statement March 18. “Therefore, we believe that Kaltex is facing a near-term default.”