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Grupo Kaltex, Coltejer, Comercializadora Círculo CCK 18 April 2018

Shareholder Profile: Kalach Family Mexico

SHAREHOLDER-RELATED RISK (see Risk Factors for details)

Succession Risk Transfer of wealth and control

Low

Of Kaltex’s nine board members, seven are second-generation family members in their 50s, 60s and 70s. Chairman and CEO Rafael Kalach Mizrahi has been the family’s most prominent member since the 1980s. His sons Moisés, Carlos and Michel hold executive positions.

Political Risk Political exposure and government relations

Moderate

Kaltex’s business could be affected by NAFTA renegotiations (in which Moisés Kalach Balas is involved), with exports to the US accounting for roughly a quarter of revenues.

Legal & Regulatory Risk Lawsuits and regulation

Low

Rafael Kalach Mizrahi is among 87 Mexican nationals named in the Paradise Papers as owning offshore companies, which the government has said it would invstigate. Kaltex has faced minor anti-trust sanctions.

Transparency Risk Structures of ownership and control

Moderate

Little detail is available on shareholdings of Kaltex and other family companies, and individual stakes are not disclosed. Colombia-listed subsidiary Coltejer pro-vides more disclosure but does not speci-fy ultimate controlling shareholder stakes. Part of the family’s stake in Col-tejer is held via UK holding companies.

Governance Risk Corporate governance

Moderate

Deloitte issued a qualified opinion on Kaltex’s 2017 results, citing failure to reclassify debt as short-term after loan covenant breaches. Audited results also differed from unaudited ones, showing a new loan from Kalach family companies and a MXN 114m drop in cash balance.

Expansion Risk Growth and diversification

Moderate

Kaltex’s growth has been focused on its core textile-related business, but the family’s rapid expansion of its conven-ience store business represents a major new undertaking that could compete with Kaltex for financial resources.

Credit History Risk Shareholder history and reputation

Low

While the financial deterioration of Kaltex following its 2017 bond issuance was dramatic and unexpected, Kaltex and other Kalach family companies do not appear to have a history of default. The family issued a MXN 1.03bn loan to Coltejer in 4Q17, and has provided other financial support.

Ratings indicate the probability of business disruption or investment loss. High: over 50% or already occurring; Low: not of concern in the foreseeable future

INTRODUCTION

The Kalach family controls Grupo Kaltex SA de CV (B/B-), a Mexican textile manufacturer and distributor with subsidiaries in the US and Colombia. The business has its origins in a textile warehouse founded by six Kalach siblings in the 1920s after immigrating from Syria. Since the 1980s, the group has been led by second-generation chairman and CEO Rafael Kalach Mizrahi, and seven of nine board seats are held by second-generation family members. Rafael’s eldest son, Moisés Kalach Balas, represents Mexico’s private sector in trade talks as head of international negotiations for the country’s main business lobby (Consejo Coordinador Empresarial).

Kaltex’s key segments are textile manufacturer Kaltex Textiles, Kaltex Internacional (which manufactures and distributes textiles outside Mexico) and Kaltex Comercial (a clothing and bedding retail chain whose main subsidiary is Grupo Milano SA de CV). The group’s main acquisitions have been Coltejer SA, a Colombian-listed textile maker acquired in 2008, and apparel retailer Grupo Milano, bought in 2012. The family also controls Comercializadora Círculo CCK SA de CV, whose Circle K brand is Mexico’s third-largest convenience-store chain. Most of the stores were acquired via the 2014 purchase of Grupo Modelo’s Tiendas Extra. Rafael Kalach Mizrahi is chairman and CEO, and the family holds five of 11 board seats.

Kaltex had 2017 net revenue of MXN 17.2bn (USD 960m) and EBITDA of MXN 1.2m. The company returned to the international bond market in April 2017 after a hiatus of over a decade, with USD 320m 8.875% senior secured notes due 2022. Kaltex’s results deteriorated after the issuance, with the company citing rising input costs among other factors. At end-2017, Kaltex’s total debt was MXN 7.6bn. In 4Q17, 37.7% of revenue was from exports, with the US accounting for 28%. After making its second coupon payment this month, Kaltex’s cash balance was USD 19m, raising concerns about its ability to pay the USD 14.2m coupon in October, Debtwire reported.

