Lafarge step-up bonds show investors dismiss downgrade threat

Lafarge step-up bonds show investors dismiss downgrade threat
Published: 19 March 2010

Lafarge SA bond prices show investors are convinced Chief Executive Officer Bruno Lafont will win his quest to keep an investment-grade credit rating, even as the world’s most indebted cement maker skirts junk status.

Five out of Lafarge’s six step-up bonds -- whose coupons rise by 1.25 percentage points if the cement maker is downgraded to junk -- offer yields above its notes that don’t have step-up provisions. The yields would be “dozens” of basis points below non-step ups if a rating cut were imminent, said Herve Goigoux- Becker, head of fixed-income investment at Ofi Asset Management in Paris. A basis point is 0.01 percentage point.

“For now, the market isn’t pricing a rating cut below investment grade,” said Maya El Khoury, a Paris-based fund manager at Allianz Global Investors France who only holds Lafarge’s step-up variety.

Lafont and Chief Financial Officer Jean-Jacques Gauthier have pledged to sell assets, trim investment and make other savings to help protect Lafarge from a building slump. Debt soared after the US$15bn purchase of Orascom Cement in 2008 to tap growth in the Middle East, where demand has held up better than in Europe and the U.S.

The one Lafarge step-up bond that doesn’t conform to the trend, a security due in May 2014, yields 3.75 per cent, 6 basis points less than the July 2014 bond without the clause. The spread is narrow enough to protect holders of step-ups better than owners of non-step debt in the event of a downgrade.

“This isn’t yet the spread of high yield, but some are preparing for that,” said Goigoux-Becker at Ofi Asset Management, which has 2014 step-up bonds in its portfolios. “There’s a risk” of a downgrade, “but it’s not very high.”

(Bloomberg)