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Rating Action:

MOODY'S CONFIRMS CEMEX S.A. de C.V.'S Ba1 AND CEMEX ESPAÑA'S Baa3 SR. UNSECURED RATINGS; OUTLOOK IS STABLE

03 Mar 2005
MOODY'S CONFIRMS CEMEX S.A. de C.V.'S Ba1 AND CEMEX ESPAÑA'S Baa3 SR. UNSECURED RATINGS; OUTLOOK IS STABLE

Approximately $1 billion in long-term debt securities affected

New York, March 03, 2005 -- Moody's Investors Service has confirmed the Ba1 senior unsecured ratings of Cemex S.A. de C.V. ("Cemex") and the Baa3 senior unsecured ratings of Cemex Espana's guaranteed finance subsidiary, Cemex Finance Europe B.V., and its U.S. operating subsidiary, Cemex Inc. The outlook for all ratings is stable.

This concludes the review for possible downgrade Moody's initiated on September 28, 2004 following the company's announcement of its intent to acquire RMC Group Plc ("RMC") of the United Kingdom in an all debt-financed transaction, which has now closed ($5.8 billion, including the assumption of existing debt). RMC will become a subsidiary of Cemex Espana.

The ratings confirmed include:

Cemex S.A. de CV:

Ba1 senior unsecured notes

Ba1 senior implied

Cemex Finance Europe B.V.

Baa3 senior unsecured €2.0 billion MTN program

Cemex Inc.:

Baa3 senior unsecured notes

Moody's has also withdrawn the Baa3 senior implied and Ba1 issuer ratings at Cemex Espana and upgraded Cemex's issuer rating to Ba1 from Ba2. The notching of the Ba2 rating had reflected the risk of structural subordination posed by indebtedness at significant operating subsidiaries of both companies, and the upgrade to Ba1 reflects the reduction in the absolute amount of indebtedness at those entities.

While the RMC acquisition increases Cemex's overall business risk, primarily associated with the integration of a company that equals its size, the ratings confirmation reflects Moody's belief that Cemex management has proven adroit at effectively integrating past acquisitions. In addition, Moody's believes that the company will generate sufficient free cash flow to mitigate the credit risks associated with higher financial leverage in the near term. The ratings are supported by Cemex's position as the third largest global cement company with a leading vertical position in cement's primary downstream distribution market, ready-mix concrete, and a significant market share position in aggregates production. The confirmation also recognizes Cemex's strong operating performance as evidenced by modest revenue growth, expanding operating margins and increasing free cash flow, which Moody's expects will be primarily allocated to debt reduction over the next couple of years.

While the RMC acquisition could take up to 2 years to integrate, Moody's anticipates there are significant potential cost reduction and working capital efficiencies at RMC, whose operations are largely in investment grade countries. During this period, Cemex's legacy markets should continue to experience moderate operating performance improvement with increasing amounts of free cash flow, particularly due to the company's dominant market share in Mexico, where the company has above industry average margins, high return on capital invested and significant barriers to entry.

Moody's notes, however, that the company is faced with business risks associated with the RMC acquisition, including a higher concentration in lower operating margin regions, lower barrier to entry ready-mix concrete business, higher financial leverage and significant near-term refinancing risk as the average life of debt is currently under 3 years. As well, while the company has enjoyed improved economic conditions over the last year or so, the company remains exposed to economic cycles in many developing countries where revenue growth tends to track GDP growth. Moody's anticipates a potential decrease in demand for housing in many of Cemex's markets, particularly in the United States and Spain as interest rates rise and in Mexico where flagging demand in the self-construction sector is resulting in a fairly elastic pricing environment.

Given that background, the stable outlook incorporates the consolidated company achieving, over the next 12 months, lease adjusted debt to EBITDAR (2004 pro forma of approximately 3.4x) of well under 3.5x, free cash flow to total debt (2004 pro forma of approximately 11.5%) of 15%, and more than 3.5x EBIT interest coverage. In order to achieve this, Moody's assumes, in 2005, the company will generate approximately $15.7 billion in revenues (which is a 3.8% growth over 2004 pro forma), maintain at least 21% EBITDA margins, convert 43.5% of that EBITDA into more than $1.4 billion in free cash flow, and utilize 80%, or $1.2 billion of free cash flow to reduce absolute debt (approximately $800 million at Cemex and $400 million at Cemex Espana). In addition, the stable outlook is predicated on the company addressing significant near-term refinancing risk. More than $3 billion in debt comes due in 2006 and another $2.6 billion in 2007 resulting in an average life of less than 3 years.

Should the company fail to achieve the financial ratios stated above or to improve the debt maturity profile there could be negative pressure on the rating. A downgrade could ensue if lease adjusted debt to EBITDAR increases to 4.0x, free cash flow to total debt deteriorates close to 10%, and EBIT interest coverage falls close to 3.0x.

Over the intermediate term, Moody's anticipates the two stand-alone ratings at Cemex and Cemex Espana, which considers the two companies' differing guarantor groups that do not provide upstream nor downstream guarantees, are likely to converge. Conversely, Cemex's Ba1 rating could be upgraded to Baa3 if it is clearly evident that, prospectively, the company will be under 3.0x lease adjusted debt to EBITDAR, 20% free cash flow to total debt, and 4.0x EBIT interest coverage, and a median debt maturity profile that is a minimum of 5 years. Moody's notes that there are currently no limitations on the movement of cash between any of the company's significant operating entities further an eventual convergence of the two companies' ratings.

Cemex, headquartered in Monterrey, Mexico, is a growing global building solutions company that provides building products to customers in more than 50 countries throughout the world.

New York
David Hamburger
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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