Family support will likely be vital. In 4Q17, the family provided a MXN 1.03bn loan to non-guarantor subsidiary Coltejer. The family has allowed Kaltex, whose stores lease space from the family’s other companies, to delay rent payments without interest, and has provided one real estate assets, valued at USD 20-USD 25m, for sale.

Deloitte issued a qualified opinion on Kaltex’s 2017 results, noting that although Kaltex received waivers for breached covenants on loans from BNP Paribas and Santander, the debt should have been reclassified as current because the waivers were obtained after the balance sheet date. The covenants limit gross leverage to 4.5x; Kaltex’s gross leverage at end-2017 was 6.1x. The audited earnings also showed a drop in cash balance to MXN 431m, from MXN 545m in the unaudited 4Q17 financials. Kaltex attributed this to adjustments in payments to suppliers, Debtwire reported. The 2022 notes last traded at 87.

CONTENTS PAGE

Timeline 2

Family Members 3

Shareholdings 4

Affiliations 6

Risk Factors 7

Debtwire Coverage 8

The Kalach family controls textile manufacturer Grupo Kaltex SA de CV , which developed from a business founded in the 1920s by six siblings. Kaltex also owns over 650 retail stores and, with other Kalach family companies, owns Bogota-listed textile maker Coltejer SA.

The family controls Comercializadora Círculo CCK SA de CV, the operator of over 1,000 Circle K convenience stores in Mexico. The family’s shareholdings also include real-estate companies.

Kaltex’s results deteriorated after issuing a USD 320m bond in 2017, and its ability to pay the third coupon in October 2018 coupon may depend on financial support from the Kalach family.

Ilya Garger, Head of Due Diligence +1 212 686 5277, [email protected]

Luciana Leite, Family Business Research, Latin America +1 212 390 7809, [email protected]

Ben Miller, Managing Editor, Latin America +1 212 686 5354, [email protected]

https://www.debtwire.com/intelligence/view/prime-2618191

https://www.debtwire.com/intelligence/view/prime-2614299

mailto:[email protected]





TIMELINE

1920s Moisés Kalach Alfie and his five brothers, Syrian-Jewish immigrants whose family arrived in Mexico in the early 20th century, begin selling textiles in Mexico City. The business expands into distribution with the establishment of Textiles America SA.

1939 Textiles America establishes its first textile mill, which produces linings and satin from rayon and acetate fibers.

1956 The group opens its first textile finishing plant.

1980 Kaltex Fibers SA de CV is established to produce synthetic fibers, and begins operations in 1985 in Tamaulipas state.

1986 Textile home products manufacturer Kaltex Home SA de CV is founded.

1987 Kaltex America Inc is established to distribute textiles in the US. The group begins exporting textiles to the US, Central and South America and Europe.

1994 Kaltex Apparel SA de CV (now Manufacturas Kaltex SA de CV) is established, and begins operations the following year in San Juan del Río, Querétaro state.

1997 The family’s business is renamed Grupo Kaltex SA de CV (Kaltex).

2005 The Kalach family establishes Comercializadora Círculo CCK SA de CV to acquire the Mexican subsidiaries of US-based convenience store chain Circle K Stores Inc, which at the time has 14 outlets in Mexico.

2008 Kaltex acquires a 55% stake in Coltejer SA, a Colombian textile manufacturer then under debt restructuring, for USD 118m from Organización Ardila Lulle SA. At the time, Coltejer has operations in Colombia, Mexico, Ecuador, Venezuela, Argentina and the United States.

2010 Kaltex acquires a controlling stake in Nicaragua-based finished garments producer Grupo Argus (renamed Kaltex Argus SA).

2012 Kaltex acquires a controlling stake in apparel retailer Grupo Milano SA de CV, which includes the brands Milano, Melody and Home & Fashion and over 400 retail stores, from private equity firm Advent International Corp.

2014 Comercializadora Círculo CCK acquires Comercio y Distribución Modelo S de RL de CV, which operates the convenience store brand Tiendas Extra, from Anheuser Busch Mexico Holdings S de RL de CV for USD 350m, according to El Financiero. The acquisition includes 872 branches, which brings CCK’s total number of locations to 1,096. The acquisition is partly financed with a MXN 675m amortizing loan from Anheuser Busch Mexico Holdings due June 2018. Kaltex builds a 36-megawatt power plant to supply energy to its textile mills.

2016 Kaltex Comercial SA de CV acquires an additional 20% stake in Grupo Milano from privately-owned Kalach family holding companies Vigoris SA de CV and Mosjak SA de CV for USD 37.2m, partly financed by a USD 28.5m loan from the two companies.

