News Column

Fitch Affirms CEMEX's Notes at 'BB-/RR3'

July 29, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings affirmed the foreign and local currency Issuer Default Ratings (IDRs) of CEMEX, S.A.B. de C.V. (CEMEX) at 'B+', as well as it senior secured notes at 'BB- /RR3'. A complete list of related rating actions follows at the end of this press release. Concurrently, Fitch has upgraded the national scale rating, as well as the Mexican peso-denominated notes due in 2017, to 'BBB(mex)' from 'BBB-(mex)'.

The Rating Outlook for CEMEX remains Stable.

KEY RATING DRIVERS

Strong Business Position:

CEMEX's 'B+' 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 U.S., 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 USD15.8 billion of net debt as of June 30, 2014. This figure compares unfavourably with USD2.7 billion of EBITDA and USD500 million of funds from operation during the LTM ended June 30, 2014, and results in a net debt/EBITDA ratio of 5.9x and a funds from operations (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.

Modest Credit Improvements Projected:

Fitch expects CEMEX's leverage to remain above 4.0x through the end of 2015, and that it will generate about USD2.8 billion of EBITDA in 2014, USD3.1 billion in 2015, and USD3.3 billion in 2016. Improved cement demand in the U.S. and Mexico are the key drivers of Fitch's projected improvement in CEMEX's operating performance. CEMEX's net debt is not projected to change materially in the next two years, despite the projected upturn in EBITDA, due to rising working capital needs associated with growth, increasing capex, and higher taxes. Absent asset sales in excess of USD100 million per year, Fitch estimates CEMEX's net leverage ratio will be 5.3x in 2014 and 4.2x in 2015. The conversion of USD320 million of subordinated debt into equity during 2015 is built into these projections. 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.

Manageable Maturity Schedule:

CEMEX has a manageable amortization schedule as a result of its aggressive refinancing efforts during the past few years. The company had USD737 million of cash and marketable securities as of June 30, 2013. Most of the company's marketable securities are held in U.S. and Mexican government bonds. CEMEX faces USD171 million of debt amortizations through the end of 2014 and USD1.1 billion in 2015. The company issued EUR400 million notes due in 2021 and USD1 billion notes due in 2024 during March, 2014, and used the proceeds to repurchase EUR245 million of notes due in 2017, USD597 million of notes due in 2020 and USD603 million 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 9%. 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. This incremental improvement in the company's financing expenses is what led to the upgrade of its national scale rating to 'BBB(mex)' from 'BBB-(mex)'.

U.S. Market Key to Recovery:

CEMEX's main markets during 2013 in terms of EBITDA were Mexico (35%), Central and South America (28%), the Mediterranean (11%), Northern Europe (12%, the U.S. (9%), and Asia (5%). CEMEX's U.S. operations continue to improve slowly, as EBITDA grew to USD255 million in 2013 from USD43 million in 2012. The company's U.S. operations, however, continue to operate at well below their potential capacity. On a pro forma basis Fitch estimates that the company's U.S. operations generated around USD2.3 billion of EBITDA in 2006. While U.S. cement demand has recovered to 80 million metric tons in 2013 from a low of 71 million tons in 2009, it remains well short of 127 million tons of demand in 2006.

Above-Average Recovery Prospects:

CEMEX and its subsidiaries have issued debt instruments from Mexico, the U.S., the British Virgin Islands, the Netherlands, and Spain. The guarantors of these instruments are also domiciled in various countries. 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 USD2.1 billion, 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% 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 USD2.1 billion 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% to 70% in the event of default.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Fitch is projecting that CEMEX's EBITDA in its U.S. operations will grow to USD650 million by 2015 from USD233 million in 2013. This projection incorporates an expectation that single-family and multi-family housing starts in the U.S. will total 1 million in 2014 and 1.2 million in 2015. Growth beyond these figures would be positive for the company's U.S. business and would accelerate the company's deleveraging process.

