Default of Panama deal hits Hancock, CSFB

Abstract

John Hancock Life, Credit Suisse First Boston, and Loomis Sayles & Co. hold the lion's share of the $126.5 million of bonds still outstanding from Pycsa Panama's offering, which is backed by tolls that drivers pay to use the Madden Segment and Northern Corridor highways near Panama City. A likely scenario will involve the construction of a $94 million extension connecting the northern corridor to the southern corridor, a move that Pycsa believes will make the thoroughfare more profitable.

The issuer of a 1997 transaction backed by Panamanian toll-road receivables failed to make its scheduled principal and interest payments earlier this month - and the default has three big-name market players scrambling to restructure their investments in the deal.

John Hancock Life, Credit Suisse First Boston and Loomis Sayles & Co. hold the lion's share of the $126.5 million of bonds still outstanding from Pycsa Panama's offering, which is backed by tolls that drivers pay to use the Madden Segment and Northern Corridor highways near Panama City. Pycsa was unable to distribute some $7.8 million of payments due on June 15, a few weeks after the issuer started negotiating with bondholders to establish a restructuring plan that would allow them to recoup their investments.

The engineering and construction outfit, based in Mexico, is presenting investors with a pair of options. It could extend the bonds' maturities while lowering their coupon rates - giving investors the same returns they expected when they bought the securities, but over a longer period. However, a more-likely scenario would involve the construction of a $94 million extension connecting the northern corridor to the southern corridor, a move that Pycsa believes will make the thoroughfare more profitable. Pycsa would seek new financing to fund that project, using the proceeds to pay down the outstanding asset-backed bonds. Pycsa has also asked bondholders to put up additional capital, which would effectively serve to extend the existing securities. It's not yet known whether Pycsa would try to fund the project through another securitized offering.

Pycsa's parent company, Grupo Protecto y Control of Madrid, has said that it will not provide a capital infusion to shore up the outstanding securities. It's unclear how a restructuring would affect the amortization schedule of the notes, since a reduction or deferral of payments would qualify as a default under the deal's covenants. The issue is scheduled to be repaid by its 2012 legal maturity date.

The company has a 10-day window after each disbursement date during which it can make payments without being considered in default - but it doesn't look like the grace period will help this time, since Pycsa already exhausted its debt-service reserve to make a payment it missed in December 2000.

First Boston's bond-trading desk, along with Hancock's and Loomis' fund-management units, are eager to come to an agreement with Pycsa. First Boston underwrote Pycsa's Rule-144A offering in October 1997. Sources said they expect a decision within the next few weeks. Unless a restructuring plan is agreed upon, it's likely that Pycsa will also miss its next scheduled payment on Dec. 15.

Nonetheless, many market players are optimistic that bondholders will be able to recover their principal and expected interest. "The-ultimate chance for recovery is pretty high, it's just a question of when," said Jeffrey Wolinsky, an analyst at S&P.

Adam Whiteman of Moody's, however, said it still isn't entirely clear whether investors can recoup their investments without a capital infusion from Grupo Pycsa.

A number of factors have contributed to shortfalls in the cashflows supporting Pycs;es deal. For starters, delays in the initial construction of the roads shortened the period of time during which the company has been able to collect tolls. What's more, drivers especially truck drivers - proved reluctant to pay the tolls once the roads were built. Trucking companies balked at the highways after a contractor hired by Pycsa to install electronic toll-payment transponders abandoned the project. Pycsa is shooting for yearend to establish a system similar to the E-ZPass arrangement used by New York-area motorists.

Many drivers have avoided the roads because traffic lights were never installed along the route from the Northern Corridor to the center of Panama City, meaning that they often must sit in traffic while police officers direct the flow of vehicles. Extra lane openings on a nearby staterun highway have also diverted some traffic away from Pycsa's toll roads, despite an agreement by the Panamanian government not to build any competing roadways.

Moody's downgraded the Pycsa transaction to "CaW a few weeks prior to the default. It's possible that the agency will lower the rating even further in response to this month's missed payment.

S&P responded by placing the deal's "CC" rating on watch for a downgrade. The agency said it would likely cut the rating to "D," its lowest grade, if investors do not receive principal and interest disbursements by the end of the grace period.'

The issue was originally rated Ba3/BB- by Moody's and S&P..:.10