Strategies & Market Trends : Cemex
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From: Glenn Petersen4/16/2012 6:31:48 PM
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Analysis: Debt renegotiation looms for struggling

By Cyntia Barrera

MEXICO CITY | Mon Apr 16, 2012 4:43pm EDT

MEXICO CITY (Reuters) - Mexican cement maker Cemex is likely to try and renegotiate a hefty portion of its debt in coming months to avoid a potential clash with creditors in 2014.

Monterrey-based Cemex ( CMXCPO.MX), which was swamped by the 2008 U.S. housing meltdown shortly after paying out some $16 billion to buy Australia's Rinker, has been working its way out of its deep debt troubles for the past three years.

The company has tightened its belt with cost cuts and non-core asset sales, but some doubts linger about year-end obligations and how quickly Cemex can convince creditors to rework the terms of an $8 billion debt coming due in 2014.

"There is no way that the company can pay at maturity (in 2014)," said Luis Martinez, a corporate ratings analyst at Standard & Poor's, whose Mexican ratings team believe Cemex will have to renegotiate the debt in the next few quarters.

The agency has a negative outlook on Cemex ( CX.N), mostly stemming from a belief that a slow global economy will take a toll on several of the company's 50-plus operations across the world.

Most of Cemex's debt commitments for this year have been covered. The 106-year-old cement company trimmed its liabilities by $131 million after a debt swap last month. Over the past two weeks, it also paid down $300 million in local debt.

But things get tougher in late 2013 as another $572 million falls due before hitting a peak in 2014, when over $8 billion in various debt instruments mature.

Debt has exacerbated problems at Cemex, which has posted annual losses for the past two years. In 2011 the net loss was $1.5 billion and total debt plus perpetual notes rose by 2 percent to $18.1 billion from a year earlier.

Servicing its debt alone is costing Cemex $372 million a year, according to research by Goldman Sachs.

Martinez at S&P believes Cemex will seek alternatives, exploring both refinancing with the banks and issuing more debt.

"The market still has room for Cemex risk," he said, adding he did not think the company would have trouble reaching a deal.

When asked if Cemex was thinking about renegotiating the maturities of its debt, vice president of corporate communications and investor relations Maher Al-Haffar told Reuters in a recent interview: "We are getting a lot of good ideas from the market. At this point in time, there is nothing we can comment on, but everybody wants to address that situation sooner rather than later."

Extending the maturities beyond 2014 may come at a price, however. Goldman estimated the annual cost of servicing the debt would rise to $720 million if Cemex goes down that road.


Foreign exchange hits and downturns in key European markets have hurt Cemex, which generates around 60 percent of its sales outside Mexico and the United States. Analysts do not expect it to return to positive territory any time soon.

"I think it will break even in 2013," said Francisco Chavez, an analyst with BBVA brokerage.

Some analysts think the company could make an announcement about its debt renegotiation by the summer.

Cemex's management has reassured investors that two key debt obligations with creditors, or covenants linked to its earnings generation, will be fully met in 2012.

They have yet to convince everyone though.

"The company remains deeply leveraged," warned analysts Francisco Suarez and Ramon Obeso, with HSBC Mexico.

Cemex has to cut funded debt, or the sum included in its 2009 refinancing deal, to 6.5 times earnings before interest, taxes, depreciation and amortization (EBITDA) in June. An even lower ratio of 5.75 times should be met in December.

Failure to meet the covenant goals could spark requests from nervous creditors for a higher rate of return on the debt - or even demands for early payment.

Cemex has said it plans savings of at least $200 million this year and asset sales for another $500 million, mostly from real estate holdings, which should improve its balance sheet.

Overall, HSBC estimates Cemex must sell assets or issue equity, or equity-linked securities, for $3.9 billion over the next two years if the company does not get a covenant waiver.


While there are some encouraging signs of improvement in the United States, one of Cemex's lifelines, there is no guarantee the slow recovery in the global economy will continue.

A narrowing of the loss in the fourth quarter and Venezuela's surprise decision to pay $240 million in December to settle a compensation claim from the 2008 nationalization of Cemex's business there, have given the firm some breathing room.

"The U.S. market is showing some recovery, but if that changes, it would be a very negative sign, particularly for the 2013 covenants," said Miguel Aguayo, deputy debt analyst with Banorte-Ixe. "And Spain is still struggling."

Cemex's 2013 covenants state the ratio of EBITDA to funded debt should fall to 5.0 in June and 4.25 in December.

Business in the United States has looked robust in the first months of this year, but Spain is mired in a downturn that has taken the jobless rate to 23 percent. The two countries account for about a third of Cemex's total installed capacity.

Industry projections, quoted by Cemex's Al-Haffar on a March 29 Reuters interview [ID:nL2E8ET7D4], show the company's U.S. cement volumes jumped at a double-digit rate in the first two months of the year, driven by good weather in the United States.

March is likely to have produced similar results, but the company remains cautious about the United States, where it will raise cement prices this month for a second time in 2012.

(Additional reporting By Gabriela Lopez in Monterrey; editing by Andre Grenon)
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