Wednesday, 25 February 2009

Cemex Must Raise $2 Billion Before April to Avert Downgrade. Asset Sales Likely Step if Bond Sale Fell Short of Goal

Cemex SAB announced yesterday it may tap international bond markets soon with a dollar-denominated, benchmark-size issuance. Bankers at Citigroup Inc., HSBC Holdings Plc. and Banco Santander SA are arranging investor meetings in New York City, London, the U.S. West coast and Europe to sell the idea -- and the paper -- to potential buyers. As we mentioned yesterday in a posting about investor inflows into emerging markets, the demand for this issuance possibly exists, it should be there. The problem might be the amount raised -- and the borrowing cost that investors will charge. For now, investors are focused on figuring out what cost of borrowing would be ideal -- based on the spread of the company's credit default swaps and market debt prices for competitors, according to a corporate debt analyst based in Mexico City. Given that, the note would be priced to yield at least 9 percentage points above Treasuries of comparable maturity, the analyst estimated. Oil company Pemex sold bonds at 8.125 percent; Petrobras of Brazil followed suit, but at a yield above 8 percent too. Different industries, yes, different terms, yes -- but different refinancing and liquidity conditions.

Standard and Poor's recently put Cemex's ratings under review for downgrade, citing the company's tight debt refinancing calendar for 2009 and 2010. Fitch downgraded Cemex yesterday to BB on concern the company's total adjusted net debt to EBITDAR ratio will remain above five times this year and about four times during 2010 (Fitch's definition of adjusted debt includes the perpetual debt instruments issued by Cemex, which are treated as equity under Mexican GAAP, as well as operating leases.) The ratings companies allege leverage metrics are worsening due to slowing activity in three key markets for the cement producer: the U.S., Spain and the U.K. These markets make up for about three-fourths of Cemex global revenue. S&P argues the company will have to divest some of its assets to make good on debt payments; such asset sales might be hampered by declining values and the paralysis of credit markets. The company has debt maturities of approximately $4.1 billion, $3.8 billion and $7.8 billion during 2009, 2010 and 2011, respectively.

The company is certainly making an effort to cover the shortfall in funding for the 2009 and 2010 maturities schedule. On Jan. 27, Cemex and banks agreed to reschedule $2.3 billion of short-term bilateral loans that fall due this and next years into terms that will result in $607 million maturing in 2009, $536 million in 2010 and about $1.2 billion in 2011. The company was also able to extend the maturity of $1.7 billion of a $3 billion obligation that was due in December 2009 until 2011. But if the company fails to raise the money (about $2 billion) before April, S&P will cut the BB+ rating -- that is our interpretation. As of Dec. 31, Cemex had total adjusted debt of $23 billion and cash and marketable securities of $993 million.

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