HeidelbergCement AG said it plans to sell at least EUR1bn (US$1.47bn) of five- and seven-year bonds to refinance borrowing in its first note issue in almost two years.
Each portion of the high-yield, or junk, bonds will be at least EUR500m, with the final amounts and terms dependent on investor demand, the company said in a statement on its Web site. The notes will be guaranteed by Hanson Ltd., the company’s wholly owned U.K. unit, the statement said.
Chief Executive Officer Bernd Scheifele, who is seeking to bring debt of more than EUR11bn under control, raised EUR2.25bn for the company in a share sale completed last week.
HeidelbergCement may also be willing to sell 10-year bonds, two people familiar with the matter said.
Following the announcement, Fitch Ratings has placed HeidelbergCement AG’s (HC) Long-term Issuer Default rating (IDR) of ’B’ on Rating Watch Positive (RWP). HC’s and subsidiary Hanson Ltd’s senior unsecured ’CCC’ have also been placed on RWP. This follows HC’s announcement today that it plans to issue a minimum of EUR1bn in bonds, divided into two equal tranches with maturities of five and seven years. Fitch has also assigned expected senior unsecured ratings of ’CCC’ to the planned issues and has placed the ratings on RWP. The final ratings on the bonds are contingent on Fitch’s receipt of final documents conforming to information already received.
In addition, HC’s Short-term IDR has been affirmed at ’B’. The Recovery Rating on the senior unsecured debt is ’RR6’.
"A successful bond issue of at least the target amount would pave the way for further refinancing of the existing secured bank facility, allowing for a progressive reduction in the December 2011 refinancing risk - a factor that has been weighing on HeidelbergCement’s ratings," says Elisabetta Zorzi, Senior Director in Fitch’s Corporates group.
This would follow the EUR2.25bn partial repayment made in October of the EUR8.7bn secured syndicated loan facility. The first partial repayment was made with proceeds from a capital increase which diluted the group’s major shareholder - the Merckle family - to 24.4% from over 70% and increased free float to 75.6% from 21.2%.
Fitch expects to resolve the rating watch following the completion of the bond issue, which is expected in the coming weeks. Should the issuance be successful HC’s IDR could be upgraded by up to two notches, while the Recovery Rating on the senior unsecured debt could be revised to ’RR5’, due to still material secured debt present in the issuer’s capital structure. As per Fitch’s Criteria Report "Issuer Default and Recovery Ratings - Frequently Asked Questions", published on 11 September 2006 and available at www.fitchratings.com, material secured debt is defined for industrials companies as 2x the current level of pre-tax, pre-interest cash flow. Conversely, should HC fail to issue the targeted amount of bonds, the ratings could be affirmed at their current level.
Fitch’s latest forecasts for HC include a mid-teen percentage point decline in revenue in 2009 and a flat performance in 2010, as well as deteriorating EBITDA margins in 2009 before a slight recovery in 2010. Under this scenario, expected lower cash flow from operations is likely to result in only slightly positive free cash flow compared to a five-year average of 4% free cash flow/revenue. Net leverage is forecast to be below 3.8x by FYE11.