Emerging Markets Bond
South American Bond
Short Term High Yielding Bond
US Dollar Bond
Each week we scan the globe to identify companies issuing excellent income producing bonds with what we see as having the least amount of risk relative to its yield. While income investors remain challenged to find healthy yields domestically, we routinely identify more competitive yields from global companies that have significant market shares in their industries. This is the case for this week’s recommendation from Peru. Copeinca is the second largest fishing company in Peru and is Peru’s largest producer of fish meal and fish oil. Pacific Andes recent acquisition of Copeinca has placed it in the enviable position of possessing the quota rights to 31% of Peru’s annual anchovy catch. This is significant since the government of Peru is no longer issuing new fishing permits for the anchovy fishery. To gain entry to the fishery, new entrants would need to purchase existing quota rights. Pacific Andes considers these rights so valuable they are listed on its balance sheet as a non-depreciating asset at a value of $1.2 Billion USD. Attaining this level of control within Peru’s anchovy fishing quota has been a carefully calculated move by Pacific Andes Group, purchasing rights from other fishing companies in May 2010 and November 2011.
The issue carries a 9% coupon rate and is rated B with a stable outlook by S&P ratings. In early 2014, there were plans by Pacific Andes / China Fishery Group to redeem these bonds, but those plans have since been postponed. Given the significant quota share owned by Copeinca / Pacific Andes, coupled with the increasing global aquaculture production and corresponding demand for fishmeal and fish oil, we feel the nearly 9.6% yield currently indicated in its slightly discounted bond price presents an excellent opportunity for increasing portfolio income, and have added them to our high-yield, managed global income portfolios, Fixed-Income1.com and Fixed-Income2.com.
The Copeinca Story
Copeinca was founded by the Dyer family in 1994, acquiring its first processing plant, located in Bayovar, Peru. Copeinca’s core business is the production of fishmeal and fish oil from anchovies (also known as anchoveta) which are caught off the coast of Peru. Peru accounts for about a third of the annual, global fishmeal production. Fishmeal is an important component in aquaculture and livestock production as it is used to fatten farmed seafood, pigs and poultry. Nearly the entire Peruvian anchoveta catch gets ground up into feed and rendered into oil.
In December 2006, Copeinca successfully carried out a private placement of $100 Million (USD), consequently moving from a family-owned business to a group with approximately 150 shareholders. Then in August 2013, Pacific Andes’ subsidiary China Fishery Group acquired a controlling stake in Copeinca after a bidding war with Norwegian-based Cermaq ASA, at a price of $790 Million USD. The acquisition was completed in March 2014. Pacific Andes is an integrated fish and seafood products processor, who derives 58% of its total annual revenue from products sales in China. By acquiring Copeinca, Pacific Andes was able to combine its existing Peru-based operations with Copeinca’s to become Peru’s largest producer of fishmeal and fish oil.
In response to the collapse of the anchovy fishing industry in the mid-1970’s as well as the decreasing biomass of anchovy stocks, the Ministry of Production in Peru enacted a quota system in 2009. In addition to setting Individual Vessel Quotas (IVQ’s), this new system declared two distinct fishing seasons per year, set an ongoing minimum amount of existing fish stocks for reproductive purposes, and allowed the government to declare total annual quotas for the anchoveta catch based on total estimated fish stocks. Under this new law, companies may own multiple vessels and the shares (IVQ’s) attached to those vessels. Any individual or company wanting to enter the fishery would need to do so by purchasing vessels with the appropriate permits and associated shares. Copeinca, along with its parent company, Pacific Andes, currently owns 31.6% of Peru’s total annual anchoveta quota. These fishing rights help to ensure adequate supply to produce the fishmeal and fish oil, almost all of which is exported.
China claims 63% of Peru’s total annual fishmeal exports for aquaculture. Since 2010, Chinese fishmeal imports have increased nearly every year, sometimes by as much as 16%. With Chinese annual per capita fish consumption at 25 kg and increasing each year, the country is racing to keep up with demand. Through its Copeinca acquisition, Pacific Andes has created a powerful vertical presence in the Chinese seafood market.
Anchovy fishmeal is a major food source for aquaculture (farmed fish), as well as feed for poultry and pigs. China is the current leader in global aquaculture, producing 61.7% of all farmed seafood in 2012. China, the world’s second largest economy, has a growing middle class with increasing disposable income. Along with this comes dietary changes, namely, more meat and seafood consumption. With the demand for meat and seafood increasing in developing economies, such as China, demand for fishmeal will only increase, which will directly benefit Copeinca.