2017 Kaltex issues USD 320m 8.875% senior secured notes due 2022. It acquires the remaining 49% stake in Kaltex Argus SA for MXN 63m. In May, its bonds fall from roughly 98 to 82 after 1Q17 results reveal a 65% year-over-year decline in consolidated EBITDA, attributed to an increase in raw-material prices. In November, after 3Q17 results show another decline in EBITDA of 54%, the bonds fall from 92 to 75.

Sources: Company filings and websites, press reports.



FAMILY MEMBERS

Note: This chart is based on public information and is not intended to be comprehensive. It includes only individuals relevant to the family business.

Other Family Members

David Kalach Mizrahib. 1956

Director since 2001 and treasury executive of Grupo Kaltex SA de CV

Adolfo Kalach Mizrahib. 1949

COO of Grupo Kaltex SA de CV; director since 2001; director of National Textile

Association (Conantex); former

president of National Textile Industry Chamber (Canaintex)

Moisés Kalach Alfie

Co-founded the predecessor of Grupo Kaltex SA de CV with his five siblings;

immigrated from Syria with family in the

1900s

Marcos Kalach Mizrahib. 1954

Director of Grupo Kaltex SA de CV since 2001

Rafael Moisés KalachMizrahi

b. 1946

Chairman and CEO of Grupo Kaltex SA de CV since 1982; chairman of Kaltex

Comercial SA de CV and Kaltex Textiles

SA de CV; general manager of Coltejer SA; director of Comercializadora Círculo CCK SA de CV; director and executive of Grupo Carso SAB de CV and Teléfonos

de México SAB de CV since 1995; director of Sears Operadora de México SA, Sears Roebuck SA de CV, América

Móvil SAB de CV, Grupo Sanborns SAB

de CV; former director of Banco Nacional de Mexico SA and Acciones y Valores Banamex Casa de Bolsa SA de

CV

Moisés R. Kalach Balasb. 1973

Director of Confederation of Industrial Chambers (Concamin), Coordinating Business Council (CCE) and the CCE's

International Negotiations Strategic Consulting Council (CCENI); member of APEC Business Advisory Council; former

president of the National Textile

Industry Chamber (Canaintex) (2012-2015); former chairman of Mexican

Business Coalition for the Trans-Pacific Partnership; shareholder of UK-based

investment company Veritas Investment SP

José Kalach Alfie

Co-founded the predecessor of Grupo Kaltex SA de CV with his siblings

Rafael Kalach Atrib. 1952

Director of Grupo Kaltex SA de CV since 2001

Alfredo Kalach Atrib. 1967

Director and executive of Grupo Kaltex SA de CV since 2001

José Kalach Atrib. 1960

Director of Grupo Kaltex SA de CV since 2001 and deputy CEO; director of

Comercializadora Círculo CCK SA de CV;

representative of the the National Textile Industry Chamber (Canaintex) in

the Energy Commission of the Confederation of Industrial Chambers

(Concamin)

Carlos Kalach Balasb. 1975

Founder, director and deputy CEO of Comercializadora Círculo CCK SA de CV and director of Tiendas Extra SA de CV;

shareholder of UK-based investment companies Waldorf One Ltd and Gamma

Investment SP

Michel Rafael Kalach Balasb. 1982

Executive of Grupo Milano SA de CV, former executive of Kaltex Comercial SA de CV and Comercializadora Círculo CCK

SA de CV; shareholder of UK-based investment companies Waldorf One Ltd

and Gamma Investment SP

Alberto Kalach AlfieWife: Celia Romano

Co-founded the predecessor of Grupo Kaltex SA de CV with his siblings; co-

founded Avante Textil SA de CV in 1990

with his sons

Rafael Kalach Romano

Chairman and co-founder of textile company Avante Textil SA de CV

Adolfo Kalach Romanob. 1959

Co-founder of textile company Avante Textil SA de CV; director of

Concentradora Fibra Danhos SA de CV;

worked at Grupo Kaltex SA de CV for 16 years

Luis Moussali Mizrahi

Gabriel Mizrahi Zonana

Director, executive and shareholder of Concentradora Fibra Danhos SA de CV

Former executive of of Grupo Kaltex SA de CV and Comercializadora Círculo CCK

SA de CV (1998-2007); executive of

Northgate CFI S de RL de CV since 2013; former executive of Promecap SA de CV

(2007-2013)



SHAREHOLDINGS: GRUPO KALTEX SA DE CV

Note: This chart is based on public information. It contains key companies but is not intended to be comprehensive. USD bonds and market capitalization are included where relevant. Family shareholdings are italicized. Companies are domiciled in Mexico unless otherwise noted.

