How Should Cemex Plan to Meet its Financial Objectives

QUESTION

 

You are leading Cemex’s financial planning group. It is Christmas – December 2008. You are faced with a
debt repayment of $5.5 billion in 2009, and the company does not – and is not expected – to have that kind
of capital available for repayment of the debt.

Cemex believes it will generate net income of roughly $200 million in 2009. With that inflow, and assuming
that corporate planning requires an end of year cash balance of $1.0 billion for 2009 (minimum), how should
Cemex plan to meet its financial objectives?

 

ANSWER

 

Financial Plan 2009

Global Financial crisis has brought in tough times for CEMEX as the sales and earnings have declined, a $711million loss on financial derivatives and lenders are not willing to extend, roll over or refinance their debt. After the Rinker acquisition, CEMEX’s credit profile with its lender was changed and posed challenges to the company to service its debt obligation. CEMEX is scheduled to repay US$5.5 billion and it needed a restructuring plan for 2009 to service its debt. While CEMEX cannot direct the market trajectory, it can focus on managing variables within its control. To align the company’s cost structure with current market realities, the company need to execute a global cost reduction and efficiency program.

The company should restructure its existing short-term debt and long-term debt. The company will settle this year US$3 billion loans and refinance the remaining US$2.5 billion short-term debt maturing in 2009 to a future date. CEMEX will sell its assets in Australia and Venezuela and also its other non-care assets, as well as through issue of equity, long-term and convertible bonds. The terms and condition of refinancing will be based on mutual understanding between lenders and company. The new loan restructuring will be based on Net cash flow after interest expense of the company and asset sales. In 2009, the company will service its US$3 billion debt. In 2010, the company will service the debt of US$2.4 billion through its net operating FCF and asset sales. Assets sales of around US$1.5 billion are planned for 2010. Current outstanding debt of US$15.5 billion will be paid in the next 5 year (CEMEX Annual Report 2008).

The company will launch out a 5-year plan for refinancing of its major outstanding dues. This new maturity schedule will be consistent with the expected free cash flow generation and will provide the company with more financial flexibility. CEMEX will include revised covenants, limitation and mandatory prepayment obligations and limitations. Since CEMEX’s credit rating at the end of 2008 has been downgraded by 2 rating agencies, CEMEX needs to pay the additional cost for debt as the interest rate is linked to the credit rating of the company. The company will work towards reducing debt and leverage significantly towards the acceptable level of shareholders and lenders and will work towards regaining its investment grade rating by the rating agencies.

The company is expected to have a strong recovery in sales and EBITDA which will help in servicing debt and maturity schedule of refinancing. This would allow the company to have a stable capital structure and recover its investment-grade rating. According to estimates by company and analysts, there will be a gradual recovery in housing markets in the U.S., Europe, and Mexico. An estimated CAGR of sales of 5.5% and 8% in EBITDA for 2009-2013 is expected for CEMEX. This will give a healthy rise EBITDA which will help the company regain its steady state ratio of 2.5 for Net Debt/EBITDA and improve its financial stability (Fernandez n.d.).

Sales Estimate

The main goal for this year is to regain financial flexibility. Therefore to regain this company needs to take 4 actions –

a. Free Cash flow and asset sales proceeds will go towards debt reduction. This should be priority till CEMEX attains financial flexibility and attains a steady state ratio of 2.5 for its Net Debt/EBITDA.

b. Realization of synergies obtained from Rinker acquisition. This will help the company is reducing costs in various operational areas.

c. Reduction of capital structure. The company needs to stop expenditure on projects which will not generate cash flow in 2009 and cancel all the new projects.

d. Divesting of assets to generate cash flow and strengthen the balance sheet. The company needs to divest many of its assets which are not generating positive cash flow in present and in future. The company needs to build a portfolio of assets that are sustainable, positive cash flow generating and profitable in long-run.

Apart from these actions, CEMEX will also look to raise capital through bonds convertible into shares, capital bonds new shares. CEMEX has continuously issued shares between US$ 400 to 500 million and will continue this practice in the near future to raise capital for debt payment and growth opportunities. The company will not provide a cash dividend in the current financial year but will provide stock-based dividends to its existing shareholders. CEMEX will be able to achieve its financial stability and investment-grade rating in the next few years and return the company to sustainable and profitable growth in the future.

Based on the operating levers (CAPEX, Asset sales, Equity issuance, and Dividends) available to CEMEX, the company can make the following decisions –

First, CEMEX needs to cut down its CAPEX to US$700 million for maintenance capital expenditure. The company’s topmost priority for 2009 is debt repayment or restructuring necessary for the company’s survival in the future. Hence, there would be no expansionary CAPEX or CAPEX for building or acquiring newer assets. The company has already employed lean practices in its manufacturing, it cannot further cut down its CAPEX. The company should complete those projects that will generate cash flow in the first half of 2009 and is expecting the realization of synergies through the previous acquisitions.

Second, CEMEX’s divestment of assets in Australia and Venezuela business. CEMEX has divested a number of units in Europe. CEMEX has sold its canary operations and is in talks for its Hungary and Austria’s unit. Therefore, improving the portfolio of assets held by CEMEX to generate long-term sustainable and profitable and generating cash to service of its debt can be done by selling its Australian and Venezuelan assets. An estimated sale of US$1.5 billion from asset sales is expected in 2009.

Third, since the company is using its cash generated and non-earning sources to pay-off debts, it must cut out on cash dividends completely. CEMEX will offer the shareholders equity-based dividend which will not require the use of cash and will not be registered on the cash-flow statements. The company needs to send out the notification to its existing shareholders about the existing crisis the company is facing and why it has cut out on dividend this year.

Lastly, CEMEX will issue additional equity shares, long-term and convertible bonds. This method of raising capital is generally used by a growing company. Potential shareholders before buying may look up at the existing financial statement and future earnings prospects which might not be promising at this moment. However, expectations of recovery and CAGR of 5 to 8 % for Sales and EBITDA from 2010 to 2013 will boost the expectations of shareholders to purchase the additional issue.

Through these four levers, CEMEX will not be able to achieve a positive US$1 billion of cash level at year end of 2009. Therefore, it will need to refinance part of its current liability to the future maturity date. The cost of debt will be higher as CEMEX has been downgraded from its investment grade and it has to add additional covenants and guarantees to its lenders. CEMEX is expected to service part of its US$5.5 billion in the coming financial year and will be servicing US$3 billion this year and remaining in next year through expected asset sales and cash flow generated.