Bloomberg News

Cemex Buy Recommendations Rejected by Investors: Mexico Credit

September 20, 2011

Sept. 20 (Bloomberg) -- Yields on bonds of Cemex SAB, the biggest cement maker in the Americas, are soaring to a record as concern that slowing global growth will curb revenue prompts investors to reject buy recommendations.

Yields on Cemex’s dollar bonds due in 2018 jumped 83 basis points in the past month through yesterday and touched 13.64 percent last week, the highest since the securities were issued in January, according to data compiled by Bloomberg. The average yield on debt sold by junk-rated global building materials companies rose 10 basis points, or 0.1 percentage point, during the same period, according to Bank of America Corp.

While analysts from five banks are advising clients to purchase Cemex’s bonds as a bet it will be able to weather the slowdown in the U.S. and Mexico, investors are selling amid concern the economic slump will crimp its ability to repay debt. JPMorgan Chase & Co. and ING Groep NV unveiled their calls to buy the securities last week, adding to recommendations made in the past month by Barclays Plc, Citigroup Inc. and Miller Tabak Roberts Securities LLC.

“Cemex depends a lot on growth and on infrastructure spending,” Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA in Mexico City, said in a telephone interview. “With everything we’re seeing in the U.S. and in Mexico, we’re not expecting much for Cemex. They’re going to have to restructure their debt. They’re not going to go bust, but they’re going to face a lot of problems.”

Growth Outlook

Cemex bonds yield 1,144 basis points more than Mexican government securities due in 2019 as of yesterday, compared with 430 at the end of March, according to data compiled by Bloomberg. Notes maturing in 2016 issued by Lafarge SA, the world’s biggest cement maker, yield 6 percent, or 756 basis points less than Cemex.

Jorge Perez, a Cemex spokesman in the Monterrey suburb of San Pedro Garza Garcia, declined to comment on the performance of the bonds.

The U.S., where Cemex got 19 percent of its revenue in 2009, may post economic growth of 1.6 percent this year after expanding 3 percent in 2010, according to the median estimate of 68 analysts surveyed by Bloomberg. Mexico’s economy, the company’s biggest market, will grow 4 percent this year after expanding 5.4 percent in 2010, central bank Governor Agustin Carstens said Sept. 8.

‘Attractive’

Investor concern about Cemex’s ability to service its debt is growing two years after the company refinanced $15 billion of bank debt to avoid a default amid the global financial crisis. A covenant under the bank agreement requires Cemex to have net debt relative to earnings before interest, taxes, depreciation and amortization of 7 times or less. The ratio was 7.16 times at the end of June.

Cemex’s stock fell 8.7 percent in Mexico City today, leaving it down 56 percent this year, the worst performing member of the benchmark IPC index. Yields on the company’s dollar bonds due in 2016 rose eight basis points to 13 percent.

Alvaro Gonzalez, an emerging-market credit analyst at Miller Tabak Roberts Securities LLC, began recommending clients buy Cemex’s bonds on Aug. 22. Investors who followed his advice would have lost 1.8 percent since then.

“You can never calculate the timing perfectly,” Gonzalez said in a telephone interview. “Bonds continue to be attractive.”

‘Top Pick’

Cemex will have no problem making debt payments, Natalia Corfield, a corporate analyst at ING in New York, said in an a report dated Sept. 12.

The company has sold $2.45 billion of debt overseas this year to help repay the bank debt. It has 4.1 billion pesos ($334 million) of local bonds and about $195 million of bank debt outside the financing agreement that matures through the end of 2013. It’s scheduled to make $8.1 billion in debt payments in 2014.

“Cemex is my top pick,” Corfield said in an e-mail. “We do not see refinancing risks in the next few years.”

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed 7 basis points to 235 at 5:47 p.m. New York time, according to JPMorgan.

The peso fell 0.8 percent to 13.2299 per U.S. dollar.

Yields on futures contracts for the 28-day TIIE interbank rate due in April 2013 rose 2 basis points to 5.01 percent.

Bond Rebound

The cost to protect Mexican debt against non-payment for five years rose five basis points today to 174, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Cemex’s bonds will rebound as concern the U.S. may fall into recession eases, according to Guillermo Rodriguez, who helps manage about $5.5 billion at Corp. Actinver SAB.

“The company isn’t that bad,” Rodriguez said in a telephone interview from Mexico City. “The fundamentals of the company haven’t changed. My scenario is that the U.S. won’t fall into a second recession. The economy will grow more slowly than expected, but there will be a recovery.”

Cemex’s rating was cut seven levels by Standard & Poor’s over a 10-month span ending August 2009 after the company boosted debt levels to pay for the $14.2 billion acquisition of Rinker Group Ltd. in 2007. The Rinker purchase formed part of a two-decade, $29 billion acquisition spree by Chief Executive Officer Lorenzo Zambrano, whose grandfather founded the company in 1906.

‘Remain Strong’

Christopher Buck, a corporate debt analyst at Barclays, said in a Sept. 15 report that Cemex will be able to weather the slowdown in Mexico and the U.S. Growing aversion to higher- yielding assets globally means the company’s bonds are unlikely to rebound in the “near term,” he said in the report.

“We expect cement demand will remain strong even if economic conditions come under pressure,” Buck wrote, referring to demand in Mexico.

JPMorgan analysts including Isabela Bacchi recommended on Sept. 15 that investors take an “overweight” position on Cemex bonds due in 2014, 2015 and 2017.

“Prices and valuations have gone too far,” the analysts wrote.

Eric Ollom, a New York-based credit strategist at Citigroup who recommended investors buy Cemex’s bonds due in 2018 last month, declined to comment further.

“It’s a good time to buy the bonds if you can stomach the volatility,” Ollom said in a telephone interview last month.

Bondholders may have to wait until 2012 for a rally in the securities, said Gonzalez at Miller Tabak Roberts. Demand may remain tepid until then, he said.

“I don’t expect Cemex to rebound from one day to another,” Gonzalez said.

--With assistance from Thomas Black in Mexico City. Editors: Lester Pimentel, Jonathan Roeder

To contact the reporters on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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