Fitch Assigns 'BB -' Ratings to CEMEX's Notes

Fitch Assigns 'BB -' Ratings to CEMEX's Notes
Published: 08 September 2014

Fitch Ratings has assigned expected ratings of 'BB-/RR3(EXP)' to Cemex's proposed USD notes due in 2025 and its proposed Euro notes due in 2022. Proceeds from the Euro notes issuance will be used for general corporate purposes, including the repayment of indebtedness under Cemex's Facilities Agreement. Proceeds from the USD issuance will be used for general corporate purposes, including the repurchase of a portion of the company's outstanding 2018 and 2020 notes. The Rating Outlook for Cemex is Stable.

Key ratings drivers

Strong business position
Fitch said in a statement that Cemex's 'B+' Issuer Default Ratings (IDRs) continue to reflect its strong and diversified business position. The company is one of the largest producers of cement, ready-mix, and aggregates in the world. Key markets include the US, Mexico, Colombia, Panama, Spain, Egypt, Germany, France, Poland and the U.K. The company's product and geographic diversification offset some of the volatility associated with the cyclical cement industry.

High leverage constrains ratings
The ratings of Cemex remain constrained by the company's high leverage. Cemex had US$15.8bn of net debt as of 30 June 2014. Fitch states that this figure compares unfavourably with US$2.7bn of EBITDA and US$500m of funds from operation (FFO) during the latest 12 months endin 30 June 2014, and results in a net debt/EBITDA ratio of 5.9x and a FFO adjusted leverage ratio of 8.5x. "These ratios improved only modestly from 6.3x and 9.4x, respectively, during 2012. Net leverage has been slow to decline during the past couple of years due to sluggishness in the company's operations in Mexico, the Mediterranean, and Northern Europe," Fitch said in the statement.

Modest credit Improvements Projected:
Fitch projects that Cemex will generate about US$2.8bn of EBITDA in 2014 and US$3.1bn in 2015 and that the company's net leverage will be around 5.25x in 2014 and 4.25x in 2015. Fitch's projects include only modest asset sales of around US$100m per year. They also include an expectation that the company's US$320m of subordinated debt will convert into equity during 2015. Net leverage would likely be more than 4.5x in 2015 if the company's stock price deteriorates and the company needs to refinance these notes with another convertible debt instrument. Improved cement demand in the US and Mexico are the key drivers of Fitch's projected improvement in Cemex's operating performance.

Fitch notes that Cemex's investment ratio, as defined by capex to depreciation, has been low at around 0.5x due to constraints imposed by the Financing Agreement. Challenges to deleveraging beyond 2015 include rising working capital needs, higher taxes in key market such as Mexico, and rising capital expenditures.

Manageable maturity schedule
Cemex has a manageable amortisation schedule, according to Fitch's assessment, as a result of its aggressive refinancing efforts during the past few years. The company had US$737m of cash and marketable securities as of 30 June 2013. Most of the company's marketable securities are held in US and Mexican government bonds. Cemex faces US$171m of debt amortszations through the end of 2014 and US$1.1bn in 2015. The company issued EUR400m notes due in 2021 and US$1bn notes due in 2024 during March 2014, and used the proceeds to repurchase EUR245m of notes due in 2017, US$597m of notes due in 2020 and US$603m of notes due in 2018. These refinancings lowered its cost of debt, since the new coupons were below 6% and those on the repurchased notes were in excess of nine per cent. The decreased cost of debt, in addition to growing operating cash flow, should lead to an improvement in the company's FFO fixed-charge coverage to around 1.7x in 2015 from 1.3x in 2013.

US market - key to recovery
Cemex's main markets during 2013 in terms of EBITDA were Mexico (35 per cent), Central and South America (28 per cent), the Mediterranean (11 per cent), Northern Europe (12 per cent), the US (nine per cent), and Asia (five per cent).

Fitch highlights that Cemex's US operations continue to improve slowly, as EBITDA grew to US$255m in 2013 from US$43m in 2012. "The company's US operations, however, continue to operate at well below their potential capacity," the rating's agency states. On a pro forma basis, Fitch estimates that the company's US operations generated around US$2.3bn of EBITDA in 2006. While US cement demand has recovered to 80Mt in 2013 from a low of 71Mt in 2009, it remains well short of 127Mt of demand in 2006, Fitch adds.

Above-average recovery prospects
Cemex and its subsidiaries have issued debt instruments from Mexico, the US, the British Virgin Islands, the Netherlands, and Spain. As a result of the complexity of the company's capital structure and the various legal jurisdictions, Fitch does not envision a scenario in which Cemex's creditors would want it to enter bankruptcy (quiebra) or an insolvency (concurso mercantil) process in Mexico in the event of additional financial distress, as there would be a high degree of uncertainty regarding the outcome.

In deriving a distressed enterprise valuation to determine the recovery under this scenario, Fitch discounted the company's EBITDA to US$2.1bn, which is a level that would just cover operating leases, interest expenses, and maintenance capital expenditures, and applied a conservative EBITDA multiple of 6x. This calculation resulted in an anticipated recovery level of 76 per cent for the company's senior secured debt, which would be consistent with a Recovery Rating of 'RR2'.

The recovery prospects of senior creditors are bolstered by US$2.1bn of convertible subordinated notes, which can only be replaced by equity or similar quasi-equity instruments, according to the Facilities Agreement. Fitch typically caps RRs of Mexican corporates at 'RR3' to account for concerns about various aspects of the bankruptcy framework from a creditor's perspective even when its bespoke analysis indicates it could be higher. Cemex's rating has also been capped at 'RR3', which is consistent with recovery prospects anticipated to be in the range of 50-70 per cent in the event of default.