Wednesday, 11 March 2009

Cemex Downgraded by S&P; Cash Flow Generation Prospects Seem to Be the Main Concern For Now

Standard and Poor's downgraded Cemex's debt ratings to B- from BB+, a cut of five notches. Let's first see what S&P defines as a BB-rated and a B-rated credit and then we continue with the analysis of the ratings company's decision:

BB: An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.

B: An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

So S&P still 1) trusts on the ability of Cemex to refinance its obligations; 2) believes that serous financial conditions are impairing the issuer's ability to refinance its obligations, and; 3) is sure that conditions have turned even more challenging since Monday's announcement that it was pulling the bond sale and began a refinancing process with its main lenders. The decision to downgrade Cemex reflects S&P's concern that free cash flow generation won't be enough to meet debt payments and operational commitments satisfactorily. The cash flow deficit might jump to as high as $2 billion this year. Says S&P: ''We remain concerned that depressed asset prices and the dearth of credit around the world will put additional hurdles to its refinancing efforts and asset sales, making the company's access to new funds will either take longer than initially expected or smaller than originally estimated.´´ The translation into English is mine. Apologies.

The downgrade decision is, thus, purely speculative. Although it is supported by a series of facts: one, that the company faces $1 billion in debt maturities by April and it may generate free cash flow of less than $1.3 billion on average during this year. Two, that it also faces $2.4 billion in maturities in the fourth quarter; its main markets (U.S., Spain and Mexico) are in deep crisis. We will see how the renegotiation talks go ... and after that we will learn with anticipation whether S&P and the other rating agencies will continue slashing Cemex's ratings.

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