Kaltex OM 2017

Kaltex 2017 Kaltex 2017 Kaltex 2017 Kaltex 2017

Kaltex 2017 Kaltex 2017

Kaltex 2017 Coltejer Website 2017

Kaltex 2017 Coltejer Website 2017

Kaltex 2017

Kaltex 2017

MCap COP 71bn Website 2017

Kaltex 2017 Energy



Kaltex 2017

Coltejer 3Q17

Kaltex 2017

Coltejer 3Q17

& Distribution (Non-Mexico) & Distribution

Textile Distribution

Synthetic Fiber

Logistics

Textile Sales

Financing

Textile Manufacturing Bedding and Clothing Retail Textile Manufacturing Bed and Bath Products

Grupo Kaltex SA de CVCEO & Chairman: Rafael M. Kalach

MizrahiDeputy CEO: José Kalach Atri & MDirectors: Adolfo Kalach Mizrahi,

David Kalach Mizrahi, Rafael Kalach Atri, Marcos Kalach Mizrahi, José

Kalach Atri, Alfredo Kalach Atri & 2 others

Kalach Family (majority stake)

Kaltex EnergíaSA de CV

Grupo Kaltex SA de CV 100%

USD 320m 8.875% sr secured notes due 2022

Energía MKKF SA de CV

Subsidiary of Kaltex Energía SA de CV

Coltejer SA (Colombia) [BVC: COLTEJ]

Kaltex Latino America SAS 47.49%Grupo MCM Colombia SAS 15.43%

Kaltex America Investments Inc 12.77%

Vigoris SAS 3.43%Mosjak SAS 3.43%

Gamma Investment SP 2.29%Veritas Investment SP 1.43%

Patrimonio Autonomo Tenedores Notas TEC 6.60%

Comercial Coltejer SAS(Colombia)

Coltejer SA 100%

Fideicomiso Cartera Comercial Coltejer SA

(Colombia)

Coltejer SA 100%

Kaltex Latino America SAS

Kaltex Internacional SA de CV

Kaltex America Investments Inc


Grupo Milano SA de CV

Kaltex Comercial SA de CV 72%

Revman International Inc (NY)

Kaltex Home Inc

Kaltex Textiles SA de CV

Grupo Kaltex SA de CV 73.7%

Kaltex North America Inc (NY)


Kaltex Colombia SAS


Kaltex Comercial SA de CV


Kaltex Internacional SA deCV


Manufacturas Kaltex SA deCV


Kaltex Fibers SA de CV


Kaltex Home SA de CV


Adcorp TCLA SA de CV


Kaltex America Inc (NY)


Milano Inmobiliaria SA de CVMilano Operadora SA de CVMilano Representaciones e

Importaciones SA de CVMilano Servicios Corporativos SA de

CV

Kaltex Home Inc (NY)


Kaltex Argus SA (Nicaragua)

Kaltex Textiles SA de CV 100%



SHAREHOLDINGS: PRIVATELY-OWNED COMPANIES

Note: This chart is based on public information. It contains key companies but is not intended to be comprehensive. USD bonds and market capitalization are included where relevant. Family shareholdings are italicized. Companies are domiciled in Mexico unless otherwise noted.

Kaltex FS2017 CCK bond 2018 Kaltex FS2017 Companies House

Kaltex FS2017 Kaltex FS2017

CCK bond 2018 Companies House

CCK bond 2018 Kaltex FS2017

Companies House

CCK bond 2018

Kaltex FS2016

Companies House

CCK bond 2018

Kaltex FS2016

CCK bond 2018

Kaltex FS2016

CCK bond 2018

CCK bond 2018 Kaltex FS2016

CCK bond 2018

CCK bond 2018

CCK 2018 prospectus

CCK bond 2018

Kaltex FS2017

CCK bond 2018

CCK bond 2018

CCK bond 2018

Administrative Services

Retail (Convenience Stores)

Fuel Retail

Financial Services

Retail (Convenience Stores)

