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Cemex Is Worst Junk in U.S. Market on Losses: Mexico Credit

Cemex Is Worst Junk in U.S. Market on Losses
A Cemex SAB worker pours concrete. Photographer: Susana Gonzalez/Bloomberg

Bonds sold by Cemex SAB, the largest cement maker in the Americas, are posting the biggest losses among major issuers of junk debt in the U.S. after the company posted its seventh straight quarterly loss.

Notes issued by Monterrey, Mexico-based Cemex have lost 3.5 percent this month, compared with an average return of 1.4 percent for the 50 biggest issuers of dollar debt rated below investment grade, according to Bank of America Corp. indexes. Yields on the company’s 9 percent bonds due in 2018 rose 122 basis points, or 1.22 percentage point, to 9.93 percent.

Cemex bonds are slumping as a slowing expansion in the U.S. reduces revenue and fuels concern the company will fail to meet debt level limits agreed to when it took out a $15 billion bank refinancing loan in 2009. The company struggled to drum up enough demand for a $650 million bond sale on June 23, prompting it to shelve the plan for two weeks before changing the terms and paying a premium of 97 basis points over its existing bonds.

“Everybody was afraid of bad results, and there was a loss,” Natalia Corfield, an analyst at ING Groep NV in New York, said in a telephone interview. “I’m not seeing catalysts for outperformance.”

The yield on the notes due in seven years rose 110 basis points since they first traded Jan. 5, according to prices compiled by Bloomberg. The securities yield 621 basis points more than Mexican government bonds of similar maturity, wider than the 466-basis-point gap in January.

Debt Levels

Cemex is rated B by Standard & Poor’s, five levels below investment grade and six levels below the Mexican government. Cemex was rated as high as BBB in 2007 before its $14.2 billion acquisition of Rinker Group Ltd. swelled debt levels just as the U.S. credit crisis throttled growth in what was then its second-biggest market, leading to the 2009 loan refinancing with banks.

Cemex might be forced to renegotiate the terms of the $15 billion refinancing agreement with banks after the company’s net-debt-to-Ebitda ratio rose to 7.16 times at the end of June. A covenant under the financing agreement calls for a ratio of net-debt-to-earnings before interest, taxes, depreciation and amortization of 7 times.

“Banks will probably amend the covenants, but there will be an extra cost for the company,” Corfield said.

Cemex will comply with the covenants, Chief Financial Officer Fernando Gonzalez told analysts on a conference call July 22. Jorge Perez, a Cemex spokesman, declined to comment.

Cemex’s shares fell 49 centavos, or 5.8 percent, to 7.94 pesos at 4:10 p.m. New York in Mexico City trading, the largest drop in six months and the lowest level since March 31, 2009. The shares have tumbled 37 percent this year.

Put Option

Net debt at the end of June was $17.8 billion, up from $17.6 billion a year ago. Net debt may climb in the third quarter because of a put option that could require Cemex to pay about $355 million and assume $17 million of debt for its partners’ stake in a U.S. ready-mix concrete joint venture. The put option is due in September and Cemex has said it’s searching for a buyer to avoid having to make the acquisition.

Cemex is the biggest Mexican issuer of international bonds after raising $2.45 billion this year, according to data compiled by Bloomberg. The company, which has sold bonds, shares and assets to repay about half of the $15 billion bank loan, is planning to sell notes backed by accounts receivable this week.

Cash Flow

The cement maker’s second-quarter loss narrowed to $294 million from $306 million a year earlier. The company had negative free cash flow of $351 million in the first half of 2011, widening from negative free cash flow of $38 million a year earlier.

The second-quarter numbers were “disappointing,” said Alonso Madero, who helps manage about $5.5 billion in debt, including Cemex bonds, at Corp. Actinver SAB in Mexico.

“With fears of a recession in the U.S., one has to be sensible and not take bonds of companies that could be in trouble,” he said.

Cemex notes yield 786 basis points more than U.S. Treasuries with similar maturity, compared with 640 when the notes were first sold. By comparison, the spread over Treasuries for similar-maturity bonds sold by Jona, Switzerland-based Holcim Ltd., the world’s second-biggest cement maker, fell 23 basis points to 221 in the same period.

La Nina

“Bonds are fairly attractive because disappointing results were partly caused by bad weather,” Eric Ollom, a credit strategist at Citigroup in New York, said in an interview. The “third quarter could generate a positive surprise. Given the negative sentiment, it could provide an upside for the bonds,” Ollom said.

The La Nina weather phenomenon generated more rain than normal across the U.S. this year, according to the National Center for Atmospheric Research. The Mississippi and Ohio rivers have set flooding records from Illinois to Louisiana.

Cemex reached an agreement with bankers in October last year to amend covenants on net debt-to-Ebitda ratio because the company would have been out of compliance. The banks raised the ratio to 7 times for the end of this year from 5.25 times in the original financing agreement and to 6.5 times at the end of next year from 4.75 times. At the end of 2013, net debt to Ebitda must be 4.25 times or lower.

The company may have to seek another amendment or waiver to the covenants if it can’t improve the ratio from current levels, according to Carlos Legaspy, the president of Precise Investment Management in San Diego, which owns more than $10 million of Cemex bonds.

Extra Yield

“It’s the same thing as last year. They were very confident they would meet it,” Legaspy said. “They didn’t and the banks gave them a waiver.”

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries fell six basis points to 125 at 5:25 p.m. New York time, according to JP Morgan.

The peso fell 0.6 percent to 11.7243 per U.S. dollar.

The cost to protect Mexican debt against non-payment for five years fell 1 basis point to 111, 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.

Rate Futures

Yields on futures contracts for the 28-day TIIE interbank rate due in April fell four basis points to 5 percent.

Cemex bonds have also underperformed the 0.4 percent return this month for similarly-rated Latin American debt, according to Credit Suisse AG indexes.

Earnings before interest, taxes, depreciation and amortization fell 7.4 percent from a year earlier to $615 million in the second quarter. In the U.S., Ebitda was a loss of $22.3 million compared with a gain of $16.6 million a year ago.

Europe’s debt crisis is also cutting into Cemex’s revenue. The region accounted for 34 percent of sales in 2010.

“It’s out of their hands,” Legaspy said. “It’s based on the macro recovery.”

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