(Mexico City, Mexico) -- Cement and building materials conglomerate Cemex SAB cleared a major hurdle this week in its efforts to refinance close to $15 billion in short-term debt, a move that gives the global giant a lifeline to get its finances in order.
The news comes as a major relief for the Monterrey, Mexico-based company, which in the past year has suffered a drop in earnings, saw its investment-grade rating vanish, and laid off more than a tenth of its work force. The damage flowed not only from the world-wide economic downturn, but also an ill-timed acquisition that expanded its exposure to the U.S. housing market just before the crash.
Cemex officials reached an agreement with a group of creditor banks that includes New York-based Citigroup Inc., Banco Bilbao Vizcaya Argentaria SA and Banco Santander SA of Spain, and the U.K.'s HSBC Holdings PLC and Royal Bank of Scotland Group PLC.
In broad terms, the agreement will extend through 2014 the maturities on debt that is currently scheduled to come due in 2009 through 2011. The deal will call for periodic payments of principal before 2014 and is also widely expected to require the company to issue new equity. The company said in a press release it will give details of the terms once documentation is completed and the refinancing takes effect. Cemex officials declined to comment for this article.
The onset of the global economic crisis and the U.S. housing market slump hit Cemex hard. In 2007, the company borrowed heavily to finance the $15.5 billion acquisition of Australia's Rinker Group Ltd., a building materials company with heavy exposure to U.S. markets.
The plan was to pay off the borrowings quickly, but the sudden drop in construction activity around the globe left Cemex with a large debt burden and significantly reduced earnings, raising the prospect of insolvency for one of the world's largest players in building materials.
Cemex managed to refinance $4 billion in short-term bank debt in January, as the worsening global economic situation crimped its cash flow. The company then tried to sell $500 million in bonds in March, but canceled those plans after balking at the high yields demanded by investors.
Cemex then went back to its banks to negotiate a more ambitious debt rescheduling -- talks that culminated in this week's agreement.
The refinancing removes the risk of a near-term insolvency, but with net debt of $18.3 billion and operating cash flow expected to fall this year to $3.1 billion from $4.3 billion in 2008, Cemex still faces a rocky road ahead.
The company has agreed to sell its Australian operations to Switzerland's Holcim Ltd. for $1.62 billion. The proceeds, along with expected free cash flow, should cover 80% of the payments on principal the company has to make through mid-2011. Nonetheless, Cemex hasn't ruled out the need for additional refinancing in the next few years.
Investors' relief that the debt burden had been addressed was tempered by concerns that the new debt and equity issue would prove costly for shareholders.
Cemex shares trading on the Mexican stock exchange rose sharply at the opening Tuesday and reached a two-month high, but gave back their gains and closed down 0.6% at 13.97 pesos ($1.08). Its American depositary receipts ended 1.3% lower at $10.77.
Covenants on the rescheduled debt will limit the company's ability to invest or make acquisitions.
For a company that in two decades grew from a regional cement producer into one of the global industry's leaders with operations in more than 50 countries, the new restrictions could make life relatively dull for the next few years.
In April, Chief Executive Lorenzo Zambrano, commenting on the ill-timed Rinker purchase, said the crisis wouldn't deter Cemex from again pursuing growth through acquisitions in the future. "Cemex isn't a static company," he said.
By ANTHONY HARRUP
SOURCE: http://online.wsj.com