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
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
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
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:
--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
C5 Capital (SPV) Limited, a British Virgin Island restricted-purpose
C8 Capital (SPV) Limited, a British Virgin Island restricted-purpose
C10 Capital (SPV) Limited, a British Virgin Island restricted-purpose
C-10 EUR Capital (SPV) Limited, a British Virgin Island
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
National Scale Ratings Criteria
Evaluating Corporate Governance
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Source: Fitch Ratings