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Cemex’s 13% Yields Lure Citigroup After Plunge: Mexico Credit

Cemex’s 13% Yields Lure Citigroup After Plunge
A Cemex SAB worker pours concrete. Photographer: Susana Gonzalez/Bloomberg

Cemex SAB’s bonds are yielding more than twice the average for Mexican corporate debt, prompting Citigroup Inc. and Barclays Plc to recommend buying the notes in a bet the company’s cement sales will weather the global economic slowdown.

Yields on Cemex’s dollar bonds due in 2016 soared 207 basis points in the past week, the most since the bonds were issued in December 2009, to 13.09 percent, according to data compiled Bloomberg data. The average yield on Mexican corporate debt rose one basis point in the same period to 6.31 percent, JPMorgan Chase & Co. data show. Borrowing costs for Latin American companies that share Cemex’s rating jumped 86 points as slowing U.S. growth sparked a sell-off.

Cemex’s yield surge is unwarranted because the largest cement maker in the Americas will weather slowing growth in Mexico and the U.S. enough to service bank debt it refinanced during in 2009 to avoid default, said Christopher Buck, a corporate debt analyst at Barclays. Weakening demand from the U.S., the destination for 80 percent of Mexico’s exports, prompted Credit Suisse Group AG, Goldman Sachs Group Inc. and Bank of America Corp. to cut their growth forecasts for the Latin American country this month.

“Bonds look incredibly cheap,” Buck said in a telephone interview from New York. “Even in a worst-case scenario if we see a contraction in overall gross domestic product in Mexico at some point down the line, we don’t believe that you’ll see a massive contraction in cement consumption.”

Treasury Spread

Cemex’s bonds yield 1,179 basis points more than similar-maturity U.S. Treasuries, according to data compiled by Bloomberg. Mexican government bonds due the same year yield 2.37 percent. The company is rated B by Standard and Poor’s, five levels below investment grade and six steps below Mexico.

Cemex, based in Monterrey, Mexico, has 4.1 billion pesos ($334 million) of local bonds and about $195 million of bank debt outside the financing agreement that matures through the end of 2013, making a default unlikely, said Eric Ollom, a credit strategist at Citigroup Inc. The company has repaid $7.5 billion of the $15 billion bank loan refinancing it obtained in August 2009 that helped it avoid default.

The company’s net debt relative to earnings before interest, taxes, depreciation and amortization rose to 7.16 times at the end of June. A covenant under Cemex’s bank agreement calls for the ration to be at 7 times or below. It reported a net loss of $294 million in the second quarter 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.

‘Good Time’

“It’s a good time to buy the bonds if you can stomach the volatility,” Ollom, who recommends investors buy Cemex’s notes due in 2018, said in a telephone interview from New York. “It seems to have bottomed out. The market still has concerns regarding growth, profits, and bank covenants, but few believe a default is forthcoming.”

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.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries rose five basis points to 189 as of 2:34 p.m. in New York, according to JPMorgan.

The peso fell 0.1 percent to 12.2816 per U.S. dollar.

Yields on futures contracts for the 28-day TIIE interbank rate due in December 2012 was unchanged at 5.05 percent.

Default Swaps

The cost to protect Mexican debt against non-payment for five years rose 1 basis point to 161 yesterday, 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.

Policy makers lowered on Aug. 10 their economic growth forecasts for this year to a range of 3.8 percent to 4.8 percent from as much as 5 percent. The bank also cut its estimate for 2012.

“The balance of risks for growth in the Mexican economy has deteriorated,” the bank said in its quarterly report.

Concern the expansion in the U.S. is slowing mounted after S&P cut the country’s AAA rating on Aug. 5, triggering a global rout. Federal Reserve officials said this week that growth is “considerably slower” than anticipated. The U.S. economy, Cemex’s biggest foreign market, may grow 2.5 percent this year after expanding 3 percent in 2010, according to the median estimate in a Bloomberg survey of 65 economists.

Stock Sinks

“One of the main markets for the company is the U.S.,” Nuria Jorba Arimany, a credit analyst at Union Bancaire Privee in Zurich, said in a telephone interview. “That justifies Cemex being one of the bonds that have suffered the most in the recent selloff.”

Fitch Ratings today revised Cemex’s credit rating outlook to stable from positive because of “anemic prospects” for private construction to recover in the U.S., where cement consumption plummeted to 70 million tons last year from 127 million tons in 2006. Fitch left Cemex’s credit rating at B.

“A vibrant U.S. construction market is crucial to the recovery of Cemex’s credit profile,” Fitch said in a statement.

Cemex’s stock fell 5.7 percent in the past week, the sixth worst performer in Mexico’s benchmark IPC Index.

Rinker Debt

Cemex ran into debt troubles after borrowing to pay $14.2 billion for Rinker Group Ltd. in July 2007 on the bet that a decline in the U.S. housing market, which began in 2006, would be temporary. Housing starts on an annual basis have dropped to 629,000 in June from a record high of 2.27 million in January 2006.

The company has issued $2.45 billion of debt overseas, making it the biggest Mexican corporate issuer, to repay bank debt. It is scheduled to make $8.1 billion in debt payments in 2014, the most in a single year for the company.

The yield on Cemex’s bonds due in 2018 rose 33 basis points yesterday to 13.56 percent, while the price sank 1.22 cents on the dollar to 80.97 cents, according to data compiled by Bloomberg.

“At a price in the low 80s, a trader would have to think it would default to push it lower on a price basis,” Citigroup’s Ollom said. “I don’t think that will happen. The company has time to fix itself before 2014.”

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