Cemex Yields Top 20% as $15 Billion Loan Covenant at Risk: Mexico Credit

Cemex SAB’s borrowing costs are soaring to a record on speculation the largest cement maker in the Americas will breach debt covenants this year as slumping economic growth crimps sales.

Yields on Cemex’s dollar bonds due in 2020 jumped 392 basis points, or 3.92 percentage points, yesterday to 21.39 percent, the highest since the securities were sold in April 2010, according to data compiled by Bloomberg. The bonds’ price sank 11 cents to 53 cents on the dollar. The average yield on debt sold by companies that share Cemex’s B rating rose 35 basis points to 10.33 percent, Bank of America Corp. data show.

Investors are concerned Cemex may fail to meet the terms of a $15 billion bank loan agreement that helped the cement maker avoid a default in 2009 as growth slows in Mexico and the U.S., the company’s biggest markets. The banks can force Cemex into bankruptcy if Cemex is unable to cut its total funded debt relative to earnings before interest, taxes, depreciation and amortization below 7 times by year-end from 7.16 times.

“Investors in the short term are really worried about a breach or renegotiation of financial covenants,” Joe Kogan, a credit analyst at Scotia Capital, said in a telephone interview. “If the global crisis gets worse, then construction will suffer as an industry.”

Yields on the 2020 Cemex bonds have soared 1,194 basis points in the past three months, according to data compiled by Bloomberg. Mexican government debt due in 2020 yields fell 15 basis points to 3.90 percent in the period.

Asset Sales

The Monterrey, Mexico-based company plans to sell about $1 billion of assets by the end of 2012 to reduce debt, Chief Executive Officer Lorenzo Zambrano said in a webcast of a meeting with analysts Sept. 29 in New York. Businesses that don’t generate at least a 10 percent return on capital over time will be sold, he said. The company had $17.8 billion of net debt including perpetual notes and $675 million of cash at the end of the second quarter.

Cemex would seek to renegotiate year-end covenants if it weren’t able to comply with the terms of the agreement, Maher Al-Haffar, chief of communications and investor relations at Cemex, said in a telephone interview yesterday from New York.

“We would have to do what we need to do to continue our businesses,” Al-Haffar said. “It’s very difficult for us to assume that, if need be, our bankers would not be supportive.”

Cemex reported a second-quarter net loss of $294 million on July 22. While sales in Mexico rose 4.9 percent to $968 million, they tumbled 9.5 percent in the U.S. to $619 million.

Stock Plunge

The company’s stock fell 69 percent this year through yesterday, the worst performance on the benchmark IPC index of 35 Mexican stocks. It fell 16.2 percent on Oct. 3 to 3.72 pesos, the lowest close since Jan. 14, 1999, before rebounding 6.5 percent yesterday.

U.S. economic growth will slow to 1.6 percent this year from 3 percent in 2010, according to the median estimate of 66 analysts surveyed by Bloomberg. Mexico’s gross domestic product will grow 4 percent this year after a 5.4 percent expansion in 2010, central bank Governor Agustin Carstens said Sept. 8.

Cemex’s credit rating was cut seven levels by Standard & Poor’s over a 10-month span ending August 2009 after the company boosted debt levels to pay for the $14.2 billion acquisition of Rinker Group Ltd. in 2007. The Rinker purchase formed part of a two-decade, $29 billion acquisition spree byZambrano, whose grandfather founded the company in 1906. Cemex’s B ranking is five levels below investment grade.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell six basis points to 271 at 6:15 p.m. New York time, according to JPMorgan’s EMBI Global index.

Peso Decline

The peso rose 1.4 percent to 13.5536 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years fell 24 basis points today to 195, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Yields on futures contracts for the 28-day TIIE interbank rate due in December fell five basis points to 4.65 percent.

The currency’s 7.7 percent plunge in the past month is driving up the cost of servicing Cemex’s dollar-denominated debt, said Gerardo Copca, an equity analyst at Mexico City-based Metanalisis SA. Seventy-four percent of Cemex’s debt was in dollars as of the end of June.

‘Delicate Situation’

The sell-off in Cemex’s bonds this week is being fueled by “scared” investors abandoning bets the bonds would rebound, said Guillermo Rodriguez, who helps manage about $5.5 billion at Corp. Actinver SAB.

“Some people got in because they thought it was cheap,” Rodriguez said in a telephone interview. “Fundamentally, nothing has happened.”

Cemex is unlikely to meet the debt-to-earnings covenant, forcing it to renegotiate the debt, said Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA.

“Cemex is in a delicate situation,” Hernandez said in a telephone interview from Mexico City. “If you don’t already have positions, why get involved?”

To contact the reporters on this story: Jonathan J. Levin at jlevin20@bloomberg.net; Boris Korby in New York at bkorby1@bloomberg.net

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

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