MOODY'S UPGRADES THE RATINGS OF CEMEX, S.A. de C.V. (SENIOR TO Ba1, POSITIVE OUTLOOK) AND ASSIGNS A Baa3 SENIOR IMPLIED RATING TO COMPANIA VALENCIANA DE CEMENTOS PORTLAND, S.A.
Moody's Investors Service upgraded the senior debt ratings of CEMEX, S.A. de C.V. and its subsidiary Cemex Mexico, S.A. de C.V. (formerly Tolmex) to Ba1 from Ba2. The rating outlook is positive. Moody's also assigned a Baa3 senior implied rating and a Ba1 senior unsecured issuer rating (for issues not carrying subsidiary guarantees) to Compania Valenciana de Cementos Portland, S.A. (CVCP), a Spanish subsidiary of CEMEX which serves as the holding company for international operations, and upgraded the ratings of the Putable Capital Securities of CEMEX International Capital LLC, a U.S.-based subsidiary of CEMEX Netherlands B.V., a subsidiary of CVCP, to "ba2" from "ba3" and the subordinated debentures of CEMEX Netherlands to Ba2 from Ba3. The ratings reflect continued improvement in the operating performance and debt protection measures of CEMEX and CVCP, while acknowledging the risks associated with a debt-financed international growth strategy.
Ratings upgraded are:
Cemex, S.A. de C.V. -- guaranteed senior unsecured debt and medium term notes to Ba1 from Ba2, senior implied rating to Ba1 from Ba2, senior unsecured issuer rating to Ba2 from Ba3.
Cemex Mexico, S.A. de C.V. (formerly Tolmex) -- senior unsecured debt to Ba1 from Ba2
CEMEX International Capital LLC -- Putable Capital Securities to "ba2" from "ba3"
CEMEX Netherlands B.V. -- subordinated debentures to Ba2 from Ba3
The ratings assigned are:
Compania Valenciana de Cementos Portland -- senior implied rating of Baa3, senior unsecured issuer rating of Ba1
Ratings not affected by this action:
Cemex S.A.-- commercial paper at Not Prime
Over the past several years, CEMEX has established CVCP as the holding company for non-Mexican operations and has transferred debt from the CEMEX holding company to the CVCP level. Although the business and financial strategies of CEMEX and CVCP are clearly linked, Moody's analysis of CEMEX currently evaluates the company in two segments: CEMEX holding company debt supported by guarantees from Mexican operations, and CVCP debt serviced by international operations. Although dividend upstreaming from CVCP is allowed to the extent of 60% of net income according to the terms of CVCP's syndicated loan facility, Moody's does not look to this potential source of cash flow as supporting CEMEX holding company debt, given the fact and intention of CEMEX to apply CVCP cash flows to its international growth. Notwithstanding this distinction, the ratings are clearly linked, and to the extent that barriers to cash flow between the groups are lowered, the ratings could ultimately equalize at CEMEX's then-prevailing senior implied rating.
The ratings for CEMEX recognize the company's strengths, including a leading market position in Mexico, strong and increasing cash flows, efficient operations, creative financial management, and ownership of CVCP. The Baa3 senior implied rating for CVCP reflects the company's diversity of cash flows, the majority of which are generated in highly rated sovereigns, slightly better debt protection measurements than CEMEX, a longer debt maturity profile, and the company's role as a source for future growth for CEMEX. The Ba1 senior unsecured issuer rating reflects potential structural subordination should future debt issuance not carry subsidiary guarantees currently afforded to CVCP's syndicated loan facility.
For both CEMEX and CVCP, the primary risk to the rating is the rate at which a strategy of global growth via acquisition proceeds. The company's active acquisition program has been financed with a combination of free cash flow and debt. Thus far, CEMEX has been successful with this strategy, given the company's ability to generate cost savings at acquired operations, and given a strong operating environment in its major markets in recent years. Thus, total consolidated debt has remained stable over the past three years despite significant acquisition activity. Nevertheless, this strategy is susceptible to the risks of economic recession in countries that serve as the primary sources of cash flow -- Mexico, Spain and the United States -- whereby debt protection measures could erode rapidly in the event of economic downturn. Thus, Moody's expects that CEMEX would adopt a somewhat more conservative approach to debt incurrence as it seeks to achieve investment grade status at the holding company level. While CVCP has been accorded that status on a senior implied basis, the rating is somewhat forward-looking and assumes management commitment to achieving continued improvement in debt protection measures over time despite ongoing acquisition activity. An additional consideration in the CVCP rating is the potential for structural subordination to weaken the rating at the CVCP holding company level. CVCP incurs subsidiary debt for the purposes of tax and interest rate efficiency. If subsidiary debt were to increase significantly beyond the boundaries established by these financial objectives, the rating at CVCP could be pressured.
Over the past several years, CEMEX has grown consistently and has gradually established more challenging financial targets, which currently stand at 3.5x interest coverage and 2.7x net debt/EBITDA. Moody's recognizes CEMEX's significant progress thus far, particularly the ability to improve financial performance while acquiring operations around the world. CEMEX's market strategy is eminently logical from a long term perspective. Given management's ambition to achieve an investment grade rating for CEMEX, the company will continue to face the challenge of achieving long term growth while establishing more conservative financial targets.
CEMEX, S.A. de C.V., headquartered in Monterrey, Mexico, is the world's third largest producer of cement. Revenues were $4.8 billion in 1999.
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