Cemex seeks to soothe investor concern on $17.8 billion debt
Oct, 03 2011
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 (Mexico City) -- Cemex SAB Chairman Lorenzo Zambrano will seek to allay investor concern this week that the Mexican cement maker’s ability to repay $17.8 billion in debt has been eroded by a weakening peso and sagging U.S. construction demand.
Cemex has cut costs, pushed the bulk of debt maturities beyond 2013 and discussed selling peripheral assets without stemming a plunge in its stock, down 63 percent this year. Shareholders may find that Zambrano has few new tools to work with, said Carlos Hermosillo, head of equity research at Grupo Financiero Banorte SAB, the largest Mexican-owned bank.
“I see it as complicated for the company until you see a clear recovery in the U.S.,” said Hermosillo, who has a “sell” recommendation on the stock. “If there’s no recovery in the U.S., you can’t do a lot.”
Cemex, which increased its debt to pay $14.2 billion for Rinker Group Ltd. in July 2007, negotiated a $15 billion loan with bankers in 2009 to stave off default. Zambrano, who is also chief executive officer, had forecast the U.S. construction market, which peaked at 25 percent of Cemex sales, would recover by now, allowing the company to slash debt and resume growth.
Instead, debt is rising, forcing the company to renegotiate covenants under the bank financing agreement. Profit from Mexico, which accounts for more than half of Cemex’s earnings before interest, taxes and depreciation, are being hurt by a 7.7 percent drop in the peso this year before today.
Cost Savings
Zambrano, who will address investors and analysts during an all-day webcast, has fired workers and shuttered capacity to wring cost savings and efficiencies that will add $650 million to Ebitda by 2012. The company, based in the Monterrey suburb of San Pedro Garza Garcia, has sold assets, shares and bonds to pay debt and refinance half of the $15 billion loan due in 2014.
The moves haven’t been enough to assuage investors. F&C Asset Management Plc is shunning the shares, having owned them previously, said Martha Reyes, who helps manage about $3 billion in emerging market equities for F&C in London.
“The movement in the Mexican peso complicates things for them on the balance-sheet side,” Reyes said. “The outlook in the U.S., in particular, is not promising for them.”
Debt Covenant
At the end of June, 3 percent of Cemex’s debt was in pesos, 74 percent was in dollars and 22 percent was denominated in euros, Cemex said in its second-quarter earnings report. Cemex’s debt was higher than a financing covenant that sets a year-end limit of 7 times Ebitda.
The company is unlikely to meet the covenant and probably will have to negotiate with banks to reset it, said analysts including Benjamin Theurer of Barclays Bank Plc in Mexico City.
The banks, including Citigroup Inc. and HSBC Holdings Plc, may demand a fee, high interest rates and new shares as part of the covenant renegotiations, Theurer said. He raised his rating on the stock to “overweight” from “equal weight” on Sept. 26 after the shares dropped 27 percent last week.
Cemex fell 27 centavos, or 5.4 percent, to 4.73 pesos at 4:10 p.m. New York time in Mexico City trading. Cemex had the second-biggest percentage drop among the 35 stocks on the benchmark IPC index, which declined 1 percent today.
Even after posting seven quarters of net losses and Ebitda at about half of its peak in 2007, Cemex generates enough cash to pay its debt through 2013, Theurer said. It’s not in the banks’ best interest to drive too hard a bargain, he said.
‘Makes No Sense’
“The banks have enough trouble with European debt on their balances and they don’t want to force a company which is still paying its interest obligations on time every year, every month, into a distressed situation,” Theurer said.
The company would have difficulty finding buyers for its shares in a public offering or as convertible bonds now, Hermosillo said.
“An equity offering at current levels makes no sense,” Theurer said. “The banks know that and Cemex knows that.
As part of the 2009 financing agreement, banks forced Cemex to take a $446 million loss on the $1.7 billion sale of its Australian operations and to create new shares in a $1.78 billion public offering.
In a renegotiation last year of its debt covenant, the banks required Cemex to sell at least $1 billion of equity- linked securities to avoid higher interest rates.
Banks may ask Cemex to raise more in equity to offset costs of a step-up in interest rates resulting from covenant renegotiations, Vanessa Quiroga, an analyst with Credit Suisse Group AG in Mexico City, wrote in a Sept. 23 report.
‘Cheap Stocks’
Complicating those challenges is stagnant U.S. construction demand. Cement consumption in the country is about 69 million metric tons a year, down from a peak of about 127 million tons in 2005, according to the Portland Cement Association.
Housing starts fell 5 percent to an annual rate of 571,000 in August after having peaked at 2.27 million in January 2006.
Faltering growth in the U.S. and Europe, which together made up 46 percent of Cemex’s sales in the first half of 2011, is fueling investor wariness.
‘‘With the correction, there are a lot of cheap stocks out there with much better fundamentals,’’ Will Landers, who manages $8.5 billion in Latin American stocks at New York-based BlackRock Inc., said in an e-mail.
By Thomas Black
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