Mexican cement giant Cemex SA, weighed down by huge debts from an acquisition made as the US housing-market went into freefall, may have to sell new stock to avoid a pricey bank refinancing or even worse, risk defaulting on its debt, analysts say.
Credit Suisse estimates that Cemex, a big provider of ready-mix concrete to the US, will face a funding shortfall next year on part of its roughly US$16bn in debt. Expected cash flow from its operations is likely to fall short of the principal on debt that’s maturing.
To bridge that gap, says analyst Vanessa Quiroga, the U.S.-listed company could sell shares, following in the steps of international rivals Lafarge and Vulcan Materials Co.
An offering would be cheaper than renegotiating its debt so it can make payments further in the future, she says.
Such a debt reworking is one possible outcome of talks the Monterrey, Mexico, company says it is holding with its banks on the majority of its debt.
"It comes to a point that it becomes so expensive to defer the debt that it is just as dilutive to shareholders as if the company issued new shares at a discount," she said.
By her calculations, the company faces a funding gap of at least US$2.5bn in 2010 and US$6.5bn in 2011. That includes proceeds from a sale, announced earlier this week, of its Australian assets to Switzerland’s Holcim Group.
Cemex has maintained it will be able to make good on its financial obligations, and it’s trying to work out a deal with its banks for a "comprehensive solution" to its bank debt.
But any stumble in refinancing could make it harder for the world’s No 3 cement producer to stay current on its debt payments.
Standard & Poor’s said Wednesday that if the company doesn’t refinance its debt in the next three months, it will likely lower Cemex’s credit rating further into speculative or "junk" territory.
"We remain concerned current conditions in global credit markets may hamper refinancing efforts, causing access to resources to take longer or be lower than we originally expected," said the agency.
Cemex, one of the hottest Mexican stocks just two years ago, has lost more than two-thirds of its US stock-market value since in mid-2007 after a jump in subprime-mortgage defaults spiraled into the worst US housing recession in generations.
Spain and the UK, which along with Mexico make up Cemex’s other major markets, have also suffered housing crashes.
While the plunge in demand for concrete and other building products has hit all material suppliers hard, Cemex is struggling with the additional burden of its mid-2007 acquisition of Australian building-materials company Rinker Group Ltd., which increased its exposure to the US market.
In the first quarter, net sales sank 32 per cent, dragged down by a 39 per cent fall-off in US sales. Earnings before interest, taxes, depreciation and amortization fell 25 per cent, and consolidated net income plunged 99 per cent.
Plans to sell some US and European assets for up to US$4.5bn fell far short of initial projections, and analysts have criticized subsequent asset sales for carrying cheap pricetags.
Cemex spokesman Jorge Aguirre said Thursday the company is working with its banks, selling assets and cutting costs to reduce its debt levels.
"It is our intention to reduce debt as quickly as possible," he said in emailed comments.
Analysts said that while the sale of the Australian assets for US$1.6bn is a good step, it’s just a drop in the bucket towards reducing overall leverage.
"This transaction is a step forward, not a comprehensive solution," wrote Deutsche Bank analyst Dan McGoey in a note earlier this week. The company may be trying to avoid a stock sale, he said.
"We expect Cemex has emphasized assets sales in its balance-sheet restructuring as a less dilutive alternative to an equity rights issue," he said.