Slow US recovery puts Cemex debt deal at risk - analysis

Slow US recovery puts Cemex debt deal at risk - analysis
Published: 24 September 2010

Cemex may be forced to sell assets or engineer onerous debt swaps as a weak U.S. economic recovery puts the company dangerously close to breaching promises made to its creditors, reports Reuters

Cemex is struggling with dismal sales in the United States, its top market, as well as in other major markets such as Spain and Mexico.

The company narrowly avoided default last year on its massive debt load by striking a deal with creditors, but analysts say the lame recovery in its key markets could leave its finances in a weaker state than Cemex promised to banks.

If Cemex fails to meet key targets set for this December and June 2011, debt holders could raise borrowing costs, push for asset sales or impose other obligations, hitting shares.

"We think they are going to miss it in December and they will have to renegotiate," said Jim Harper, head of corporate research at BCP Securities, a Connecticut-based broker-dealer that is active in the Cemex bond market.

The failure to meet its targets could hit the company’s stock ,which sank to a one-year low in August on fears the U.S. economy could slump back into recession.

The stock rebounded on U.S. President Barack Obama’s proposal to boost infrastructure spending, but share prices could be hit if the market begins to worry Cemex will miss its debt targets. Cemex stock has been underperforming its global peers Lafarge and Holcim ever since it bought Australian rival Rinker in July 2007.

The deal cleared just as the bottom fell out of the housing market in the United States and Cemex shares have lost nearly three-fourths of their value since then.

Fernando Gonzalez, Cemex’s vice president of planning finance, told Reuters on Tuesday the company will not miss targets. "We’ll take the convenient or necessary measures to comply. We do not think this is anything to worry about."

Credit rating agencies slashed Cemex debt to junk status last year and the company teetered close to a default. But the company refinanced $15 billion of more than $19 billion in total debt at the time of the deal. Total debt is now around $17 billion.

The acquisition of Rinker was one of the largest-ever takeovers by an emerging markets company.
The takeover increased Cemex’s U.S. presence, but came at a huge cost. Cemex has had to issue more stock, exchange debt and sell assets to meet creditors’ demands.

"The doubt the market has now is that cement demand in the United States is not recovering as strongly as they proposed in their business plan with creditors," said Carlos Hermosillo, an analyst at brokerage Vector in Mexico City.

Cemex will have to meet a ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of 6.75 by the end of the year and 5.75 in June 2011.

The company slashed estimates twice this year, and said in late July that its 2010 EBITDA will total $2.65 billion. Some analysts think growth could end up even lower, which could make the company breach its debt covenant with creditors.