TEXT-S&P Affirms And Removes From Watch CEMEX 'B-' Ratings

Wed Oct 10, 2012 6:25pm EDT

Overview

-- On October 4, Mexico-based cement producer CEMEX issued $1.5 billion in bonds due 2022 to pay the March 31, 2013, $1 billion prepayment milestone under the new Facilities Agreement with bank lenders.

-- We are affirming our 'B-' global scale and 'mxBB/mxB' national scale ratings on CEMEX and removing them from CreditWatch with negative implications.

-- The stable outlook reflects the company's improved liquidity, as well as our expectation that cash flow generation and key financial metrics will continue to gradually improve during the next 18 months, despite downside risks and persistent challenges in the main markets where CEMEX operates.

Rating Action

On Oct. 10, 2012, Standard & Poor's Ratings Services affirmed its ratings, including the 'B-' global scale and 'mxBB/mxB' national scale corporate credit ratings, on CEMEX S.A.B. de C.V. and its key operating subsidiaries--CEMEX Espana S.A., CEMEX Mexico S.A. de C.V., Cemex Corp., and CEMEX Inc. In addition, we removed the ratings from CreditWatch with negative implications. We had placed the ratings on CreditWatch on July 3, 2012, after CEMEX announced a refinancing proposal for its Financing Agreement that included a $1 billion payment to lenders by March 2013. The outlook is stable.

Rationale

The rating action follows CEMEX's recent debt issuance for $1.5 billion in bonds due 2022. The company plans to use the net proceeds from this issuance to prepay principal outstanding under the new Facilities Agreement, allowing the company to satisfy the March 31, 2013, $1 billion prepayment milestone and the Feb. 14, 2014, $500 million amortization payment. In our view, CEMEX's ability to raise $1.5 billion in cash through this debt issuance improves its liquidity and addresses our previous concerns the company's risk of nonpayment in the short term.

Our ratings on CEMEX and its key subsidiaries are still constrained by its "highly leveraged" financial risk profile, and reflect our assessment of the company's "satisfactory" business risk profile and "adequate" liquidity.

CEMEX's "satisfactory" business risk profile mainly reflects its leading position in the global cement, concrete, aggregates, and ready-mix businesses. We have equalized the ratings on CEMEX Mexico, CEMEX Inc., and CEMEX Espana because of the strategic importance of each of these subsidiaries to the group.

During the first half of 2012, CEMEX's financial performance started to recover due to rising demand for cement, particularly from the U.S. market. For the 12 months ended June 30, 2012, the company posted adjusted total debt to EBITDA of 9.1x, EBITDA interest coverage of 1.5x, and funds from operations (FFO) to total debt of 4.0%. These metrics were in line with the results for the same period a year earlier, and were stronger than the 9.8x, 1.4x, and 3.1% metrics as of March 31, 2012. CEMEX has been able to alleviate some of its operating pressures, through cost-reduction initiatives, resulting in higher EBITDA margins that are firmly returning to 16% levels.

Our assessment of CEMEX's financial risk profile as "highly leveraged" reflects its high leverage ratios that we expect to be in the mid-8x area during the next 12 months. For 2013-2015, we expect the company's financial strategy to remain focused on liability management, while maintaining profitability indicators in a positive trend. We also expect CEMEX to move forward on its asset sales plan, which would allow it to gradually deleverage its capital structure. In particular, we expect that CEMEX will follow its plan to sell a minority stake of its Central and South American operations, excluding Mexico, and raise additional cash from this transaction before year-end 2012. Our baseline forecast for 2013 assumes that CEMEX will benefit from marginal sales growth for the next two years in the U.S. and Latin American markets, translating into gradual recovery of profit margins and cash flow generation, Considering this, we expect CEMEX to be able to post total debt to EBITDA of 8.3x, EBITDA interest coverage of 2.0x, and FFO to total debt of 4.1% in 2013.

Liquidity

Based on its likely sources and uses of cash during the next 12-18 months, our performance expectations, and pro forma for the transaction, CEMEX has an "adequate" liquidity profile. Relevant factors in our assessment of CEMEX's liquidity profile include the following:

-- We expect CEMEX's sources of liquidity to exceed uses by at least 1.2x;

-- We expect net sources to be positive, even if EBITDA is lower than our expectations by 15% during the next 12 months; and

-- The company faces a smooth debt maturity profile through 2014.

