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Friday, 15 December 2017

Cool in the face of danger

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Mexican cement giant Cemex made one ill-timed decision and in a second saw itself on the brink. However, instead of losing its cool, the company renegotiated US$15bn in loans and quickly tapped multiple markets to reduce its leverage, ensuring the underlying business was not adversely affected. Christopher Langner reports.

In the past two years Mexican cement giant Cemex has pulled itself back from the brink by renegotiating approximately US$15bn in bank debt and tapping multiple capital markets to reduce its leverage. Since September it has raised US$1.75bn with euro and US dollar denominated 2016 notes, US$750m with global convertible bonds and almost US$1.9bn through an equity follow-on. It also issued US$437m of new 10-year debt in exchange for a similar amount of its perpetual notes, and issued Ps4.1bn (US$315.3m) in local mandatorily convertible notes in Mexico, in exchange for local debt tendered by Mexican pension funds.

Many of these deals were landmarks: the US$1.25bn US dollar portion of the issuance of 2016 was the largest ever high-yield deal by a Latin American corporate; the local convertible was the first of its kind in Mexico; and the follow-on was the largest ever by a private company from Mexico. In fact, Cemex provided a study case on how to tap multiple funding sources successfully. “When you tap any investor group you have to first understand the supply-demand dynamic,” said CFO Rodrigo Trevino.

While Cemex has been praised in the past year for its capital markets prowess, it has also endured its share of criticism. Often viewed by bankers as tough on lenders and leads, and by analysts as excessively ruthless in its acquisition growth strategy, the company was humbled in 2009 in having to ask its banks to restructure US$15bn in loans.

In hindsight, Cemex was perhaps driven to that uncomfortable situation by its prior successes. After making a smart buy of UK-based RMC in 2005, which Cemex quickly integrated, the company felt empowered to pursue Rinker, a much bigger target. In April 2007, the Australian company accepted Cemex’s revised offer of roughly US$15bn. “[Rinker] was about US$5bn too big for us but we decided to pursue it anyhow, because we planned to sell about US$4bn-5bn in assets as part of the deal,” Trevino said.

At that point markets had started falling. Buyers that had expressed interest in the assets turned their backs, leaving a funding gap in their trail. Cemex started to tap the capital markets as much as it could, issuing over US$3bn in perpetual notes and other securities to pad its coffers. “We knew we would be highly leveraged and would be facing refinancing risk and there is nothing worse than that combination,” said Trevino. The funding effort was halted by the market closure after Lehman Brothers went bankrupt.

In 2009, some of the bank facilities taken on by Cemex to fund the RMC acquisition of 2005 were coming due. Cemex knew it had to engage the 50 banks in its syndicated loan. “Besides the 50 bankers that came in you had lawyers and advisors and not everybody is interested in getting the workout done quickly,” said Trevino.

despite difficult odds, Cemex worked out an agreement in just three months. By June most of the lenders were on board. “We committed to make a sacrifice and issue equity and with that concession it was in the interest of all to reach a quick agreement,” said Trevino.

The company then proceeded to tap markets sequentially, allowing it to meet its target of bringing gross debt to Ebitda down to 7.75 times by June. That ratio is currently just above seven times, meaning Cemex has already met its December target. By the end of 2013 Cemex’s target leverage is around 3.5 times. If housing and infrastructure investments in the US recover as analysts expect, the boost in Cemex’s Ebitda alone should enable it to meet covenants. However, scarred from the recent rout, Trevino is now prepared for the worst: “We know that the negotiations we had last year may not be the last so to be in a better position to have these conversations in the future it is good to show that we are proactive reducing exposure,” said Trevino.

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