Monday, October 31, 2011

MEXICO: Losses put Cemex under pressure



Cemex, the world’s third-largest cement producer by production, reported hefty third-quarter net losses of $821.7m on Wednesday, heightening concerns over its ability to meet forthcoming debt obligations.

The losses, which were more than twice what analysts had expected, place the Mexico-based company under increasing pressure as it struggles to meet a December covenant to lower its debt-to-earnings ratio.



As part of a $15bn bank loan negotiated in 2009 to avoid bankruptcy, the company committed to reducing its level of total funded debt to seven times earnings before interest, taxes, depreciation and amortisation by December. Last month, that ratio stood at 7.2 times.

Yet analysts were quick to point out that much of the third-quarter losses came from adverse foreign-exchange movements as well as equity derivatives on Cemex shares, which fell more than 50 per cent during the quarter.

Meanwhile, consolidated earnings before interest, tax, depreciations and amortisation grew 1 per cent to $658m for the quarter. “We see the results as positive,” said Barclays Capital in a research note. Cemex shares in New York went up 2.4 per to $3.67 in early morning trading.

Attempting to head off concerns surrounding the December covenant, Fernando González, the company’s executive vice-president of finance and administration, said in a press release on Wednesday that the company continued “to be confident in our ability to meet all of our financial obligations”.

Mr González said that Cemex had already sold $80m in non-core assets during the first nine months of this year, and planned to sell between $100m and $200m in further assets before December. The sell off is part of a plan to raise $1bn in such sales between now and the end of next year.

Fortunes turned sharply for Cemex following its $14.2bn purchase of Rinker, the Australian building-materials supplier, in 2007. The acquisition, which was funded with short-term debt, substantially increased the Mexican company’s exposure to the US and European markets just at the onset of the US financial crisis and subsequent global recession.

More recently, Cemex saw its share price plunge to 13-year lows as prospects dimmed for recovery in key US and European markets. At the same time, a rapid devaluation of the Mexican peso in recent weeks has made it more difficult for the company to pay its dollar-denominated debt.

There were several bright spots in Wednesday’s results. Net sales during the quarter increased 5 per cent to about $3.9bn, driven mainly by a 9 per cent year-on-year improvement in northern Europe where sales were $1.3bn. In the US, net sales reached $713m, up 4 per cent compared with the same quarter in 2010.

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