Fitch Ratings has upgraded the foreign and local currency Issuer Default Ratings (IDRs) of CEMEX, S.A.B. de C.V. (CEMEX) to 'BB+' from 'BB', its senior unsecured notes to 'BB+' from 'BB', and its subordinated hybrid issuance to 'BB-' from 'B+'. Cemex's National Long-Term rating is being upgraded to 'AA-(mex)' from 'A+(mex)', and its National Short-Term rating is affirmed at 'F1'. The Rating Outlook is Stable.
The upgrade reflects CEMEX's ongoing stronger operating performance which along with asset sales have supported effective debt reduction since late 2019. The company has been also improving its debt profile, in terms of maturity, collateral basis and financial costs which translate to better financial flexibility. Fitch expects Cemex to solidly maintain credit metrics below 3.5x in the next 2 – 3 years while continuing to invest to optimise its portfolio, enhance its business position and advance on its sustainability agenda.
KEY RATING DRIVERS
Declining Debt Burden: Cemex's adjusted net debt has been showing a downward trend as it declined to USD7.9 billion in 2021 from USD9.4 billion in 2020 and USD10.2 billion in 2019. Debt reduction in 2021 was primarily driven by the sale of carbon credits for approximately USD550 million, FCF and USD500 million of equity credit from hybrid security issued in June 2021. Fitch expects Cemex to solidly maintain net debt/EBITDA ratios below 3.5x in the next 2-3 years, with net leverage projected to be 3.1x in 2022 and 2.8x in 2023.
U.S. Market Trends Still Positive: Despite rising interest rates and elevated inflation, Fitch expects the private non-residential and public construction end-markets to grow by low to high-single digits this year following declines in 2021, while residential construction activity grows modestly supported by record-high backlogs and long build cycles for many public homebuilders.
Risks remain that rapidly rising interest and mortgage rates, input cost inflation, and disrupted supply chains will weigh on demand in the construction end-markets. However, the Infrastructure Investment and Jobs Act and non-residential construction's tendency to follow growth in residential construction should support demand for cement beyond 2022.
Mexican Market to Normalise: Fitch expects cement demand in Mexico to return to more normal levels of around 43 million mt from the peak 46 million mt registered in the last 12 months ending 3Q21 as pandemic driven homes improvement spending gradually subsides over the next few years. During the last twelve months period ended in Mar. 2022 total volume was 44 million mt.
Manageable EBITDA Pressure: Fitch forecasts that CEMEX's adjusted EBITDA in 2022 will maintain slightly in line with 2021 figures, at USD2.5 billion per the agency's calculation (adjusted by IFRS16). This reflects general inflationary pressures as well as higher electricity and fuel costs, that should be partially offset by strong prices increases across the portfolio and regions. Still favorable long-term fundamentals in the U.S., and additional EBITDA from bolt-on investments should sustain EBITDA moderate growth in the next two years. For 2023-2024, Fitch estimates median adjusted EBITDA of USD2.7 billion.
Declining FCF Projected: CEMEX generated USD771 million of FCF in 2021, compared with USD674 million in 2020 and USD71 million in 2019, mainly through capex reduction, foregone dividends and higher EBITDA cash conversion. FCF is estimated around USD53 million for 2022 due to higher operating costs, working capital and capex. The increasing in raw material costs are putting some pressure in working capital during 2Q22 and 3Q22, which together with higher capex (around USD1.2 billion per year in the next three years) will pressure FCF. For 2023 and 2024, FCF are forecasted USD187 million and USD390 million, respectively.
Strong Business Position: CEMEX benefits from product and geographic diversification as one of the world's largest cement producers, selling 67 million metric tons of cement in 2021. It is the leading cement producer in Mexico and one of the top producers in the U.S. CEMEX also has a large global presence in ready-mix and aggregates, with 2021 sales of 49 million m3 of ready-mix and 137 million mt of aggregates. CEMEX's main geographic markets by EBITDA are Mexico at 40%, the U.S. at 27%, Europe at 13%, Central and South America at 14%, and Asia, the Middle East and Africa at 6%.
