CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'B+/RR3' rating to CEMEX Finance LLC's proposed senior secured high yield note issuance. The notes will be guaranteed by CEMEX S.A.B. de C.V.'s (CEMEX); CEMEX Mexico, S.A. de C.V.; CEMEX Espana, S.A.; CEMEX Research Group AG; CEMEX Shipping B.V.; CEMEX Asia B.V.; CEMEX Egyptian Investments B.V.; CEMEX UK; CEMEX France Gestion; and CEMEX Corp. as primary guarantors. CEMEX Concretos, S.A. de C.V.; Empresas Tolteca de Mexico, S.A. de C.V.; and New Sunward Holding B.V. are additional guarantors. The guarantees are full and unconditional for both principal and interest payment. Proceeds from the issuance will be used to repay debt under the Facilities Agreement.
The Rating Outlook is Stable. For a complete list of ratings please see the end of the press release.
The notes will be secured with a first priority interest over a collateral package consisting of substantially all of the shares of CEMEX Mexico, S.A. de C.V.; Centro Distribuidor de Cemento, S.A. de C.V.; Mexcement Holdings, S.A. de C.V.; Corporacion Gouda, S.A. de C.V.; CEMEX Trademarks Holding Ltd.; and New Sunward Holding B.V. The notes are also expected to be secured with a first priority security interest in the shares of CEMEX Espana, S.A.
The 'B' ratings of CEMEX and its subsidiaries reflect the company's high leverage and limited free cash flow prospects through 2014. CEMEX had USD17.629 billion of total debt and USD611 million of cash and marketable securities as of June 30, 2012. For the LTM ended June 30, 2012, CEMEX generated USD2.418 billion of EBITDA, resulting in a total debt/EBITDA ratio of 7.3x and a net debt/EBITDA ratio of 7.0x. Cash flow from operations was USD641 million during the LTM ended June 30, 2012, which is slightly lower than for the comparable period of the prior year.
Fitch expects CEMEX's leverage to remain high through the end of 2014. Fitch projects that CEMEX will generate about USD2.450 billion of EBITDA in 2012, USD2.550 billion in 2013 and USD2.900 billion in 2014. Free cash flow after capex and the payment of coupons on the company's perpetual notes is projected by Fitch to be negative USD150 million in 2012, neutral in 2013 and positive USD500 million in 2014. At these levels, absent asset sales, CEMEX's leverage will continue to be elevated and the company will need to focus on cost control and liability management.
A recovery of the company's U.S. operations is crucial to generating free cash flow in excess of USD1 billion annually and lowering leverage. CEMEX generated USD2.339 billion of EBITDA during 2011. Its main markets were Mexico (USD1.2 billion), Central and South America (USD513 million), the Mediterranean (USD439 million) and Northern Europe (USD416 million). Cemex's U.S. operations were very weak in 2011, generating a negative EBITDA of USD100 million. This compares with pro forma estimated U.S. EBITDA of USD2.6 billion during 2006 - estimated as though Rinker were consolidated.
Cemex has a more manageable debt amortization schedule due to the new Facilities Agreement that it closed on Sept. 17, 2012. The company has USD1.1 billion of debt maturing in 2013, USD1.7 billion in 2014 and USD1.4 billion in 2015. The amortization schedule then escalates, to USD3.1 billion in 2016, USD4.8 billion in 2017 and USD2.7 billion in 2018. Cemex's new Facilities Agreement has springing maturities which could lead to about USD7.4 billion falling due in 2014 if debt outside of this agreement is not refinanced, extended or purchased prior to its maturity date
The 'RR3' Recovery Rating (RR) on the company's capital market's debt indicates above-average recovery prospects in the event of default (anticipated to be in the range of 50% to 70%). CEMEX and its subsidiaries have issued debt instruments from Mexico, the United States, the British Virgin Island, 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 bankruptcy scenario for CEMEX in the event of additional financial distress, as creditors would most likely not want to enter a process with such a high degree of uncertainty regarding the outcome. In Fitch's opinion, the most likely scenario under additional stress would be a negotiated restructuring of the debt subject to the Financing Agreement and the company's additional capital markets debt.
In deriving a distressed enterprise valuation to determine the recovery under this scenario, Fitch discounted the company's LTM EBITDA to USD2 billion, a level that would barely cover operating leases, interest expenses and maintenance capital expenditures. A 20% decline in EBITDA to this level would most likely be driven by a more marked deterioration of the eurozone, which would send the U.S. into a double-dip recession, and have a negative impact on Cemex's Mexican operations. Currently, the strong performance of CEMEX's Central, South America and Caribbean operations and the gradual improvement of its U.S. operations have been able to offset the negative cash flow trajectory of its Mediterranean operations, comprised mainly of Egypt and Spain, as well as its Northern European division.
In determining a projected recovery in the event of default, Fitch applied a 6x distressed EBITDA multiple. The low multiple reflects the high leverage within the industry, which would hamper a competitive bidding process. It also reflects the fact that if Europe would deteriorate to the point that the U.S. entered a double-dip recession, the core operations of some potential bidders would also be weak, limiting their ability to pursue the purchase of CEMEX or some of its larger assets.
What Could Trigger a Rating Action
Positive Rating Actions: Key factors toward recovering the company's capital structure and future upgrades will be the recovery of the anemic U.S. economy and improved demand for cement. A stabilization of risks related to the eurozone would also be positive in terms of improving the overall operating environment of Cemex in Europe, and could contribute to a positive rating action in the future.
Negative Rating Action: A number of factors could 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 divisions. Further weakening in Europe or the U.S. would also have a material impact upon cash flow and could lead to a ratings downgrade as well.
Fitch currently rates CEMEX Finance LLC and CEMEX as follows:
CEMEX Finance LLC
-- Foreign and local currency Issuer Default Rating (IDR) 'B';
-- Senior unsecured notes 'B+/RR3'.
-- Foreign and local currency IDR 'B';
-- Senior unsecured notes 'B+/RR3';
-- National scale long-term rating 'BB-(mex)';
-- National scale short-term rating 'B (mex)'.
In addition to the aforementioned ratings of CEMEX Finance LLC and CEMEX, Fitch also maintains the 'B' foreign currency IDRs of the following entities that CEMEX has used to issue debt, as well as 'B+/RR3' ratings of debt issued by them:
Cemex Espana S.A. (Cemex Espana)
--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 Euro Capital (SPV) Limited, a British Virgin Island restricted purpose company
CEMEX Finance Europe B.V., which is incorporated in The Netherlands.
CEMEX Materials Corporation, a limited liability company incorporated in the U.S.
Additional information is available at 'www.fitchratings.com'.The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'National Ratings - Methodology Update', Jan. 19, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011.
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
National Ratings Criteria
Corporate Rating Methodology
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Source: Fitch Ratings