Bloomberg News

Cemex Rebounds as Sub-60 Cent Price Lures Buyers: Mexico Credit

October 14, 2011

Oct. 14 (Bloomberg) -- Cemex SAB, the largest cement maker in the Americas, is posting the biggest rally in Mexico’s bond market as investors bet yields that earlier this month exceeded 20 percent exaggerate the risk of default.

Yields on Cemex’s dollar bonds due in 2018 have plunged 589 basis points to 16.2 percent since reaching a record 22 percent on Oct. 4, while the bond’s price soared to 72.37 cents on the dollar from as low as 56.65 cents, according to data compiled by Bloomberg. The average yield on Mexican corporate debt fell 52 basis points, or 0.58 percentage point, during the same period to 6.77 percent, according to JPMorgan Chase & Co.

Cemex is benefitting from a global rebound in higher- yielding assets spurred by speculation Europe will address its debt crisis. Cemex’s debt sank earlier this month on concern it may fail to meet terms of a $15 billion loan agreement that helped it avoid default in 2009 as growth slows in Mexico and the U.S. Chris Wilder, a portfolio manager at Stone Harbor Investment Partners LLC, said he boosted holdings of Cemex debt this month because the market overstated the chance of default.

“The bonds trading in the 50s and the 60s -- that makes no sense,” Wilder, who helps oversee about $24 billion in emerging-market assets, said in a telephone interview from London. “Cemex has hit bottom. Assuming they remain on target on paying down the bank debt, then the banks are going to be willing to roll over the debt.”

Global Rally

Cemex’s bonds yield 1,265 basis points more than similar- maturity Mexican government bonds, compared with 1,826 on Oct. 4, according to data compiled by Bloomberg. The company is rated B by Standard and Poor’s, five levels below investment grade and six steps below Mexico. The average yield on debt sold by companies rated junk, or below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, fell 76 basis points during that period, according to Bank of America Corp.

The Standard & Poor’s 500 Index earlier this week posted its best rally over seven days since 2009 as German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged to deliver a plan to recapitalize banks and address Greece’s debt crisis.

The price of Cemex’s bonds fell to a record low 56.65 cents on the dollar on Oct. 4 as concern the company may breach covenants mounted. The banks that arranged the loan agreement in 2009 can force Cemex into bankruptcy if the company is unable to cut its total funded debt relative to earnings before interest, taxes, depreciation and amortization below 7 times by year-end from 7.16 times.

Renegotiating Terms

Cemex, based in Monterrey, would seek to renegotiate year- end covenants if it wasn’t able to comply with the terms of the agreement, Maher Al-Haffar, chief of communications and investor relations, said in a telephone interview Oct. 5. The company plans to sell about $1 billion of assets by the end of 2012 to reduce debt, Chief Executive Officer Lorenzo Zambrano said in a webcast of a meeting with analysts Sept. 29 in New York.

Cemex spokesman Jorge Perez declined to comment citing company policy.

Alonso Madero, who helps manage about $5.5 billion at Corp. Actinver SAB, said he may add to his holdings of Cemex bonds because yields are “attractive.”

“Cemex bonds were trading as if the company was bankrupt, which is absolutely illogical,” Madero said in a telephone interview in Mexico City. “We’re inclined to take advantage of these attractive levels.”

Stock Rebounds

Cemex is the best-performing company on the Bolsa de Mexico index this week after rising 28 percent. The shares climbed as much as 24 percent on Oct. 12 on speculation investors sold short positions on the U.S. shares. Cemex said it had nothing to disclose in a filing to the Mexican stock exchange. The stock rose 9 percent to 4.96 pesos yesterday.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries fell 10 basis points to 224 at 7:27 a.m. in Mexico City, according to JP Morgan’s EMBI Global index.

The peso rose 0.7 percent to 13.3380 per U.S. dollar.

Yields on futures contracts for the 28-day TIIE interbank rate due in December rose one basis point yesterday to 4.69 percent.

The cost to protect Mexican debt against non-payment for five years increased four basis points yesterday to 154, 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.

Yields on Cemex’s bonds climbed 51 basis points yesterday, underscoring the securities’ vulnerability to swings in global markets.

‘Bad Enough’

Cemex bonds may slump if the crisis in Europe deepens or the U.S. falls into a recession, according to Joe Kogan, a credit analyst at Scotia Capital.

“If a crisis gets bad enough, it can happen,” Kogan said in a telephone interview. “Nothing fundamentally has changed. Whatever was bothering investors can start bothering them again.”

The U.S., the destination for 80 percent of Mexico’s exports, will expand 1.7 percent this year after rising 3 percent in 2010, according to the median estimate of 91 analysts surveyed by Bloomberg. Mexico’s economic growth will slow to 4 percent this year from 5.4 percent in 2010, central bank Governor Agustin Carstens said Sept. 8.

Cemex’s credit 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 Zambrano, whose grandfather founded the company in 1906.

Cemex reported a net loss of $294 million in the second quarter, the seventh straight quarter of losses.

“Certainly, Cemex has problems, but the drop in the market was exaggerated,” Actinver’s Madero said. “It’s unlikely that the yield on Cemex bonds will go back to 20 percent.”

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

To contact the reporters on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net; Katia Porzecanski in New York at kporzecansk1@bloomberg.net

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


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