Mexican cement company Cemex (BB+) failed to lengthen maturities on $418m of commercial paper while its stock price tumbled this week, piling on fears that its debt refinancing plans will come unstuck in 2009 amid a global recession and the credit crunch.
Yesterday, the company’s share price tumbled 18.7% after it was only able to exchange $71m of its $418m of commercial paper in return for longer term debentures. After just 20% of the offer was completed, investors were reminded of the cement producer’s fragile financing position in the wake of the US slowdown and recent derivatives losses. Five year credit default swaps increased from 751bp to 755bp following the news. Nevertheless, its ability to pay off its remaining $347m stock of commercial paper is not in doubt.
The company’s total debt burden amounts to around $22bn and it is in talks with Banco Santander, BBVA, Citi, HSBC and RBS to restructure a large portion. The falling peso and the company’s flurry of leveraged acquisitions such as last year’s debt-funded purchase of Australian rival Rinker has forced Cemex to shed assets in Austria, Hungary and the Canary Islands. Fitch and Standard & Poor’s downgraded the company from investment grade to junk in October triggering a surge in its borrowing costs.
ING estimates that the company has $6.8bn of debt to roll over in 2009 and is short by $2bn. But the Dutch bank believes the recent downward pressure on the company’s debt has been overdone and has an outperform recommendation with a target price for its perpetual notes at 68.
In a recent research note, it argued Cemex’s financing shortfall will be met due to its "strong cash flow generation despite the global turmoil; therefore, we see full repayment as a matter of ‘when’, not a matter of ‘if’ and the fiscal stimulus programme focused in infrastructure announced by the Mexican, Spanish, and UK governments, and a strong lobby in the US, that will most likely be reflected in an increase in revenues starting in 2010".
The company, which operates in more than 50 countries, has around $2.2bn of assets up for sale next year. One debt capital markets banker in New York familiar with the issuer argued that Cemex has a tight refinancing schedule rather than a solvency issue. As a result, banks will be accommodative since they have no appetite for a spike in non-performing loans on their balance sheets.
"The company is too important a client for banks not to give them the cash," said the banker. But all bets are off on whether the Mexican government would be prepared to bail out the national giant since 55% of its gross debt lies under its Spanish subsidiaries. Nevertheless, Cemex bulls are not factoring in potential sovereign support.
The company is a lively and popular international issuer. In December 2006, it made history in Latin America’s debt markets by issuing a $1.25 billion perpetual hybrid bond, the first of its kind to be launched south of the US border. Cemex is a bellwether for investor appetite towards Latin American corporate debt. Emerging market debt syndicate bankers say the borrower could come to the external markets next year if sovereign issuers manage to inject new liquidity into the asset class. But it is not expected to launch new money next year. One banker mandated to restructure the company’s debt said: "the entire emerging markets investor community and elsewhere knows about them and will be prepared to support them".