CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned expected ratings of 'BB-/RR3(EXP)' to CEMEX Finance LLC's proposed Euro 300 million senior secured notes due 2021 and its proposed USD denominated senior secured notes due 2024.
Both tranches of the notes will be guaranteed by CEMEX S.A.B. de C.V.'s (CEMEX); CEMEX Mexico, S.A. de C.V.; CEMEX Concretos, S.A. de C.V.; Empresas Tolteca de Mexico, S.A. de C.V.; New Sunward Holding B.V.; CEMEX Espana, S.A.; CEMEX Asia B.V.; CEMEX Corp.; CEMEX Egyptian Investments B.V.; CEMEX Egyptian Investments II B.V.; CEMEX France Gestion; CEMEX Research Group AG; CEMEX Shipping B.V.; and CEMEX UK. These guarantees are full and unconditional for both principal and interest payment. Proceeds from the issuance will be used for general corporate purposes and to repay debt.
The Rating Outlook for CEMEX is Stable. A complete list of the company's current ratings follows at the end of the press release.
KEY RATING DRIVERS
Strong Business Positions
The ratings of CEMEX and its subsidiaries reflect the company's strong and diversified business position. The company is one of the largest producers of cement, ready mix, and aggregates in the world. Key markets include the U.S., Mexico, Colombia, Panama, Spain, Egypt, Germany, France, and the U.K. The company's product and geographic diversification offset some of the volatility associated with the building product industry. CEMEX's main markets during 2013 in terms of EBITDA were Mexico (30%), United States (25%), Central and South America (20%), the Mediterranean (10%), and Northern Europe (10%).
CEMEX's Issuer Default Ratings (IDRs) are constrained at 'B+' due to the company's high leverage. CEMEX had USD17.6 billion of total debt and USD1.2 billion of cash and marketable securities as of Dec. 31, 2013. During the fiscal year 2013, the company generated USD2.6 billion of EBITDA, which is consistent with EBITDA from the prior year end. As a resulted, the company's net leverage remained unchanged at 6.2x for both periods.
Leverage to Remain High through Year-End 2014
Fitch expects CEMEX's leverage to remain high through the end of 2015. Fitch projects that CEMEX will generate approximately USD3.1 billion of EBITDA in 2014 and USD3.3 billion in 2015. CEMEX's net debt is not projected to change materially in the next two years despite the projected upturn in EBITDA due to rising working capital needs associated with growth, increasing capex, and higher taxes. Absent asset sales in excess of USD100 million per year, Fitch projects CEMEX's net leverage ratio will be 5.1x in 2014 and 4.4x in 2015. The projected conversion of CEMEX's of USD715 million subordinated convertible notes due in 2015 will be a key factor in net leverage reaching 4.4x in 2015. During February, CEMEX announced that around USD280 million of the holders of these converts had reached an agreement to convert them to shares of CEMEX.
U.S. Market Remains Key to Recovery
The U.S. market has historically been the company's strongest market. On a pro forma basis, as if Rinker were consolidated for all of 2007, this market used to generate USD2.3 billion of EBITDA for CEMEX. CEMEX's U.S. operations rebounded in 2013, generating USD255 million of EBITDA, which was slightly below Fitch projections of USD300 million. Importantly, the company has high operating leverage as approximately USD300 million of sales raised the company's EBITDA by nearly USD200 million from USD43 million of EBITDA in 2012. Fitch is forecasting an improvement in CEMEX's U.S. EBITDA to USD500 million in 2014, and USD600 million in 2015. A key contributor to the projected growth in EBITDA is the gradual rebound in the U.S. housing sector. During 2013, CEMEX's sales volumes increased by 3% (cement), 6% (ready mix) and 5% (aggregates), while prices for these products were up by 3%, 6% and 5%, respectively.
Manageable Debt Amortization Schedule
As of Dec. 31, 2013, CEMEX had USD 1.2 billion of cash and marketable securities. The company's debt repayment schedule is manageable with only USD382 million of debt amortization through the end of 2014 and USD1.5 billion falling due in 2015, of which USD714 million was related to convertible subordinated debentures. Proceeds from the notes will further improve the company's debt amortization schedule, as CEMEX intends to repurchase portions of the 2018 and 2020 notes.
Above Average Recovery Prospects
CEMEX and its subsidiaries have issued debt instruments from Mexico, the U.S., the British Virgin Islands, the Netherlands, and Spain. The guarantors of these instruments are also domiciled in various countries. As a result of the complexity of the company's capital structure and the various legal jurisdictions, Fitch does not envision a scenario in which CEMEX's creditors would want it to enter a bankruptcy (quiebra) or insolvency (concurso mercantil) process in Mexico in the event of additional financial distress, as there would be a high degree of uncertainty regarding the outcome. Fitch's opinion is that the most likely scenario under additional stress would be an out-of-court negotiated debt restructuring. Fitch has notched up CEMEX's debt instruments by one notch from the company's IDR rating of 'B+' to reflect above average recovery prospects in the event of default. CEMEX's recovery prospects are bolstered by its issuance of USD2.4 billion of convertible subordinated notes, which can only be replaced by equity or similar quasi equity instruments according to the Facilities Agreement. Fitch typically caps Recovery Ratings of Mexican corporates at the level of 'RR3' to account for concerns about various aspects of the bankruptcy framework from a creditor's perspective even when its bespoke analysis indicates it could be higher. CEMEX's rating has also been capped at the level of 'RR3', which is consistent with recovery prospects anticipated to be in the range of 50% to 70% in the event of default.
A number of factors could individually or collectively lead to a negative rating action. They include: a downturn in the company's businesses in Mexico and Central/South America, which have been crucial to offset weakening of the company's Northern European division and Mediterranean division; a loss of the positive moment in the U.S. market would have a material impact upon the company's ability to generate free cash flow (FCF) in 2014 and 2015; a lack of capital market access during 2014 and 2015.
Factors that could contribute to Positive Rating Watches individually, or collectively, include: an acceleration of the U.S. economy that would result in CEMEX's FCF exceeding USD500 million before 2015; an equity issuance; or the conversion of the company's subordinated debt to equity.
Fitch currently rates CEMEX as follows:
--Foreign and local currency IDR 'B+';
--Senior unsecured notes 'BB-/RR3';
--National scale long-term rating 'BBB-(mex)';
--National scale short-term rating 'F3(mex)'.
In addition to the aforementioned ratings of CEMEX, Fitch also maintains 'B+' foreign currency IDRs of the following entities that CEMEX has used to issue debt, as well as 'BB-/RR3' ratings on debt issued by them:
Cemex Espana S.A.
CEMEX Finance LLC
CEMEX Finance Europe B.V., incorporated in the Netherlands
CEMEX Materials Corporation, a limited liability company incorporated in the U.S.
C5 Capital (SPV) Limited, a British Virgin Island restricted-purpose company
C8 Capital (SPV) Limited, a British Virgin Island restricted-purpose company
C10 Capital (SPV) Limited, a British Virgin Island restricted-purpose company
C-10 EUR Capital (SPV) Limited, a British Virgin Island restricted-purpose company
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'National Scale Ratings - Methodology Update' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria