Canacol Buyers Worry Worst as Fuel Producer’s Money Woes Spark Main Selloff

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(Bloomberg) — Bonds of Canacol Power Ltd. are getting hammered after the most important non-public pure gasoline producer in Colombia mentioned its liquidity had slumped because it struggles with weak manufacturing volumes.

Notes maturing in 2028 tumbled as a lot as 20 cents on the greenback in simply three days to recent lows of about 46 cents after the corporate reported that it had solely $39.4 million left in money or equivalents. That’s down by about 30% from the yr earlier — and solely marginally above the quantity it wants to fulfill coupon funds due in Might and November.

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It was the ultimate straw for some buyers. Whereas the notes have been declining since October, when the agency canceled a key contract for a pipeline within the metropolis of Medellin, the current selloff has doubled the six-month decline. Pledges from administration of the Calgary, Canada-based firm to contemplate asset gross sales and arrange a brand new credit score facility didn’t ease issues.

“Individuals are not pleased with the sudden U-turn with the pipeline final yr, whereas some shortfalls and output and operational hiccups will not be serving to sentiment,” mentioned Eduardo Ordonez, portfolio supervisor at BI Asset Administration in Copenhagen. 

Canacol reported a drop in output and noticed web debt rise 37% to $674 million on the finish of 2023 from the yr earlier. Furthermore, the substitute ratio — a key metric that assesses the agency’s capability to maintain future output — for confirmed and possible reserves fell to a “meager” 31%, BancTrust & Co. mentioned.

With debt rising, money ebbing away and reserves weakening, the corporate “doesn’t have a lot room for error,” analysts from Seaport World Holdings LLC warned final week. 

A consultant for the corporate pointed to Chief Monetary Officer Jason Bednar’s feedback on a name on Friday, the place he instructed buyers all of Canacol’s fashions embrace the scheduled curiosity funds and that it expects to maintain leverage under the brink that might set off the breach of bond covenants.

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Debt as a share of earnings earlier than gadgets stood at 2.85 instances on the finish of 2023, up from 2.31 instances on the finish of 2022, however nonetheless under the three.25 that might set off some covenants.

Distressed Debt

Canacol bonds have now handed holders losses of greater than 20% prior to now three months, the worst returns in Latin America based on a Bloomberg index. Meantime, different power corporations in Colombia — EnfraGen Energia Sur SA, Gran Tierra Power Inc., AI Candelaria Spain, SierraCol Power Andina — have largely outperformed the two.2% return within the index throughout that interval.

The corporate’s 2028 notes now yield about 20 proportion factors over comparable US Treasuries — a degree thought of as distressed. 

BCP Securities, which downgraded its suggestion to detrimental when bonds hovered at 68 cents, stays bearish. 

“The market is looking for a degree,” mentioned Ben Hough, director of company analysis on the agency in Greenwich, Connecticut. “We don’t see free cashflow equilibrium based mostly on present steerage.”

Misplaced Confidence

Looking for to calm buyers, Canacol rushed to cancel dividends and postponed the drilling of an exploration properly in efforts to protect money, based on an announcement final week.

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It additionally mentioned it might promote its Arrow Exploration Corp stake — valued at round $20 million — and enter right into a short-term credit score facility if additional money is required. 

The following coupon fee is on Might 24 for $14.4 million, based on information compiled by Bloomberg. Canacol is unlikely to face difficulties making its upcoming funds, per Lucror Analytics. 

“The cushion from liquidity is gone and reserves are solely getting worse,” JPMorgan Chase & Co. analyst Alejandra Andrade wrote in a word. “This units up 2024 to be a a lot trickier yr for the corporate in our view, leaving no room for error until the corporate can safe different strains of credit score.”

(Updates bond pricing in deck headline and second paragraph.)

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