-- On Feb. 27, 2012, Mexico-based cement producer Cemex announced a debt exchange plan.
-- Sluggish global economic activity is continuing to pressure the company's financial performance.
-- We are assigning a 'B-' issue rating and '3' recovery rating to Cemex's proposed senior secured notes due 2019, while affirming our ratings, including the 'B-' global scale and 'mxBB/mxB' national scale corporate credit ratings, on the company.
-- The outlooks remain negative, reflecting our belief that slow global economic activity and cement demand growth in the major markets where Cemex operates will continue to pressure the company's financial performance and key credit metrics over the next 12 to 18 months.
On Feb. 29, 2012, Standard & Poor's Ratings Services affirmed its ratings, including the 'B-' global scale and 'mxBB/mxB' national scale rating long-term corporate credit ratings, on Mexico-based cement producer Cemex S.A.B. de C.V. (Cemex). At the same time, we assigned a 'B-' senior secured debt rating and a recovery rating of '3', indicating expectation of meaningful (50% to 70%) recovery in the event of a payment default, to the proposed fixed-rate dollar- and/or euro-denominated senior secured notes due 2019 to be issued by Spain-based subsidiary Cemex Espana S.A. (B-/Negative/--) and unconditionally guaranteed by Cemex, Cemex Mexico S.A. de C.V. (B-/Negative/--), and New Sunward Holding B.V. (not rated). The outlooks remain negative. Rationale Our ratings on Cemex and its key subsidiaries--Cemex Inc., Cemex Mexico, and Cemex Espana--are constrained by its "highly leveraged" financial risk profile, as our criteria define it, reflecting the company's high debt and "less-than-adequate" liquidity position. The ratings also reflect the relatively high concentration of its cash flow generation in a few key operating markets despite geographic diversification. These factors are partially mitigated by the company's "satisfactory" business risk profile based on the group's leading position in the global cement, concrete, aggregates, and ready-mix businesses; and its operating efficiency. 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.
On Feb. 27, 2012, Cemex announced the voluntary exchange offer of its currently outstanding euro-denominated notes due 2014 and perpetual debentures for new senior secured notes due 2019. Although this exchange will be realized at less than par value, we believe that the terms and conditions on the proposed notes--such as a higher interest rate, the absence of a deferral option to the issuer on interest payments, and a fixed maturity date--help compensate for the loss of face value. Also, according to our criteria, we view this exchange offer as an opportunistic refinancing plan rather than a distressed restructuring, as Cemex has almost completely mitigated the risk of an insolvency or bankruptcy scenario in the near term, even if the bondholders don't accept the offer. Standard & Poor's believes that, in the event that bondholders decide not to accept the invitation to exchange, the company will continue to pay them in accordance with the terms and conditions of their current holdings.'
During fourth-quarter 2011, Cemex's financial performance continued to reflect sluggish economic activity and depressed demand for cement. For past 12 months ended Dec. 31, 2011, the company posted adjusted total debt to EBITDA, EBITDA interest coverage, and funds from operations to total debt of 9.8x, 1.4x, and 3.1%, respectively. This compared unfavorably with the results it posted for the same period a year earlier of 8.6x, 1.6x, and 3.5%. Operating performance also remains under pressure, as evidenced by EBITDA margins that continue to decline as a result of certain changes in the product mix and higher energy costs, coupled with lesser economies of scale. Cemex also posted an unadjusted EBITDA margin of 15.4%, compared with 16.4% for 2010.
Based on our expectation of weak global economic prospects and difficult industry conditions over the next two years, we anticipate Cemex will continue to face volume and pricing pressures in the main markets where it operates. Cemex's management has implemented certain initiatives in an attempt to improve its profitability and reduce leverage, including headcount reduction and other cost-saving initiatives, and sale of assets. These actions may somewhat mitigate the situation.
We assess Cemex's liquidity as "less than adequate." Cemex's covenant headroom is tight. Covenants under the financing agreement include a funded debt-to-EBITDA ratio of less than or equal to 6.5x by June 2012, decreasing to 5.75x by December 2012; and an EBITDA interest coverage ratio of more than 1.75x through December 2012. As of Dec. 31, 2011, these ratios were 6.6x and 1.88x, respectively, and the company was in compliance with all its covenants. We anticipate the company complying with its June 2012 covenants, even though we continue to foresee the potential need to renegotiate credit conditions in its financing agreement to avoid a covenant breach in December 2012. This is feasible, in our view, given the company's close relationship and sound track record with its lenders. We will closely monitor any impact these modifications could have on the company's financial flexibility, given the potential impact of the company's cost of debt.
As of Dec. 31, 2011, Cemex's cash and short-term investments reached $1.1 billion. For 2012, we expect free operating cash flow generation of $150 million to $200 million. The company faces debt maturities of $373 million in 2012, which consists mainly of domestic medium-term notes and has already created a cash reserve to address these payments. Cemex faces significant debt maturities in fourth-quarter 2013 and in 2014 of approximately $572 million and $8.0 billion, respectively, mainly related to its syndicated bank facility. We expect the company will continue working on its liability management to seek refinancing alternatives for the aforementioned maturities.
The recovery rating on Cemex's proposed senior secured notes offered in exchange for its euro-denominated notes due 2014 and perpetual debentures is '3', indicating expectation of meaningful (50% to 70%) recovery in the event of a payment default. (For the complete recovery analysis, see Standard & Poor's recovery report to be published on RatingsDirect soon after release of this report.)
The negative outlook reflects the downside risk to our base-case scenario for Cemex's performance in the next few years amid weaker-than-expected global economic conditions, particularly in its main markets. We might take a negative rating action if the company's financial metrics and liquidity weaken further, or if the amendment to the credit conditions in the financing agreement doesn't take place as expected. We could revise the outlook to stable if the company improves its liquidity position and we detect a positive trend in its financial performance.