Real Estate

Administrative Services

Real Estate

Holding Companies Telecom Holding Companies Investment Management

Real Estate

Ready Made Meals

Kaltex Inmobiliaria SA de CV

Owned by the Kalach family

Grupo MCM Colombia SAS

Grupo MCM SA de CV

Grupo AdministraciónCorporativa SC


Inmobiliaria Los Mejía SA de CV


Mosjak SA de CV


Vigoris SA de CV


Rancho Los Mejías SA de CV


Inmobiliaria Emilio Castelar SA de CV


Inmobiliaria Mago SA de CV


Grupo MCM SA de CV


Comercializadora Círculo CCK SA de CV

Directors: Rafael M. Kalach Mizrahi (Chairman & CEO), José Kalach Atri, Carlos Kalach Balas (deputy-CEO),

Adolfo Kalach Mizrahi, David Kalach Mizrahi & 6 others

Grupo MCM SA de CVGrupo Tribeca SA de CVGrupo Laboris SA de CV

Impulsora Círculo CCK SA de CV


Inmobiliaria Círculo CCK SA de CV


Convegas SA de CV

Inmobiliaria Círculo CCK SA de CVImpulsora Círculo CCK SA de CV

Convegas del Valle de México SA de CV

Convesgas de San Luis Potosi SA de CV

Convegas de Sinaloa SA de CV

Operadora Círculo CCK SA de CV


Telecomunicaciones CCK SA de CV


EK Conveniencia SA de CV


Operadora Círculo CCK SA de CV

Alimentos CCK SA de CV


Soluciones Financieras CCK SA de CV


Comercio y DistribuciónModelo S de RL de CV


Inmobiliaria Exmod SA de CV

Comercio y Distribucion Modelo S de RL de CV

Tiendas Extra SA de CV


Extraser SA de CV


Administración Corporativa ADCORP SA de CV


Waldorf One Ltd (UK)

Carlos Kalach BalasMichel Rafael Kalach Balas

Gamma Investment SP

Waldorf One LtdCarlos Kalach Balas

Michel Rafael Kalach Balas

Veritas Investment SP

Regent Elite LtdMoises Kalach Balas

Regent Elite Ltd

Moises Kalach Balas



AFFILIATIONS Relationships with individuals, companies and institutions

Banco Nacional de México (Citibanamex)

Rafael Moisés Kalach Mizrahi is a former director of Banco Nacional de México SA (Citibanamex, which was acquired by Citigroup in 2001) and Acciones y Valores Banamex Casa de Bolsa SA de CV, a brokerage that belongs to the same group (Grupo Financiero Banamex SA de CV), according to Kaltex’s 2017 bond prospectus. As of December 2016, Kaltex had two revolving loans from Citibanamex with a total of MXN 83m outstanding. Kaltex had no loans from Citibanamex at end-2017.

Concentradora Fibra Danhos SA de CV

Concentradora Fibra Danhos SA de CV is a real estate investment trust listed on the Bolsa Mexicana de Valores (BMV). Its mar-ket capitalization was MXN 43.6bn as of 13 April 2018. It is controlled by the Moussali family, the Daniel family and Esther Monique Guindi Hemsani. The Moussali family includes Luis Moussali Mizrahi. Moussali and Adolfo Kalach Romano are direc-tors of Concentradora Fibra Danhos, and Moussali and Rafael Kalach Romano are members of its technical committee. Adolfo Kalach Romano worked at Kaltex companies for 16 years, and founded textile company Avante Textil SA de CV, which he con-trols with brother Rafael. The Kalach Romano brothers are sons of Alberto Kalach Alfie, one of Kaltex’s founding siblings (see family tree).

Grupo InterBolsa SA

Grupo InterBolsa SA is a Colombian stock brokerage that acquired a stake in Coltejer in 2008. Kaltex had expressed interest in acquiring Coltejer, but wanted the company to first clean up its balance sheet and restructure debt, former Coltejer CEO José Roberto Arango, who was hired during the company’s debt restructuring process, told El Espectador. Interbolsa acquired MXN 37.5m in Coltejer’s debt in exchange for a 10% stake in the company, according to Portafolio. Kaltex then acquired a controlling stake in Coltejer for the equivalent of USD 118m, partly through the acquisition of labor liabilities. In 2012, InterBolsa an-nounced that it was facing liquidity problems and Colombian regulator Superintendence of Societies (SFC) ordered its reorgani-zation. InterBolsa completed its reorganization in April 2016, Portafolio reported. Interbolsa had a 0.24% stake in Coltejer as of June 2017.

