Each week, we screen thousands of bond issues to find higher yielding debt instruments from around the globe. This week, we are focused on five year Yankee bonds from Mexico’s largest producer of printing and writing paper and notebooks, Grupo Papelero Scribe. These 8.75% couponed bonds appear to be trading just over par, and offer excellent cash flow and a healthy 8.6% yield to maturity. The company currently holds a market dominating 80% share of notebook sales in Mexico as well as an equally impressive 75% market share of school products in Mexico. This market leadership seems to have attracted the attention of Bio-Pappel, who is reportedly in the process of acquiring Scribe. Bio Pappel plans to merge Scribe with its existing operations, creating additional value and cost savings by consolidating duplicate functions throughout the two companies. Once the acquisition is completed, the resulting company will command nearly 20% of the entire paper and paper products market in Mexico, and there may be a very lucrative opportunity for Bio Pappel to introduce recycling operations to Scribe’s existing customers in order to secure additional material for its cardboard and packaging production. Consequently, we think these 5 year, medium term notes from market leader Grupo Papalero Scribe not only offer excellent cash flow and a superior yield that’s over 8.5%, we also believe it soundly enhances global and sector diversification within our Fixed Income-1 and Fixed Income-2 high-yield portfolios.
About the Issuer
Grupo Papalero Scribe is Mexico’s largest producer and marketer of notebooks and writing paper based on sales volume. For the twelve months ending June 30, 2014, the company registered sales of USD $390 million. Its notebook products are marketed under several brand names, including “Scribe,” which is Mexico’s most widely-recognized notebook brand. The company’s paper products include some of the most recognized and preferred paper brand names in Mexico. The company was founded in 2006, when it split from Kimberly-Clark Mexico, long recognized as a leading manufacturer of world-class premium writing, text, cover and specialty papers and notebooks.
Scribe currently has two lines of business: notebooks and paper. The paper division manufactures and markets fine printing and writing paper for various uses in the retail and business markets while the notebooks division manufactures and markets notebooks and notepads in various formats and sizes. Using these two lines of business, Scribe sells both to consumer end-users as well as industrial customers. On the consumer side, they sell notebooks, cut-size papers and tissue. On the industrial side, the company sells paper rolls, flat sheets and specialty paper. The company currently employs 2,500 people within its four production plants within Mexico and one production plant in Columbia. The company’s assets are currently estimated to be valued at USD $700 million and the current company revenues are approximately USD $500 million per year.
Scribe has a commanding 75% market share for school products in Mexico as well as an 80% share of the notebook market in Mexico. The near-monopolies in these markets may have attracted the attention of Mexico’s largest cardboard company, Bio Pappel, that currently appears to be capacity restrained and in need of additional manufacturing facilities.
Pending Acquisition by Bio Pappel
In August 2014, Grupo Bio Pappel (Bio Pappel) reached an agreement to acquire 100% of Grupo Papelero Scribe’s shares. The acquisition of Scribe is part of Bio Pappel’s strategy to grow and integrate its operations throughout North America and Latin America. Bio Pappel has grown through a series of acquisitions, with the company acquiring five competitor companies over the last 10 years. The transaction is contingent on the approval of Mexico’s Anti-Trust Commission and is expected to close by mid-2015. We have twice reviewed and recommended Bio Pappel’s 2016 bonds, the first in September 2012 and again in December 2012.
Bio Pappel, S.A.B. de C.V. (CDURQ) is one of the largest paper producer in Mexico and the leader in the production of 100% recycled, recyclable and biodegradable paper throughout Mexico and Latin America. Founded 25 years ago, Bio PAPPEL’s goal of sustainability includes environmental protection and social responsibility. The paper industry is the largest global consumer of wood. Wood pulp is a key raw material for paper production. However, Bio Pappel has replaced the use of forest woods in its paper products production, instead using urban woods (paper recycling). The company has invested over USD $500 M in the past 10 years in its recycling technology. In 2011, the company recycled 1.5 million metric tons of paper, which is equivalent to saving 685 thousand trees. Bio Pappel is the only Mexican company to obtain “FSC-Certification 100% Recycled”.
