Todos tenemos un plan (Everyone has a plan) (Viggo Mortensen)
Everyone has a plan until they get punched in the mouth (Mike Tyson)
No plan survives contact with the enemy (Field Marshall Helmut von Moltke)
The Mexican government announced a unilateral reduction in airport tariff fees for the publicly operated and traded airport operators in Mexico. Word may have leaked out of the intent by Mexican President Emanuel Lopez (AMLO) in mid August, when he announced that he would not be changing the duration of the concessions, set at 50 years, but railed against the profitability of the operators.
“Do you know how much they make?,” he asked at his daily press conference on Aug. 10.
“Fifty percent per year! We respect the agreements, and that is why we are not modifying those concessions, but we can no longer continue with that policy. The government must be to serve the people, not to be a committee serving a minority,” Lopez Obrador said at the time.”
This harkens to the risk of any government authorized monopoly I indicated a while ago. A private monopoly must be always prepared for an adversarial government and must do what they can to maintain a responsible balance sheet, in the event of a change from a coexistence with regulators to an adversarial relationship. In Mexico, the relationship has now shifted.
Terms of the new, undoubtedly less profitable, rate schedule has not been made public at this time. The reasons for the lack of clarity, according to the executive operating Aeroportuario Del Pacifico (PAC) are that the wording was strong but the terms are vague. One could intimate that AMLO is attempting a renegotiation without resulting to a court challenge and will start with a highly punitive change to the tariff schedule, perhaps softening somewhat in the final wording. Alternatively, it could argued be that airport operators, having seen the initial wording, are utterly shocked at how this will impact profitability and don’t want to report even worse news than the market has already assumed.
As a result of this unilateral action, one without precedent in the Mexican public stock market, the entire Mexican Bolsa has declined by about 4.5% on the day of the news. The expectation is that more concessions will be subject to revisions to the terms of the contracts, and that corporations will either shut up and accept what is being offered, or, alternatively, have the concessions cancelled outright.
The Gnostic Capital portfolio, a multi-decade long holder of both PAC and ASUR, has declined in value by about 3% on the news. This may, or may not be, the bottom for the Mexican airport operators. Even with a reduction in tariff fees in the range of 50%, both companies would still be extremely profitable, but given the flouting of the rule of law by the Mexican government, the risk of being wrong largely equals the reward of being right. The tide has, for now, gone out for Mexican investments in general and Mexican airport operators specifically. At best, this appears to be a multi-year workout.
There is a global theme that investors should explore in further depth, which indirectly addresses the question of why Mexico would seek to change a concession structure at all mid-stream.
I have opined on the wide move up in global interest rates for the better part of a year. My view is that corporations are largely unprepared for a permanently higher cost of funding. I believe that the public, as well paid as they are and will be in the future, still are unprepared for permanently higher costs of funding.
There is another sector, neither consumer nor business, in the global economy, and that is government. Given the global emphasis on perpetual government deficits, they would appear to be completely unprepared for structural, permanently higher, costs of borrowing. Take any western country and potentially triple their net borrowing costs should rates remain where they are into the end of 2025; government’s budgets will be untenable in some cases. Countries such as Mexico, as despicable as a unilateral contract breach appears to an equity investor, might just be getting ahead of the game if the goal is to preserve government budgets. In other profligate western nations, should interest rates remain at these current levels, interest costs to service debts in a few years could themselves match existing deficit levels, effectively doubling annual national deficits absent change. The incredibly painful reality is that government debts mature over a number of years and like homeowners, eventually, should rates persist, much of that debt will need to be refinanced at the prevailing rate of the day. Therefore, tax changes will almost certainly be coming for both consumers and for businesses globally to address the new cost of interest. Leftist governments will act first to remove profits from private corporations, but centrist governments, when push comes to shove, will effect whatever levers legally exist to change terms so as to continue deficit spending.
The days of free or cheap money have ended, for everyone.
Assume that more punches to the mouth may be in store.