CEMEX's ratings reflect its diversified business position across several large markets, notably Mexico, the U.S. and certain European countries; its vertical integration and economies of scale; and positive FCF. The company is the leading cement producer in Mexico, one of the top producers in the U.S. and the largest in Spain.
CEMEX's closest peers are large global cement producers such as Holcim Ltd. (BBB/Stable), which CEMEX competes with in several markets. Holcim has broader geographic diversification, with operations in Europe, North America and Asia-Pacific, each representing roughly 25% of EBITDA, while the remaining 25% of EBITDA is split among the Middle East and Africa at 10% and Latin America at 15%. Latin America is CEMEX's largest region, representing close to 50% of EBITDA, of which 35% is generated in Mexico. The U.S. represented almost 30% of CEMEX's EBITDA, with the remainder from Europe at about 15% and, to a lesser extent, Israel and the Philippines.
CEMEX's broader geographic diversification and larger scale compare well with regional building materials companies such as Martin Marietta Materials, Inc. (BBB/Stable) and cement producers Votorantim Cimentos S.A. (VCSA; BBB-/Stable) and InterCement Participacoes S.A. (B-/Stable).
VCSA, which has a dominant position in Brazil and operations in the U.S., Canada and throughout the world, is not a direct peer, as the rating is tied to parent Votorantim S.A.'s (BBB-/Stable), which includes mining, utilities and financial services subsidiaries. Martin Marietta is focused in the U.S. and the Caribbean. InterCement's portfolio is weighted heavily toward volatile emerging markets such as Brazil, Argentina and Mozambique, which creates cash flow uncertainty and higher exposure to foreign currency risk than CEMEX.
CEMEX's ratings reflect its weaker credit metrics than higher rated global peers. CEMEX's net EBITDA leverage is forecast below 3.5x in 2022, while Holcim and Votorantim were around 2.0x. CEMEX's global scale, business position and funding access are all positive, as is the company's record of reducing debt. CEMEX's FFO interest coverage forecast at around 4.5x is in line with a 'BB' category building materials issuer.
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Mexican cement sales volumes to decline low single digits in 2022 and a timid recovery to low single digits in 2023 and 2024.
- U.S. cement sales volumes rise by low-single digits in 2022-2024.
- Fitch adjusted EBITDA of USD2.5 billion in 2022 and USD2.7 billion in 2023.
- Capex of about USD1.2 billion in 2022 in line with management guidance, and a similar level in 2022.
- An exchange rate of the Mexican peso to the U.S. dollar at around MXN20.5/USD1.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Sustainable net debt/EBITDA of below 2.5x.
- Sustainable FCF generation that leads to a reduction in net debt to below USD7 billion.
- Continued growth in the U.S. market coupled with sustained cash flows in Mexico and a rebound in other key markets, leading to more stable cash flows.
- A strengthening of CEMEX's business position outside of Mexico that leads to expectations of higher operating cash flows.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A weakening of operating cash flow and FCF expectations such that net debt/EBITDA is forecast above 3.5x.
- Expectations of a pronounced deterioration of Mexico's economic environment that weakens EBITDA prospects.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit here.
LIQUIDITY AND DEBT STRUCTURE
Sound Liquidity: CEMEX's liquidity is solid and Fitch expects the company to maintain an active approach in terms of liability management in order to avoid refinancing risks in the shot to medium term. The company does not face meaningful maturities until 2025, when approximately USD852 million of bank debt is due. In addition to USD593 million of cash, CEMEX has undrawn committed credit facilities for USD1.3 billion (USD1.75 billion as of Mar. 31, 2022), which support liquidity. Fitch expects the company to generate USD53 million in FCF in 2022.
As of Mar. 31, 2022, Cemex's total debt was USD8.9 billion, which mainly includes market bonds (60%), syndicated loans (27%), receivables securitization (7%) and hybrid issuance (6%). During June 2021, Cemex issued USD1 billion of perpetual notes in June 2021, which qualify for 50% equity credit under Fitch's criteria. During April 2022, CEMEX repurchased around USD440 million of its bonds and used the committed credit facility to fund it.
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