Moisés Kalach Balas: International Negotiations Councils and Industry Chambers

The Coordinating Business Council (Consejo Coordinador Empresarial, or CCE) is a lobbying organization representing Mexi-co’s private sector. Moisés Kalach Balas, the son of Kaltex CEO Rafael Kalach Mizrahi, is a director of the CCE and head of its International Negotiations Strategic Consulting Council (CCENI), through which he is involved in North American Free Trade Agreement (NAFTA) renegotiations, according to press reports. He is also a member of a group of 150 Mexican business leaders who have been called on to participate in NAFTA-related discussions with President Enrique Peña Nieto and Secretary of Econ-omy Ildefonso Guajardo. Kalach Balas has criticized President Donald Trump’s rhetoric against NAFTA, as well as recent steel tariffs, and called for US business leaders to support the agreement. Kalach Balas has said the negotiations are expected to con-clude before Mexico’s presidential elections in July, El Economista reported in April. In 4Q17, exports to the US accounted for 28% of Kaltex’s revenue. Kalach Balas is also a director of the Confederation of Industrial Chambers (Concamin), a member of the APEC Business Advisory Council (to which he was appointed by Peña Nieto in 2013) and a member of the Mexico-China High-Level Coordination and Cooperation Committee. He was president of the National Textile Industry Chamber (Canaintex) from 2012 to 2015, and is the former chairman of the Mexican Business Coalition for the Trans Pacific Partnership (TPP).

In November 2009, Kaltex and two other Mexican textile companies requested that the Secretariat of Economy investigate alleged unfair trade practices by China. Canaintex argued in favor of tariffs on Chinese textile imports, but the official investiga-tion concluded in October 2011 with no tariffs imposed.

Jaime Cuauhtémoc Morales Vázquez

Jaime Cuauhtémoc Morales Vázquez has been a director and CFO of Kaltex since 2010. He was previously director of corpo-rate development at Mexichem SAB de CV (click here for Debtwire’s profile on the Del Valle family, which controls Mexichem) and an executive in the financial division of Dow Chemical Co (1986-2007). According to the Paradise Papers, leaked docu-ments on offshore companies, he is also a director at Bermuda-based General Administration Partners and Risk Management Ltd, of which Rafael Kalach Mizrahi is president.

Carlos Slim (Grupo Carso)

Rafael Kalach Mizrahi is a director at numerous companies controlled by Carlos Slim, and Slim’s Banco Inbursa SA is a creditor of Kaltex. Rafael Kalach Mizrahi has been a director and executive of Grupo Carso SAB de CV and Teléfonos de México SAB de CV since 1995, and is a director of América Móvil SAB de CV, Grupo Sanborns SAB de CV, Sears Operadora de México SA and Sears Roebuck SA de CV, which are controlled by Carlos Slim.

At the end of 2015, Kaltex had MXN 254m outstanding on a syndicated loan from Inbursa, Banco Nacional de Mexico SA and Banco Santander SA, and MXN 240m outstanding on two loans from Inbursa. By end-2016, Kaltex’s debt to Inbursa had de-creased to MXN 101m outstanding on a single loan. At end-2015, debt to Banco Inbursa represented approximately 4% of Kaltex’s total. The figure fell to 1.7% in 2016, and Kaltex had no loans from Inbursa at end-2017.

https://www.debtwire.com/document-repository/document/rygS8LIguMhttps:/www.debtwire.com/document-repository/document/rygS8LIguM/USA-NYC-FP02/DesktopMyDocuments$/lucianal/My%20Documents/Add-in%20Express



RISK FACTORS Legal issues, conflicts and controversies

Worker-safety and labor issues (2010-2018)

After an October 2010 fire at Kaltex’s Tepeji del Río plant, Mexico’s Protección Civil emergency-services agency reportedly found irregularities related to the incident, including a three-hour delay in reporting it, according to local news website El Inde-pendiente de Hidalgo. A Protección Civil employee was cited in the report as saying that the building had already collapsed by the time authorities arrived. Employees also told to El Independiente de Hidalgo that the fire might have been avoided if the company had not laid off five safety employees earlier that year. According to the same report, the fire was only contained four days later and caused MXN 300m in damage. El Independiente de Hidalgo reported that Labor and Social Welfare Secretariat director Daniel Ludlow Kuri said Kaltex had always shown a “difficult and reluctant” attitude towards labor inspections, and had not shown willingness to improve conditions to comply with requirements. In March 2018, one person died in another fire in the Tepeji del Río plant. The matter will be investigated by prosecutors, La Jornada reported.

