Cemex's $5.9 Billion Debt Payback Spurring Rally in Bonds: Mexico Credit

Cemex SAB, the largest cement maker in the Americas, is trouncing Mexican peers in the bond market after cutting debt by 25 percent in the past two years to reverse declines in its credit rating.

The 6.9 percent return this year on Cemex’s dollar bonds due in 2016 compares with a 1.2 percent gain for debt sold by Mexican companies and a 3.8 percent advance for U.S. corporate notes rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, according to JPMorgan Chase & Co. and Bank of America Merrill Lynch. The yield on Monterrey-based Cemex’s bonds, whose B rating is five levels below investment grade, sank 101 basis points this year to 7.78 percent.

Cemex is rebounding after the U.S. housing market collapse reduced demand for building materials in its biggest foreign market by sales and forced the company to refinance $15 billion of bank debt in 2009. Its rating was cut seven levels by S&P in a 10-month span ending August 2009 after Cemex boosted debt levels to pay for the $14.2 billion acquisition of Rinker Group Ltd. in 2007. Cemex cut $5.9 billion of debt since June 2009 to $17.7 billion last year.

“They’re doing a good job to create confidence in the market,” Alonso Madero, who helps manage about $5.5 billion of debt, including Cemex bonds, at Corp. Actinver SAB in Mexico City, said in a telephone interview. “It’s a big opportunity.”

Photographer: Susana Gonzalez/Bloomberg

A Cemex driver arrives at the company's Monterrey manufacturing plant to load his truck with cement. Close

A Cemex driver arrives at the company's Monterrey manufacturing plant to load his truck with cement.

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Photographer: Susana Gonzalez/Bloomberg

A Cemex driver arrives at the company's Monterrey manufacturing plant to load his truck with cement.

Cemex’s bonds yield 438 basis points, or 4.38 percentage points, more than similar-maturity notes sold by the Mexican government, the smallest gap since April 2010 and down from 769 in May, according to data compiled by Bloomberg. The average yield on dollar bonds sold by Mexican companies climbed 33 basis points this year to 6.37 percent, or 141 less than Cemex bonds, according to JPMorgan.

U.S. Recovery

Similar-maturity dollar bonds issued by Paris-based Lafarge SA, the world’s biggest cement maker, returned 2.1 percent this year. Euro-denominated notes sold by Holcim Ltd., a cement maker in Jona, Switzerland, advanced 4 percent in the same period.

The economic recovery in the U.S. will boost Cemex’s cash flow and its ability to pay down debt, said Carlos Legaspy, who manages about $300 million of emerging-market debt, including Cemex bonds, at San Diego, California-based Precise Investment Management.

The U.S. economy, where Cemex got 19 percent of its revenue in 2009, may grow 3.1 percent this year after expanding 2.9 percent in 2010, according to the median estimate in a Bloomberg survey of 68 economists.

“We believe in the story and we believe in the global recovery,” Legaspy said in a telephone interview.

Bond Sale

Jorge Perez, a Cemex spokesman in the Monterrey suburb of San Pedro Garza Garcia, declined to comment on the performance of the company’s bonds.

Cemex sold $800 million of floating-rate debt due in September 2015 on March 29 to yield 500 basis points more than the three-month London interbank offered rate, or LIBOR.

The cost to protect Mexican debt against non-payment for five years dropped 1 basis point to 105, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

The extra yield investors demand to hold Mexican dollar bonds instead of U.S. Treasuries was unchanged at 128 at 5 p.m. New York time, according to JPMorgan.

The peso rose 0.1 percent to 11.90477 per dollar and is up 3.7 percent this year. The currency posted its best quarterly performance in a year.

Cemex’s stock fell 1.2 percent to 10.63 pesos.

‘Pain’

Cemex’s shares are down 16 percent this year and touched a four-month low on March 17 on concern the company’s $1.67 billion sale of convertible bonds will dilute the stock. The offering is part of an effort to meet debt-reduction targets under the refinancing agreement it negotiated with banks to avoid default. The company said March 29 it has about $7.5 billion left of bank debt, down from the original $15 billion.

“The shareholders took the brunt of the pain,” James Harper, director of corporate research at BCP Securities in Greenwich, Connecticut, said in a telephone interview. “There’s not a cent of accrued interest or principal that has been taken away from creditors. It would be hard to point to any other company headquartered in Mexico that would make such a big effort to avoid a major restructuring.”

Vitro SAB, a Monterrey-based glassmaker, defaulted on $1.2 billion of bonds in 2009. Supermarket chain Controladora Comercial Mexicana SAB, based in Mexico City, defaulted in 2008.

Cemex is scheduled to make $8.1 billion in debt payments in 2014, the most in a single year for the company. The redemptions may be more than it’s able to pay, said Jorge Lagunas, who manages $200 million of equities at Mexico City-based Grupo Financiero Interacciones SA.

Default Swaps

“I’m worried about 2014,” he said in a telephone interview. “If the company comes out with a restructuring plan, then we’ll evaluate the benefits and see if it should be on my list of favorites. Until that day, it’s off the list.”

While Cemex’s five-year credit-default swaps tumbled 143 basis points this year to 590, the cost of protecting its debt against default is higher than Portugal’s, according to data compiled by Bloomberg. Portuguese government bonds declined yesterday amid speculation the Iberian nation will need financial assistance.

Chief Executive Officer Lorenzo Zambrano, whose grandfather founded the 105-year-old company, boosted Cemex’s debt levels after making $29 billion in global acquisitions over two decades. Investors demanded a record 2,330 basis points to insure Cemex debt against non-payment in December 2009.

Debt Ratios

“I saw them in the thick of the crisis when they had taken on all this debt, and they were literally like a deer in headlights,” Harper said.

S&P cut Cemex’s rating from BBB, the second-lowest investment grade, to BBB- in October 2008, to BB+ in January 2009 and B- in August of that year before receiving an upgrade to B two months later.

The company’s debt to earnings before interest, tax, depreciation and amortization, or Ebitda, ratio -- a measure of leverage versus the cash available to make payments -- will decline to 5.8 times this year from 7.4 in 2010 and to 4.3 in 2012, according to Eric Ollom, an analyst at Jeffries & Co. in New York. Cemex said it reduced debt, including perpetual bonds, by 8 percent last year.

“In 2012, it starts to look better,” Ollom said. “The assumption is that we’re in a more robust recovery. What is important is the trend is clearly improving and should continue to improve provided that the economy improves.”

To contact the reporter on this story: {Jonathan J. Levin} in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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