Tuesday, 10 March 2009

Cemex Announced Plans to Restructure $14.5 Billion of Debt. Bond Sale Scrapped

Cementos Mexicanos SA, the famous Cemex and No. 3 cement producer in the world, kicked off a $14.5 billion debt restructuring effort with banks. It also scrapped a plan to sell a dollar-denominated benchmark size issue as conditions in capital markets deteriorated. We heard from a source that the issue had lost considerable appeal by Thursday, when the size has been chopped and yield talk was reaching 16 percent to 18 percent.

Cemex said yesterday in a statement that it will seek to meet all its obligations while it carries out the renegotiation talks. Completion of the renegotiation may require consent from all lenders. The company's main lenders include Banco Santander (reputation tarnished by the Madoff scandal and profit generation is at jeopardy following the pronounced recession in Spain,) HSBC Holdings (which stock plunged 24 percent yesterday in Hong Kong,) Royal Bank of Scotland (recently nationalised by the U.K. government), BBVA (well, another Spanish giant suffering in its home market) and Citigroup (well, the jewel of the crown as you imagine. Nearing nationalisation, the Citi empire is falling apart.) Negotiations, therefore, will be marked by intense pressure on both sides: on one hand the company feeling the pinch of a possible downgrade or default; on the other, banks trying to cut their exposure to highly-leveraged companies like Cemex.

Cemex is also considering selling assets in an effort to ''quickly achieve maximum financial flexibility.´´ This may hamper the ratings situation as you know -- the risk of selling assets in such an environment is catching low prices for them. A ratings downgrade is almost certain in such event -- asset sales.

The loan restructuring announcement followed recent warnings by rating agencies that the company faces a downgrade if it fails to refinance more than $4 billion to $6 billion in obligations due this year. The company has struggled to obtain refinancing for short term loans used to buy rival Rinker Group last year. The cost of such acquisition was between $14 billion and $15 billion -- and the timing of the purchase couldn't have been worse, as the markets were beginning to experience the hangover of five years of economic boom and feast.

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