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Lafarge, HeidelbergCement Cut Spending, Payrolls to Rescue Credit Ratings
Lafarge SA, the world’s largest cement maker, and HeidelbegCement AG outlined 500 million euros ($650 million) of cost cuts aimed at rescuing their credit ratings from junk status.
Lafarge today announced an additional 200 million euros in savings for next year as well as extra asset sales to make good on a pledge to reduce debt and retain an investment-grade rating. HeidelbergCement said it will cut as many as 350 jobs in North America to help save 300 million euros, though won’t be in shape to shake off its junk rating this year.
“HeidelbergCement set their targets too high in the first place and no-one really believed they could reach that goal this year,” said Jochen Schlachter, a credit analyst at UniCredit in Munich. “Lafarge is at the brink of getting downgraded to junk. It will all depend on how performance and cash flow recovers.”
The credit metrics of both companies are clearly in sub- investment grade territory at the moment, Schlachter said. HeidelbergCement and Lafarge each made purchases of at least $15 billion leading up to the financial crisis. Attempts to cut budget deficits could heighten the need to make disposals.
Moody’s Investors Service and Standard and Poor’s have said they may cut Lafarge’s credit rating, which is one notch above speculative grade. Its debt was little changed in the second quarter from a year earlier at 15.2 billion euros, inflated by the euro’s drop. Net debt at its German rival, rated three notches below investment grade at Moody’s and S&P, rose to 9.07 billion euros from 8.96 billion euros on March 31.
Interest Burden
A cut in Lafarge’s debt to junk would increase interest payments by about 55 million euros on an annual basis because of “step-up” clauses on some of its bonds, Chief Financial Officer Jean-Jacques Gauthier said on a call. “We are looking at progressively and quickly reducing the debt situation.”
The French cement maker pared its outlook for demand, saying markets will expand 3 percent at best in volume terms this year, down from as much as 5 percent. The worst case scenario is a 1 percent fall, as the economic outlook is still “uncertain.”
The recovery’s strength and the impact of budget-deficit reduction on infrastructure spending are still unclear, HeidelbergCement Chief Executive Officer Bernd Scheifele said. Scheifele abandoned a goal to get credit metrics in shape for an eventual move to investment grade this year.
Inevitable Downgrade
“With the guidance lowered on volumes it seems difficult for Lafarge to avoid the rating downgrade to high-yield,” said Caroline Brugere, an analyst at Credit Agricole CIB in Paris, in a note to investors. “However the amount of further asset sales needs to be confirmed.”
Lafarge is also seeking to cut costs by more than a previous goal of 200 million euros in 2010. Investment next year will be limited to 1 billion euros, down from 1.3 billion euros this year, Chief Executive Officer Bruno Lafont said.
Lafont aims to beat a previous goal of as much as 500 million euros of asset sales this year, and said additional divestments make take place next year. The company in 2007 paid $15 billion for Orascom Construction’s rival operations.
Lafarge, whose Baa3 rating is under review at Moody’s Investors Service, slumped 3.8 percent to 41.83 euros in Paris trading as of 10:26 a.m. local time. The decline ranked the cement maker today’s seventh worst performer on the Dow Jones Stoxx 600 index.
Divestments by Lafarge so far total 350 million euros. Lafont, on a call, declined to specify which additional assets could be put up for sale. He maintained guidance that profit will rise and borrowings will fall this year.
HeildelbergCement remains committed to reaching an operating profit of about 3 billion euros and lowering net debt to between 7.5 billion euros and 8 billion euros as “mid-cycle targets,” Chief Financial Officer Lorenz Naeger said today. It has had a junk rating since October 2008 in part due to debt amassed by the takeover of Hanson in 2007.
The Heidelberg-based cement maker is rated BB- at S&P and Ba3 at Moody’s, both three levels below investment grade.
“We maintain a cautious stance towards the price situation for cement producers,” said Paris-based Natixis analysts Rafic El Haddad and Gregoire Thibault in a research note today. Debt “is likely to continue to drag on the share.”
To contact the reporter on this story: Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net.
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