Our assessment of CEMEX's "adequate" liquidity reflects our expectation that the company will prepay the March 31, 2013, $1 billion prepayment milestone and Feb. 14, 2014, $500 million amortizations, and no other debt maturities will be due over the next 15 months. As of June 30, 2012, CEMEX's cash and short-term investments reached approximately $620 million, and for 2013, we estimate free operating cash flow generation in excess of $200 million. We expect the company will continue working on its liability management to seek refinancing alternatives for its future maturities. Following the $1.5 billion prepayment that CEMEX will make under its Facilities Agreement, the company's next important debt repayment will be in 2015, when it will need to repay approximately $1.5 billion in debt maturities, including convertibles.

The new Facilities Agreement considers a 7.0x maximum consolidated leverage ratio and a minimum 1.5x consolidated coverage ratio in 2013. Under our performance expectations, we believe CEMEX will maintain sufficient cushion of more than 10% relative to the covenants.

Recovery analysis

We rate CEMEX's senior secured notes 'B-' (the same as the corporate credit rating on the company), with a recovery rating of '3', indicating expectation of meaningful (50% to 70%) recovery in the event of a payment default. The senior secured debt includes $1.65 billion in senior secured notes due 2018, $1.75 billion in senior secured notes due 2016, EUR350 million in senior secured notes due 2017, EUR115.3 million in senior secured notes due 2017, $1.19 billion in senior secured notes due 2020, $800 million in senior secured notes due 2015, EUR179.21 million in senior secured notes due 2019, $703.86 million in senior secured notes due 2019, $500 million in senior secured notes due 2018, and $1.5 billion in senior secured notes due 2022.

Outlook

The stable outlook reflects our expectation that CEMEX will focus on improving its profitability indicators by increasing its operating cost structure, as well as from the gradual recovery of sales volumes in the U.S. market. The outlook also reflects our belief that management will remain committed to its liability management and mitigating potential liquidity pressures in the short term. We expect CEMEX to improve its profitability levels, with EBITDA margins above 16% during the next two years, and we expect debt to EBITDA in the low 8x area and interest coverage in the 2x area by the end of 2013.

We could upgrade the ratings on CEMEX if the company maintains its positive operating trend, with positive EBITDA growth and EBITDA margins above 16%, while maintaining its key financial metrics in line with our expectations. The completion of the sale of a minority stake of its Central and South American operations that results in further improvement of the company's liquidity could also support a rating upgrade. We could lower the ratings if operating performance within the next 18 months is weaker than our current expectations, resulting in significant liquidity pressures or a sharp decline in profitability, with EBITDA margins below 12%.

Related Criteria And Research

-- What's Behind CEMEX S.A.B. de C.V.'s Negative CreditWatch Listing?, July 16, 2012

-- CEMEX 'B-' Rating Placed On CreditWatch Negative On Higher Short-Term Risk From Proposed Debt Refinancing, July 3, 2012

-- Corporate Ratings Criteria 2008, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch/Outlook Action

To From

CEMEX S.A.B. de C.V.

CEMEX Mexico S.A. de C.V.

Corporate Credit Rating B-/Stable/-- B-/Watch Neg/--

Caval - Mexican Rating Scale mxBB/Stable/mxB mxBB/Watch Neg/mxB

CEMEX Corp.

Corporate Credit Rating B-/Stable/NR B-/Watch Neg/NR

CEMEX Espana S.A.

CEMEX Inc.

Corporate Credit Rating B-/Stable/-- B-/Watch Neg/--

CEMEX S.A.B. de C.V.

Senior Secured B- B-/Watch Neg

Recovery Rating 3 3

Senior Unsecured mxBB mxBB/Watch Neg

Subordinated mxB+ mxB+/Watch Neg

Commercial Paper mxB mxB/Watch Neg

C10 Capital Ltd.

Senior Unsecured CCC+ CCC+/Watch Neg

C10-EUR Capital (SPV) Limited

Senior Unsecured CCC+ CCC+/Watch Neg

C5 Capital Ltd.

Senior Unsecured CCC+ CCC+/Watch Neg

C8 Capital Ltd.

Senior Unsecured CCC+ CCC+/Watch Neg

CEMEX Espana S.A.

Senior Secured B- B-/Watch Neg

Recovery Rating 3 3

CEMEX Finance Europe B.V.

Senior Unsecured B- B-/Watch Neg

Recovery Rating 3 3

CEMEX Finance LLC

Senior Secured B- B-/Watch Neg

Recovery Rating 3 3

CEMEX Materials LLC.

Senior Unsecured B- B-/Watch Neg

Recovery Rating 3 3

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