June 26, 2012 / 5:09 PM / 6 years ago

Guarantors, pre-payment stir concern over Cemex debt plan

MEXICO CITY (Reuters) - Cemex’s plan to refinance its debt was welcomed by investors but doubts remain about the new guarantors the Mexican cement maker will use to back the plan, and its goal of paying down $1 billion ahead of schedule.

Monterrey-based Cemex on Monday unveiled a refinancing plan that calls for a three-year maturity extension, an up-front fee, revised margins, and a bigger guarantor package.

Cemex’s unexpectedly early move - its hefty $7.25 billion debt pile falls due in 2014 - sent share prices up by over 7 percent in Mexico and New York on Monday.

Cemex (CMXCPO.MX) (CX.N), which was swamped by the 2008 U.S. housing meltdown shortly after paying out some $16 billion to buy Australian peer Rinker, has been working its way out of deep debt obligations for the past three years.

Bank of America Merrill Lynch said the company’s additional guarantors could include Mexican subsidiaries, and said it hoped the company would disclose the cash flows of each one.

In the past, Cemex has used its Mexican and Spanish operations as guarantors for debt issuances. But business in Spain has suffered due to Europe’s sovereign debt crisis.

The company has tightened its belt with cost cuts and non-core asset sales, mostly from its real-estate holdings. Last year, Cemex committed to unload $1 billion in assets but better-than-expected results allowed it to trim that target to $300 million.

Cemex’s plan to reassure its creditors also includes revised operational and financial covenants, which keep tabs on the company’s cash generation versus its funded debt, or the sum included in its 2009 refinancing deal. The firm said it was in good shape to meet 2012 covenants, which foresee the reduction of funded debt to 6.5 times earnings before interest, taxes, depreciation and amortization (EBITDA) in June, and an even lower ratio of 5.75 times by December.

But steep fluctuations in the dollar and euro exchange rate could have been one of the key reasons for Cemex to move ahead with the refinancing plan, analysts said.

“We expect the covenants’ (ratio) to increase so that they have a wider margin. Given the recent foreign exchange swings, they may not meet the June covenant,” said analyst Gonzalo Fernandez with Santander.

Cemex operates in more than 50 countries around the globe and generates around 60 percent of its sales outside of Mexico and the United States.


The planned $1 billion pay-down is making some analysts ponder again about the possibility of Cemex floating a portion of its business to get the cash.

“We believe the company may be evaluating the listing of a smaller entity, like Cemex South America & Caribbean (SCAC), which is mainly driven by Colombia and Panama,” said analyst Vanessa Quiroga with Credit Suisse.

“In terms of the transaction, we envision the sale of 49 percent of Cemex SCAC to the market, while Cemex would become the holding company and retain control with 51 percent stake, assuming a one share, one vote structure,” she added.

The idea has surfaced before. Last year, some analysts said Cemex could list Colombia, one of its best performing operations in Latin America, but the company rejected the notion.

Another option to pony up the money would be issuing convertibles or equity, a move that could face resistance from current shareholders because of its diluting effects.

The plan also raises the question of whether Cemex would have to pay a penalty for making an early payment.

But all told, the plans outlined by Cemex have lifted the mood of market watchers, many of which are confident the company will strike a deal with creditors.

“The fact they have already had preliminary talks with half the debt holders should in our view help the successful conclusion of the refinancing,” said Banorte-Ixe in a report.

The company will meet the full syndicate of lenders on Friday and Monday to discuss its initiative.

Cemex’s shares rose 0.6 percent on Tuesday in Mexico while its U.S.-traded stock (CX.N) gained 1.5 percent.

Reporting By Cyntia Barrera Diaz and Gabriela Lopez; Editing by Tim Dobbyn

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