Bio PAPPEL currently has 31 manufacturing plants in the lower US and throughout Mexico, and currently employs 7,500 people. It has a broad and diversified customer base in Mexico and the USA, which includes most of Mexico’s top 500 companies.
Bio Pappel has registered two solid years in 2013 and 2014 with EBITDA margins of 16% and 15.6% respectively. The company has also made significant progress in reducing its debt, paying down USD $50 million of debt in 2013 and an additional USD $50 million in 2014. The 2014 debt payment prompted an outlook upgrade from Fitch ratings, from a Stable rating to a Positive rating for the company.
As of 12/31/2014, Bio Pappel had cash on hand of USD $90.4 M. For Q4 2014, it had operating income of USD $22.9 M and interest expense of USD $6.3 M, for a healthy interest coverage ratio of 3.6x.
The New Scribe / Bio Pappel Company
The newly combined Bio Pappel / Scribe company will have 10,000 employees with 35 production sites across Mexico, the southern United States and Columbia. More impressively, the company will be the largest, most integrated manufacturer of paper and paper products in Latin America, controlling an impressive, estimated 18 – 20% share of the Mexican market for pulp, paper and cardboard. The next closest competitors are Copamex and Papel San Francisco, each with a much lower 4.8% market share.
In regards to the pending acquisition, Scribe has received approval for its consent solicitation from a majority of the bondholders of these 8.875%, 2020 Notes. As a result, Scribe has issued a supplemental indenture, which amends the definition of Permitted Holders so that the acquisition does not constitute a “Change of Control”.
The default risk is Grupo Papelero Scribe’s ability to perform. With dominant market shares of 75% and 80% in the school products and notebook sectors, as well as the nearly 20% Mexican market share for pulp, paper and cardboard for the new Bio Pappel / Scribe acquisition, we think the higher yield these bonds offer significantly outweighs the default risk that we can identify.
Although the bigger and more diverse Scribe / Bio Pappel company will be the leading Latin America paper and paper products manufacturer, it will still be smaller than some of the larger, multi-national paper companies such as International Paper Company and Weyerhauser. As such, it may face increased competition from these larger, better-financed companies, both in the marketplace and in demand for raw materials.
Grupo Papelero Scribe’s primary raw ingredient in the production of its paper and notebooks is wood pulp. The cost for pulp is directly affected by trends in international and domestic prices, which come from market fluctuations beyond Scribe’s control. A significant increase in the cost of pulp could have negative impacts on the company’s financial results and profitability. Although wood pulp prices are forecasted to rise moderately over the next few years, increasing consumer and industrial demand for paper and paper products should allow manufacturers and suppliers to pass on price increases to the end user. Additionally, Bio Pappel’s sustainable practice of using primarily recycled materials could help to lower Scribe’s raw material costs moving forward.
Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. While this service typically enable retail clients to achieve higher yields and broader diversification in different industries as well as in different countries, it also may result in a lack of liquidity for issues that are not held to maturity.
These 8.875% couponed, 60 month, Yankee bonds appear to have similar risks, maturities, and yields to other bond issues previously reviewed on Bond-Yields.com, such as 9.15% Vanguard Natural Resource Bonds, 8.1% Japfa Comfeed Bonds, and 7.75% Hidroelectrica Bonds.
Summary and Conclusion
After giving considerable thought to Grupo Papelero Scribe’s operations and its pending acquisition by Bio Pappel, the leading paper recycling company in Latin America that we reviewed and have followed for over 2 1/2 years, we think that these longer 5 year bonds might offer a very savvy and strategic extension of the high yielding Bio Pappel bonds that continue to be one of the portfolio’s top performing issues, but is subject to be called at par and is due to mature in 2016. Although currently trading at a slight premium, even without regulatory approval of the acquisition we believe these U.S. Dollar bonds from Grupo Papelero Scribe offer outstanding cash flow and yield relative to the risks we can identify, and are targeting over 8.5% yields for them in our FX1 and FX2 High Yield Global Income portfolios.
Issuer: Grupo Papelero Scribe S.A. de C.V.
Yield to Maturity: ~8.6%
Disclosure: Durig Capital and certain clients may have positions in Scribe 2020 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
To know more about this Scibe bond call our fixed income specialist at 971-327-8847