Cement demand in Mexico has underperformed Fitch's expectations since 2013. This has offset improvements in operating cash flow in Central and South America, as well as in the U.S. The EBITDA generated by CEMEX in Mexico fell to USD1 billion in 2013 from USD1.2 billion in 2012 as its cement sales volumes declined by 8%. Fitch currently projects that the company's EBITDA in this market will rebound to USD1.1 billion by 2015. Growth faster than this could also accelerate debt reduction.

CEMEX's stock currently trades at more than USD12.50 per ADS. The company has issued subordinated convertible notes that mature in 2015 (USD320 million), 2016 (USD 978 million) and 2018 (USD690 million). The conversion prices for these notes are USD11.18/ADS, USD9.65/ADS and USD9.65/ADS, respectively. If successful in converting the 2015 and 2016 notes, Fitch projects that the company's net debt/EBITDA ratio would be below 3.5x by the end of 2016, which could result in upgrades of one or more notches for the company's IDRs.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Ratings downgrades are not likely during 2014 as CEMEX's credit protection measures are strong for the existing ratings, given the company's strong global business position and the sluggishness of the U.S. market relative to its long-term potential.

--CEMEX received an unfavorable ruling by the Spanish tax authorities during 2014 that could result in a payment of Euro455 million. If the company is unsuccessful in its appeal, this fine would hinder its ability to deleverage and could lead to a negative rating action if the payment coincides with continued sluggishness in other key markets.

--A loss of the positive momentum in the U.S. market would have a material impact upon the company's ability to deleverage to less than 4.5x by 2015. Fitch would consider a change in rating or Outlook if CEMEX's leverage trends reversed and net leverage exceeded 6.5x.

RELATED RATING ACTIONS

In addition to affirming the foreign currency and local currency IDRs and issuance ratings of CEMEX, Fitch has affirmed the following debt issues:

CEMEX Espana S.A. (CEMEX Espana)

--Senior Secured Notes due 2017, and 2020 at 'BB-/RR3';

--National short-term rating at 'F3 (mex)';

CEMEX Materials Corporation, a limited liability company incorporated in the U.S.

--Senior secured notes due 2025 at 'BB-/RR3';

CEMEX Finance LLC, a limited liability company incorporated in the U.S.

--Senior secured notes due 2021, 2022, and 2024 at 'BB-/RR3';

C5 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Senior secured perpetual notes at 'BB-/RR3';

C8 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Senior secured perpetual notes at 'BB-/RR3';

C10 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Senior secured perpetual notes at 'BB-/RR3';

C-10 EUR Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Senior secured perpetual notes at 'BB-/RR3'.

In addition, Fitch has affirmed and withdrawn the following ratings:

Cemex Espana S.A. (Cemex Espana)

--Foreign currency IDR at 'B+'.

CEMEX Materials Corporation, a limited liability company incorporated in the U.S.

--FC IDR at 'B+'.

CEMEX Finance LLC, a limited liability company incorporated in the U.S

--Foreign currency IDR at 'B+'.

CEMEX Finance Europe B.V., which is incorporated in The Netherlands

--Foreign currency IDR at 'B+'.

C5 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Foreign currency IDR at 'B+';

C8 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Foreign currency IDR at 'B+'.

C10 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Foreign currency IDR at 'B+';

C-10 EUR Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Foreign currency IDR at 'B+'.

These ratings were withdrawn as these entities are not considered analytically meaningful for the credit quality of the notes that have been issued out of them. During 2014, the note of CEMEX Finance Europe matured. The notes of Cemex Espana and Cemex Finance are fully guaranteed by CEMEX and various other subsidiaries. CEMEX is also the guarantor of the dual-currency notes that accompany the perpetual debentures of the special purpose vehicles entities C5, C8, C10 and C-10. CEMEX Material has a $149 million bond due in 2025 that is guaranteed by CEMEX Corp.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Ratings Criteria' (Oct. 30, 2013);

--'Evaluating Corporate Governance' (Dec. 12, 2012).

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842514

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Phillip Wrenn

Associate Director

Fitch Ratings, Inc.

70 W Madison Street

Chicago, IL 60602

+1 312-368-2075

or

Secondary Analyst

Joe Bormann, CFA

Managing Director

+1 312-368-3349

or

Committee Chairperson

Dan Kastholm, CFA

Managing Director

+1 312-368-2070

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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