Fitch Rates CEMEX's Notes 'BB-(EXP)'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an expected rating of 'BB-(EXP)' to CEMEX S.A.B. de C.V.'s (CEMEX) proposed EUR400 million secured notes issued through its subsidiary CEMEX Finance LLC. Proceeds from the notes will be used for general corporate purposes, including liability management.

The guarantors for the notes will be CEMEX, S.A.B. de C.V., CEMEX Mexico, S.A. de C.V., CEMEX Concretos, S.A. de C.V., Empresas Tolteca deMexico, S.A. de C.V., New Sunward Holding B.V., CEMEX Espana, S.A., Cemex Asia B.V., CEMEX Corp., Cemex

Egyptian Investments B.V., Cemex Egyptian Investments II B.V., CEMEX France Gestion (S.A.S.), Cemex Research Group AG, Cemex Shipping B.V., and CEMEX UK. The notes will enjoy the same collateral package as the creditors under CEMEX's Credit Agreement.

KEY RATING DRIVERS

Leverage to Remain High

Fitch projects CEMEX's net leverage will remain unchanged in 2016 at around 5x, absent asset sales and new equity from conversion of convertibles and CEMEX's planned Philippines public offering. Challenges to organic deleveraging include low single digit volume growth in many markets and the weak performance of CEMEX's equity preventing the anticipated debt to equity conversion. Targeted asset sales of approximately USD1.0 - 1.5 billion over the next 18 to 24 months coupled with the IPO of its Philippines operations would lower leverage by around 0.7x.

Weak Stock Performance

The poor performance of CEMEX's stock price has lowered the probability that the company will be convert more than USD1 billion of debt to equity. CEMEX has USD690 million of convertible debt due in 2018 and USD521 million due in 2020. The strike prices for these conversions are USD8.92/ADS for the 2018 convertibles and $11.45/ADS for the 2020 convertibles, which compares with a current stock price of USD6.61.

Continued Free Cash Flow Generation:

Fitch expects CEMEX's free cash flow generation growth to remain above USD600 million in 2016. Keys to positive FCF in 2016 include strong price increases in key markets, continued cost reduction measures, reduced working capital cycle, lower interest expense, and lower cash taxes. Sluggish volume growth in Mexico, Colombia, and Europe will partially offset some of the strong positive free cash flow generation.

Strong Business Position:

CEMEX's 'BB-' IDRs continue to reflect its strong and diversified business position. The company is one of the largest producers of cement, ready-mix and aggregates in the world. Key markets include the U.S., Mexico, Colombia, Panama, Spain, Egypt, Germany, France, Poland, the U.K., and the Philippines. The company's product and geographic diversification offset some of the volatility associated with the cyclical cement industry.

Growth in EBITDA Margins:

CEMEX's EBITDA margins were 18.2% during 1Q16, which was a 120 basis point (bps) improvement compared to 1Q15. Fitch projects CEMEX's EBITDA margins will remain above 18% in 2016 as continued EBITDA growth in the U.S. coupled with continued companywide cost reductions will result in sustained profitability for the year.

Improvements in U.S. Market:

CEMEX's main markets during 2015, in terms of EBITDA, were Mexico (39%), Central and South America (23%), the U.S. (19%), Europe (9%), and Asia, Middle East, and Africa (18%) before others and intercompany eliminations. CEMEX's U.S. EBITDA was USD109 million in 1Q16, which represents a 71% increase from 1Q15.

KEY ASSUMPTIONS

--U.S. cement sales volumes increase mid-single digits in 2016;

--Mexico cement sales volumes increase low-single digits in 2016;

--Consolidated sales volume growth of low-single digits in 2016;

--Capital expenditures of approximately USD700 million in 2016;

--Additional asset sales of approximately USD0.7-1.5 billion over the next 18 months.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Rating downgrades are not likely during 2016 as CEMEX's credit protections remain consistent with the category despite underperformance by some key business units. CEMEX received an unfavorable ruling by the Spanish tax authorities during 2014 that could result in a payment of EUR455 million. If the company is unsuccessful in its appeal, this fine would hinder its ability to deleverage and could lead to a negative rating action if the payment coincides with sluggishness in other key markets.

--A loss of the positive momentum in the U.S. market would have a material impact upon the company's credit profile and could pressure leverage to around 6.0x, which could result in a negative rating action.

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Net leverage at or less than 4.0x could lead to an upgrade of both the IDR and the company's notes to 'BB'.

--Fitch projects that CEMEX's EBITDA in its U.S. operations will grow to USD650 million by 2016 from USD565 million in 2015. This projection incorporates an expectation that single-family and multi-family housing starts in the U.S. will total 1.2 million in 2016. Growth beyond this figure would be positive for the company's U.S. business and would accelerate its deleveraging process.

--Cement demand in Mexico has underperformed Fitch's expectations since 2014, and this has offset improvements in operating cash flow in the U.S. and in Asia. EBITDA generated by CEMEX in Mexico declined approximately 3% to USD966 million in 2015 compared to USD999 million in 2014. Fitch currently projects EBITDA in this market to remain relatively flat in 2016. A turnaround in the Mexican market to EBITDA levels of around USD1 billion could also accelerate debt reduction.

LIQUIDITY

CEMEX has a manageable amortization schedule as a result of its aggressive refinancing efforts over the past few years. The company had USD1.3 billion of cash and marketable securities compared to zero short-term debt as of March 31, 2016. Most of the company's marketable securities are held in U.S. and Mexican government bonds. Approximately 83% of CEMEX's debt is denominated in USD and 16% in euros. CEMEX also had full availability under its USD735 million committed revolving credit facility as of March 31, 2016.

Fitch currently rates CEMEX as follows:

CEMEX

--Foreign and Local Currency Long-Term IDRs 'BB-';

--Senior secured notes due 2018, 2019, 2021, 2022, 2023, 2025, and 2026 'BB-';

--National scale long-term rating 'A-(mex)';

--Senior unsecured certificates due 2017 'A-(mex)';

--National scale short-term rating 'F2(mex)'.

Fitch currently rates the following guaranteed debt 'BB-':

CEMEX Materials LLC, a limited liability company incorporated in the U.S.

--Senior Notes due 2025.

CEMEX Finance LLC, a limited liability company incorporated in the U.S.

--Senior secured notes due 2021, 2022, and 2024.

C5 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Senior secured perpetual notes.

C8 Capital (SPV) Limited, a British Virgin Island restricted purpose company

--Senior secured perpetual notes.

C10 Capital (SPV) Limited, a British Virgin Island restricted

purpose company

--Senior secured perpetual notes.

C-10 EUR Capital (SPV) Limited, a British Virgin Island

restricted purpose company

--Senior secured perpetual notes.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Leases: Fitch has adjusted the debt by adding 7x of yearly operating lease expense of $1.7 billion for 2015 and $419 million for 1Q16.

Date of Relevant Rating Committee: July 27, 2015

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005753

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160608006065/en/

Fitch Ratings
Primary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Gilberto Gonzalez, CFA
Associate Director
+1-312-606-2338
or
Committee Chairperson
Sergio Rodriguez Garza
Senior Director
+52-81-8399-9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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