Fitch: Spanish tax ruling negative for Cemex

Fitch: Spanish tax ruling negative for Cemex
28 April 2014

The recent ruling by Spanish tax authorities to fine Cemex Espana EUR455m will slow the recovery of Cemex’s credit profile but will not result in a negative rating action to the 'B+' rating of Cemex or the 'BB-' of the company's bonds, according to Fitch Ratings.

Cemex has announced it plans to appeal this fine, which was levied for alleged underpayment of taxes between 2006 and 2009. Cemex will not have to make payments, in whole or in part, during the appeal process. The timing of the resolution of a final ruling remains highly uncertain.

If the fine of approximately US$620m is upheld during the appeal process, Cemex’s net debt would likely remain unchanged through the end of next year, as Fitch is currently projecting that the company's US$715m subordinated convertible notes due in 2015 will fully convert. During February, Cemex announced that around USD280m of the holders of these converts had reached an agreement to convert them to shares of Cemex.

Fitch projects Cemex will generate approximately US$3.1bn of EBITDA in 2014 and US$3.3bn in 2015. These figures represent growth from US$2.6bn in 2013. Improved cement demand in the US and Mexico are the key drivers of Fitch's projected improvement in Cemex’s operating performance. Absent asset sales in excess of US$100m per year, Fitch projects Cemex’s net leverage ratio will be 5.3x in 2014 and 4.5x in 2015 considering the impact from the potential US$620m fine. These figures represent an improvement from 6.2x in 2013.

If Cemex is successful in its appeal, Fitch's projected net leverage ratios for Cemex would be 5.2x in 2014 and 4.4x in 2015. Fitch does not foresee a material improvement in Cemex free cash flow due to rising working capital needs associated with growth, increasing capex, and higher taxes. During 2013, Cemex spent US$433 million on capex. This compared unfavorably with US$1.1bn depreciation and amortisation indicating the company may have catch up capex in the future.

Cemex has a manageable amortisation schedule due to its aggressive refinancing efforts. As of 31 December 2013, the company had US$1.2bn of cash and marketable securities. The company's debt repayment schedule is manageable with only US$382m of debt amortisation through the end of 2014 and US$1.5bn falling due in 2015, of which US$714m was related to convertible subordinated debentures, of which US$280m was converted in February 2014.

During March, the company issued EUR400m notes due in 2021 and US$1bn notes due in 2024. Proceeds were used to repurchase EUR245 million of notes due in 2017 and US$597m due in 2020 and US$600m notes due in 2018.

The ratings of Cemex and its subsidiaries continue to reflect the company's strong and diversified business position, Fitch notes. Key markets include the US, Mexico, Colombia, Panama, Spain, Egypt, Germany, France, and the U.K. The company's product and geographic diversification offset some of the volatility associated with the building product industry. Cemex’s main markets during 2013 in terms of EBITDA were Mexico (30 per cent), United States (25 per cent), Central and South America (20 per cent), the Mediterranean (10 per cent), and Northern Europe (10 per cent).

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Tagged Under: Fitch Ratings Cemex Mexico Debt