Employees of Kaltex’s San Juan del Río plant held a strike for two weeks in May 2015, on the grounds that the company had not distributed a profit-based bonus for 2014, to which they claimed they were entitled. According to El Universal, employees dis-puted the company’s claim that it did not make a profit in 2014, and filed a complaint with the Labor and Social Welfare Secre-tariat. According to local news website AM de Querétaro, employees also accused the company of not paying for overtime and paid holidays, and demanded better contract terms. The employees were represented by the national textile workers union and the Confederation of Mexican Workers. The company denied violating labor laws. According to El Universal, Kaltex and its em-ployees signed an agreement weeks later regarding payment for overtime and holidays, but the agreement did not address the bonus.

Paradise Papers (2017)

According to the Paradise Papers, offshore financial documents leaked in 2017, Rafael Kalach Mizrahi is the president of Ber-muda-based General Administration Partners and Risk Management Ltd, established in 2013. Other directors include Kaltex legal representative Carlos Avelar Guerrero, former Kaltex legal executive Luis Roberto Gonzalez Castro and Kaltex CFO Jaime Cuauhtemoc Morales Vasquez. Kalach family company Administración Corporativa ADCORP SA de CV is named in Paradise Papers documents as a shareholder of General Administration Partners and Risk Management. Mexican tax authority Servicio de Administración Tributaria announced in November 2017 that it was investigating all 87 Mexican nationals named in the Paradise Papers for potential tax fraud and failure to declare offshore company ownership, according to Forbes.

Related-party Transactions (2013-2017)

Kaltex has substantial transactions with Kalach family companies. Kaltex reported a total of MXN 62.5m in related-party reve-nue and MXN 154m in related-party expenses in the five years from 2013 to 2017. In May 2016, Kaltex increased its stake in Grupo Milano by acquiring an additional 20% stake from Kalach family holding companies Mosjak SA de CV and Vigoris SA de CV for USD 37.2m, of which it still owes USD 28.5m. In 2017, Kaltex received USD 4.9m in loans from the two companies. Also in 2017, Kaltex subsidiary Coltejer received a MXN 1.03bn loan with 16.25% interest from family company Grupo MCM Co-lombia SAS to fulfill working capital requirements. The 16.25% rate is in line with interest on Kaltex’s main third-party loans, which ranged from 11.91% to 16.8% at end-2017. Other payables to Kalach family companies include MXN 157m in rents to Kaltex Inmobiliaria SA de CV for store leases. The Grupo MCM Colombia loan was disclosed in Kaltex’s audited 2017 financials, but not in its unaudited 4Q17 results. The family also plans to provide cash to Kaltex through the sale of property, Debtwire reported. The company’s accounts receivable and payable with related parties increased substantially at year-end 2017 com-pared to the previous year, to MXN 42m in receivables and MXN 1.19bn in payables. At end-2016, total accounts receivable and payable from related parties were MXN 20m and MXN 196m, respectively.

Grupo MCM SA de CV fine (2010-2016)

In 2010, Colombian corporate regulator Superintendencia de Sociedades (associated with the Ministry of Commerce, Industry and Tourism) opened an administrative investigation into a USD 16m investment made by Grupo MCM SA de CV in July 2008, which had not been reported until five months later. According to court documents, the Superintendencia de Sociedades fined the company COP 342m (USD 126,500) in 2011. The company appealed and the regulator confirmed the decision in August 2012. The state court, Tribunal Administrativo de Antioqua, upheld the fine in 2014. In 2016, Grupo MCM appealed to Consejo de Estado, the highest court for administrative cases, which revoked the fine. In its appeal, the company claimed the investment was made to fulfil obligations related to the acquisition of Coltejer, which was intended to save the company from liquidation. In revoking the fine, the court considered a new law passed in 2012 that changed the requirements for reporting foreign invest-ment.

