Company's Distress Reveals Typical Latin American Issues

(TMA International Headquarters)

The winning bid, from an anonymous buyer, was $15 million. The seller, however, was well known in elite circles in the U.S. The prominent Argentine businesswoman and philanthropist had established scholarships to allow students from her country to study dance in New York and other disciplines at Harvard University and the Catholic University of America in Washington.

But with the sale of “Mary Cassatt,” Amalia Lacroze de Forabat was on a desperate mission to raise money to save Cementera Loma Negra, the largest cement company in Argentina and the jewel of Lacroze de Fortabat’s empire. Her holdings also include a railway, a large cattle ranch, horse stables, and two radio stations, among other enterprises.

The Loma Negra case touches on a common combination of factors that produce distress in Latin American companies. Sudden changes in macroeconomic variables generated by fiscal policy mismanagement, along with typical issues that arise in family businesses, the entrance of foreign competitors, a lack of appropriate management systems to help produce informed decisions, and inadequate vision and strategy combined to create a time bomb in the once highly profitable Argentine business.

The case also presents one of the most difficult situations for turnaround professionals in Latin America. This column discusses the steps taken to address the distress and touches on how the case would likely be resolved if the restructuring issues it presents were being addressed in the U.S. Information for this report was gathered from the October issue of the magazine AmericaEconómica; El Clarin , a large Argentinean business newspaper; Standard & Poor’s; and the company’s Web site (www.lomanegra.com.ar ).

Corporate renewal solutions available in the local Argentine market to Loma Negra apply mainly to the upper left-hand side of the balance sheet. Very little activity is evident in the right-hand or the lower-left-hand sides of the balance sheet.

The $15 million from the auction of the painting went directly into the badly hurting company, followed, almost predictably, by another $60 million. The cement company found itself in trouble because of a very bulky debt load, a steep drop in prices, a surge in the number of new multinational competitors, and a lack of family succession or next-generation leadership.

Free Fall

By September, despite the infusions of cash, the cement company could not meet its financial obligations. Loma Negra was caught in the collapse of the Argentine economy that led to a 300 percent devaluation of the peso, the freezing of the deposits of the general public in commercial banks, and a default on the country’s foreign national debt. Lacroze de Fortabat saw revenues converted to pesos from dollars, producing a free fall that dropped revenues below $100 million (U.S.D).

In 2001, Lacroze de Fotabat’s nine cement plants produced revenues of $260 million, and she realized another $67 million from Estancias Unidas del Sur, a group of 13 horse stables, and Ferrosur Roca, a port facility acquired a decade earlier to aid in the transportation of cement to other states.

In an effort to avoid default, Loma Negra began regnegotiating its debt with foreign creditors. According to press releases, the company had hired Morgan Stanley & Co. by July to refinance its creeping debt of $460 million, 76 percent of which was in U.S. dollars.

Morgan Stanley faced a formidable task in restructuring the debt. Loma Negra’s situation was further complicated by a huge drop in the ­consumption of cement, which reached 1962 levels after the devaluation of Argentina’s currency. The company found itself in the worst-case, post-devaluation scenario: Its declining revenues were paid in pesos, but it held high debts in dollars.

Competitive Landscape

For decades, Argentina’s cement companies faced no foreign competition, and few if any were prepared to compete against newcomers to the market that began appearing in the 1990s. Furthermore, thanks to Lacroze de Fortabat’s close political ties to various administrations over the years, Loma Negra had been a “preferred” supplier of cement to the government.

However, in a very short period of the 1990s, Loma Negra found itself surrounded by world players who financed their operations at lower interest rates. Despite the increased competition, however, Loma Negra experienced increased sales in 1997 and 1998.

Based on that, Alejandro Bengolea, Loma Negra’s managing director and Lecroze de Fortabat’s grandson, increased the company’s bet on the cement business, investing $250 million to expand one existing plant and build another, larger plant adjacent to it. Christened L’Amali, the new plant was outfitted with state-of-the-art technology. The expansion increased Loma Negra’s production capacity by 2 million tons, to 3.5 million tons.

By the time the new plant was finished, however, production overcapacity in Argentina caused prices to fall, and demand for cement soon dropped as well. The ­enormous debt that Loma Negra had taken on created a difficult-to-manage crisis.

Loma Negra’s creditors are an international group of financial institutions and include banks and bondholders. Morgan Stanley was charged with providing “oxygen” for Loma Negra so the company could avoid defaulting on payments that were due at the end of 2002. The mismatch between revenues and debts made it impossible to roll over the debt.

Imminent Sale?

According to recently published accounts, the management of the company so far has avoided red ink in its profit-and-loss statements. The hiring of Morgan Stanley increased rumors that Loma Negra was for sale. Loma Negra’s management, however, has flatly denied that their company is for sale.

That speculation was fueled by the visit two months ago of top executives from a large Swiss cement company, Holcim, to Buenos Aires for the first time since that company had bought Minetti y Corcemar, a Loma Negra competitor, several years ago. Holcim increased its market presence in Argentina after that acquisition through mergers and today, it holds a 33 percent share of the market for cement in the country.

Loma Negra has taken some basic steps aimed at turning around its situation. It has reduced its workforce, closed plants, and increased production at L’Amali, its most efficient plant. It continues to hold nearly 50 percent of the market for cement in Argentina.

The initial turnaround steps seem insufficient, however. EBIDAT fell from an average of 28.4 percent in 2001 to 20.3 percent by mid-2002. Holcim, which would control 80 percent of the Argentine cement market if it purchased Loma Negra, and Cemex, a large Mexican cement company without a strong presence in the region, could provide potential exits to the Loma Negra crisis. However, given the expectations of the Argentinean market and the ­company’s heavy debt, many analysts note that Loma Negra might not sell for enough to repay its creditors, let alone provide cash for shareholders.

Perhaps the presence of U.S.-type turnaround management firms and special-situation investors in Latin America would make it more profitable for creditors and shareholders alike to negotiate a sale to a multinational buyer.