Mexico’s Cemex starts big asset sale to pay debt

Mexico’s Cemex starts big asset sale to pay debt
Published: 02 April 2008

Cemex, may have to sell up to $2.7 billion in assets, according to a report from Reuters, to repay its huge debt and avoid losing its investment grade status amid the U.S. housing crisis, analysts said on Tuesday.

Cemex, which last year paid $16 billion for Australian rival Rinker, said on Monday it sold its 9.5 per cent stake in local telecoms company Axtel, generating $257 million in cash.

While that amount is tiny compared to Cemex’s $18.9 billion debt load, the sale signals the start of an asset sale over the next two years in businesses ranging from cement plants to nonstrategic investments.

Chief Financial Officer Rodrigo Trevino said last month Cemex would sell about $2 billion in assets, but analysts at Credit Suisse and several Mexican banks and brokerages say it may need to sell more -- as much as $2.7 billion.

"Cemex is likely to need to sell more than they say. The debt issue is a big challenge," said a Mexico-based analyst who declined to be named.

Trevino declined to detail Cemex’s asset portfolio.

Cemex is anxious to control its debt, which has surged to 4.1 times earnings before interest, taxes, depreciation and amortization (EBITDA) in the first quarter of this year, according to Credit Suisse.

Monterrey-based Cemex has promised investors it will cut its debt to 2.7 times EBIDTA by 2009 but faces a difficult climate in the United States, its top market, where a subprime mortgage crisis has caused residential construction to slump.

For Cemex, which competes globally with Switzerland’s Holcim and France’s Lafarge , the fall in housing construction has been particularly severe in its high-growth markets such as Florida, and Cemex sees declining cement demand this year.

"Cemex is on the borderline of losing its investment grade," said Vanessa Quiroga, an analyst at Credit Suisse.

Rating agency Standard & Poor’s could downgrade Cemex’s credit rating of BBB if the company allowed its ratio of fully adjusted funds from operations to rise above 20 percent this year, Quiroga added.

A downgrade would increase Cemex’s financing costs and could cap its access to investment, as many institutional investors are limited to investment grade companies only.

Cemex may get away with a downgrade that does not affect its investment grade level, said Gonzalo Fernandez of Santander. " Cemex’s strength is its capacity to generate cash flow," he said. Cemex expects 2008 cash flow of over $3 billion, a 15 percent rise over 2007.

Still, Cemex has little room to maneuver because another key market, Spain, is weakening due to lower demand for new houses as economic growth there slows.

Source: Reuters News