Cemex juggles debt but US still a worry

Cemex juggles debt but US still a worry
Published: 20 January 2010

Cemex is showing itself adept at tapping markets to extend maturities on its hefty debt but investors are worried about cash generation at a time when the U.S. construction market shows little sign of life.

Shares in Cemex have fallen six per cent in Mexico City since the start of the year despite modest gains in the IPC index . Its shares are down 17 per cent since October, according to Reuters data.

Investors applauded Cemex’s surprise decision to reopen its 2016 bond last week and sell $500 million to refinance more debt. The offer was heavily oversubscribed. That followed the sale of $2.1 billion in dollar, euro and peso bonds last year.

But the company appears focused on extending its maturities rather than paying back its obligations quickly because it has limited cash flow from slumping cement sales.

Cemex says it can cover its debt obligations until at least 2011 after a successful bank refinancing in August, its bond issues and a share offering.

The company said that in the fourth quarter of 2009, it used only part of the $1.7 billion it received from the sale of its Australian assets to reduce debt.

Investors want Cemex to repay loans quickly to get back to its glory days of just a few years ago, when it was busy snapping up rivals from developed economies, generating record profits and dishing out dividends.

"We are still somewhat concerned that Cemex continues refinancing banking debt with bonds, and that it is not effectively reducing debt," said Gonzalo Fernandez at Santander brokerage in a note to clients.

Cemex’s debt was around $21 billion at the end of September.

While the company’s refinancing has calmed nerves, investors have demanded more money to insure against a default by Cemex, even as creditors’ trust grows in the Mexican government.

For Cemex, the top cement maker in the United States, much depends on a recovery in construction in the world’s biggest economy, which would also lift business in Mexico.

"The market focus will continue to be on how fast construction activity recovers, especially in the U.S. market, where we see an important risk of a delayed recovery," said Vanessa Quiroga at Credit Suisse, who has a neutral recommendation on Cemex’s stock.

Cemex’s U.S. operations generated around a fifth of total sales in 2008, ahead of Mexico and Europe, the company’s other two major markets.

Analysts expect fourth-quarter results, probably to be released at the end of January, will remain weak but mark the end of Cemex’s most difficult year in its century-long history.

This year could prove to be testing as sales of new U.S. homes are yet to surge on the back of a healthier American economy. Yale University economist Robert Shiller predicts U.S. housing prices will fall further in the coming months.

Analysts say the best Cemex can hope for this year is to improve its operating margins as cost savings and an efficiency drive implemented last year squeeze more out of sales.

"The lessons Cemex has learned in the crisis means it has a lighter, more flexible and dynamic operating base that will allow its eventual recovery ... multiplying its profitability not only in the United States but in the majority of its subsidiaries," said Carlos Hermosillo, an analyst at Vector brokerage in Mexico City. (Edited report from Reuters)