Water Pollution (2012-2013)

In a 2012 report titled “Toxic Threads: Under Wraps” Greenpeace claimed that Kaltex’s plant in San Juan del Río discharged a “wide range of hazardous substances in wastewater”, including chemicals used in textile dyes and resin production. According to the report, only one inspection of the plant’s discharge process took place between 2007 and 2011. The chemicals identified in the samples are not regulated in Mexico, according to the report. Greenpeace claimed there had been “numerous complaints from local inhabitants about pollution of the river and of bad management of hazardous materials”. It cited to a 2004 study by Comisión Nacional del Agua (Conagua, associated with the Environment and Natural Resources Secretariat) and the UN mete-orological agency, which found that the Kaltex plant discharged 18m litres of waste per day. In December 2012, Greenpeace activists partly blocked the plant’s discharge pipe. Kaltex responded that its discharge controls exceed Mexican regulations.

According to the same Greenpeace report, Conagua and Kaltex were involved in a legal dispute in 2003 in relation to water pollution from the San Juan del Río plant. The dispute was reported to have been resolved. There were proposals by members of Congress to investigate water pollution by Kaltex and another company in 2007 and 2009, but the proposals were rejected by the Environment and Natural Resources Congressional Commission, according to the Greenpeace report and congressional documents. Federal prosecutors and the Sustainable Development Secretariat (Sedesu) told El Universal that Kaltex complies with water-treatment regulations.

After the Greenpeace report was published, Senator Carlos Alberto Puente Salas called in December 2012 for Conagua and the Environment and Natural Resources Secretariat to investigate water pollution by the San Juan del Río plant. The Senate ap-proved the proposal in April 2013. However, there do not appear to have been consequences for Kaltex.

Anti-trust fines (2001)

In 2001, Kaltex was fined roughly MXN 300,000 by Mexican anti-trust authority Comisión Federal de Competencia Económica (Cofece) for failing to provide timely notification of the incorporation of subsidiary Grupo K-Canelo SA de CV. According to Cofece documents, Kaltex had also been fined by the agency prior to 2001.



DEBTWIRE COVERAGE

10 Apr 2018 Kaltex to hold USD 19m in cash balance after 11 April bond coupon payment

03 Apr 2018 Kaltex discloses related party financing; obtains waiver for loan covenant breach

27 Mar 2018 Grupo Kaltex downgraded to 'B-' - Fitch

08 Feb 2018 Kaltex guides USD 90m-USD 100m FY18 EBITDA, gross leverage around 4.5x by year-end

07 Feb 2018 Kaltex 4Q17 EBITDA falls 23% YoY; cash balance of USD 29m at year-end

05 Feb 2018 Millicom, Kaltex and Cemex to release 4Q17 results this week – Earnings Calendar

08 Dec 2017 Kaltex: Analysts concerned about possible default in next 12 months

06 Dec 2017 Grupo Kaltex's IDRs downgraded to 'B'; on negative watch - Fitch

16 Nov 2017 Grupo Kaltex downgraded to B from B+ on weaker-than-expected profitability and credit metrics; outlook negative - S&P

02 Nov 2017 Kaltex seeks USD 45m-USD 50m from property sale; 3Q17 results send bonds plummeting

06 Sep 2017 Mexican USD borrowers benefit from Bancomext program to reduce FX risk

11 Aug 2017 Kaltex expects 8%-11% 2017 EBITDA margin, with focus on efficiency

19 May 2017 Kaltex 2Q17, 3Q17 expected to be stronger - CFO

16 May 2017 Grupo Kaltex releases 1Q17 unaudited results

11 Apr 2017 Grupo Kaltex added to high-yield universe

07 Apr 2017 Tierra del Fuego finally arrives; Mexico’s Kaltex debuts – LatAm Primary Wrap

06 Apr 2017 Grupo Kaltex prices USD 320 5NC3 bond at 8.875% yield

06 Apr 2017 Kaltex sets low 9%-area IPT for USD 300m 5NC3 bond

03 Apr 2017 Grupo Kaltex proposed issuance of up to USD 320m in senior secured bonds rated B+ by Fitch

03 Apr 2017 Grupo Kaltex proposed issuance of up to USD 320m in 2022 bonds rated B+ by S&P

28 Mar 2017 Grupo Kaltex plans roadshow

Disclaimer: We have obtained the information provided in this report in good faith from sources that we consider to be reliable, but we do not inde-pendently verify the information. The information is not intended to provide tax, legal or investment advice. We shall not be liable for any mistakes, errors, inaccuracies or omissions in, or incompleteness of, any information contained in this report. All such liability is excluded to the fullest extent permitted by law. Data has been derived from corporate disclosures, regulatory announcements, government publications, media reports, press releases, presentations and Debtwire intelligence.

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