Ratings and Financials
Fitch ratings affirmed the B+ ratings on these $250 Million USD bonds reflecting Copeinca’s strategic importance for Pacific Andes, while S&P and Moody’s rate it at B and B2, respectively. The acquisition of Copeinca appears a positive step for Pacific Andes, as shown in its most recent 2014 fiscal year third quarter results. For the nine month period ending June 28, 2014, operating income increased 13.4% from the corresponding timeframe in 2013. Also, for the first half of its fiscal year (ending March 31, 2014), Pacific Andes recognized a six-fold revenue increase from its Peruvian fishmeal operations, growing from HKD$248M to HKD$1.587B, due in part to a recovery of Peru’s anchovy quota.
A portion of this $250 Million USD Yankee bond issue was issued in 2010 with the final installment issued in 2013, both due in 2017. Pacific Andes interest coverage ratio for the nine month period ending on June 28, 2014 is 2.14, down from 2.76 for the same time period last year. While this ratio has shown a slight decline, we feel the current ratio of 2.14 reflects more than sufficient income to cover interest payments. Current cash flow to debt ratio for the nine months ending June 28, 2014 is 8.1%
Pacific Andes subsidiary, China Fishery Group (CFG), has issued a consent solicitation to Copeinca’s bondholders that would allow Copeinca to transfer assets to CFG and would also allow Copeinca to guarantee debts of CFG. At the current time, this solicitation has not received approval, and as such, this existing bond issue remains separate from CFG’s liabilities.
There is one final interesting note on the value of the fishing and plant permits issued by the government of Peru. Pacific Andes (parent company of China Fishery Group) lists the value of these permits at $1.2 Billion USD on their balance sheet. While Peru is no longer issuing additional permits for entry into the anchovy fishery (nor for additional fishmeal processing plants), these rights are assigned to individual fishing boats, are transferable, and are therefore saleable. Also, they note that they have obtained legal counsel regarding the permits and indicate that these permits do not have a finite term and remain in full force and good standing as long as the applicable legal requirements are complied with. While there may be some debate as to the value that has been assigned to these permits, one cannot dispute the value of seemingly permanent rights to Peru’s rich anchoveta fishery and the corresponding production and sale of fishmeal and fish oil.
The default risk is Pacific Andes / Copeinca’s ability to perform. Pacific Andes appears to be in the process of moving away from one of its main business segments; the contract supply business of Alaska pollock in Russia’s northern Pacific area. The company saw a 53% decline for the first half of FY 2014 in that segment of its business. With no new contracts being signed in its contract supply business, fishmeal and fish oil stand poised to become one of Pacific Andes core businesses.
Another risk is environmental risk. The anchoveta stock can be and has been negatively affected by the El Nino weather pattern that materializes every three or four years. During El Nino years, anchoveta stocks have dropped significantly, consequently reducing the annual catch quota set by the Peru Ministry of Production. This reduces the amount of fishmeal than can be produced and sold. However, since demand drives price, and the demand for fishmeal still exists (and may even increase), the resulting price increases will partially offset the reduced inventories.
Geopolitical risk is always difficult to predict. Peru’s fisheries sector is a key component of their economy. The government has taken positive steps to ensure the longevity of the anchoveta biomass, but it needs to increase policing and accountability for all parties involved in the industry.
This bond issue is denominated in USD, so there may be a currency risk with respect to rate flucutations between USD and PEN (Peru’s currency.) As China is the largest customer for Peru’s fishmeal and fish oil, there is also a risk in the exchange rate fluctuations between the PEN and the RMB (Chinese Renminbi) may affect the company’s revenues or profits. However, we think this is minimal due to the commodity-like nature of its main product, fishmeal.
We believe that these 9.6% Copeinca bonds have similar features and risks as other high-yielding Yankee bonds from Latin America such as the 8.45% Camposol SA bonds, the 9.5% Alto Palermo SA (APSA), or the 8% Ceagro Agricola bonds which have been previously reviewed on Bond-Yields.com.
Summary and Conclusion
There is certainly no argument that Copeinca has a valuable asset in the permits and quota shares it owns for the Peru anchovy fishery. By combining Pacific Andes Group, Copeinca now has the resources to streamline its fishing efforts and fishmeal / fish oil production. Decreasing operating costs should translate to better profit margins for their products, and with the increasing demand for fish oil and fish meal for aquaculture, we think Copeinca is well-positioned to improve its profitability. Therefore, we believe that the 10% yields and high cash flow offered in these bonds make a strong, well diversified addition to our global high yield income portfolios, FX-1 and FX-2.
Issuer: Copeinca S.A. (Corp Pesquera Inca SAC)
Yield to Maturity: ~9.6%
Disclosure: Durig Capital and certain clients may have positions in Copeinca 2017 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.
Emerging Markets Bond
South American Bond
Short Term High Yielding Bond
US Dollar Bond
To know more about this Copeinca bond, call our fixed income specialist at 971-327-8847
Tell us what type of bonds your looking for or ask more about this Yankee bond.