News Column

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

September 4, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned expected ratings of 'BB-/RR3(EXP)' to CEMEX S.A.B. de C.V.'s (CEMEX) 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 guarantors for the notes will be CEMEX Mexico, S.A. de C.V., CEMEX Concretos, S.A. de C.V., Empresas Tolteca de Mexico, S.A. de C.V., New Sunward Holding B.V., CEMEX Espana, S.A., Cemex Asia B.V., CEMEX Corp., CEMEX Finance LLC, Cemex Egyptian Investments B.V., Cemex Egyptian Investments II B.V., CEMEX France Gestion (S.A.S.), Cemex Research Group AG, Cemex Shipping B.V. and CEMEX UK. The notes will enjoy the same collateral package as the creditors under CEMEX's Facilities Agreement.

The Rating Outlook for CEMEX is Stable. A complete list of the company's current ratings follows at the end of this release.

KEY RATING DRIVERS

Strong Business Position:

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 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 unfavorably with USD2.7 billion of EBITDA and USD500 million of funds from operation (FFO) during the latest 12 months (LTM) ended June 30, 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.

Modest Credit Improvements Projected:

Fitch projects that CEMEX will generate about USD2.8 billion of EBITDA in 2014 and USD3.1 billion 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 USD100 million per year. They also include an expectation that the company's USD320 million 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 U.S. 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 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.

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. 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 USD13.35 per ADS. The company has issued subordinated convertible notes that mature in 2015 (USD320 million), 2016 (USD978 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 EUR455 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.

Fitch currently rates CEMEX as follows:

CEMEX

--Foreign and local currency Issuer Default Rating (IDR) 'B+';

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

--National scale long-term rating 'BBB(mex)';

--Senior unsecured certificates 'BBB(mex)';

--National scale short-term rating 'F3(mex)'.

In addition to the aforementioned ratings of CEMEX, Fitch also maintains 'BB-/RR3' ratings on the guaranteed debt issued by:

Cemex Espana S.A.

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

CEMEX Finance Europe B.V., incorporated in the Netherlands

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

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

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

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

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

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

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

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

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

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=865015

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

+1-312-368-2075

Fitch Ratings, Inc.

70 W Madison Street

Chicago, IL 60602

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

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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