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DEAL OF THE YEAR: Corporate Liability Management

Jan 1, 2013

Cemex $7bn Debt Exchange

Cemex's $7.2 billion maturity payment due in 2014 was always going to be difficult to meet, even in the best of times for the global construction industry. But the three years since the $15 billion restructuring that saved Cemex's life have been among the toughest ever for the sector.

To head off another disaster, Cemex would again have to sell creditors on the soundness of its post-crisis recovery efforts and convince the markets to give it more time. The result was the extension of $6.6 billion in debt, giving the company breathing room as it sells assets and raises equity.

"This was an extremely important transaction for Cemex as the majority of its debt was bank debt maturing in 2014," says Mario Espinosa, co-head of LatAm DCM at Citi. "Cemex needed to refinance to continue with its liability management program on the rest of their debt and improve its stock price, which would enable them to issue equity in the future."

Following five months of intense negotiations the Mexican cement maker met at least 55 lenders - including the main bank group of BBVA, BNP Paribas, Bank of America Merrill Lynch, Citi, HSBC, JP Morgan, RBS and Santander - who held debt from the 2009 financing agreement.

Working in Cemex's favor was the fact that it wasn't asking for a haircut, and was dealing with the problem in a proactive way two years before the due date.

In an ambitious move, Cemex targeted acceptance from creditors representing at least 95% of existing exposures. This was a higher-than-needed goal that would send a strong message to the markets and set a positive tone on further restructuring efforts. In the operation, holders could exchange their existing exposures for three classes of debt due 2017 and new 9.5% bonds due 2018.

As demand for the 2018 bonds exceeded a $500 million cap, creditors that wanted to receive new notes after the early deadline would be allocated approximately 54% of the amount they elected to receive, with the balance of their exposures allocated to the other classes involved in the exchange - new 2017 loans paying Libor plus 525 basis points, new 2017 dollar private placement notes paying 9.66%, and new 2017 yen-denominated private placement notes paying 7.735%.

In the end, participation hit 92.7%, just shy of the target. Creditors agreed to extinguish their existing loans and private placement notes in return for approximately $6.12 billion in new loans, new private placement notes, and $500 million of new 9.5% senior secured notes due 2018. Approximately $525 million in loans and dollar private placement notes remain outstanding with the original 2014 maturity.

The move bought another three years' breathing space for the Mexican cement maker, until 2017. Given expectations that the construction sector will recover, this would allow the company either to repay its loans or refinance them under easier terms.

Cemex also agreed to make a $1 billion payment in 2013. If it misses the payment, the debt maturity reverts to 2014.

"The bankers understood that we needed the flexibility to deal with our market debt," says Fernando González, CFO at Cemex. "At the end of 2011, the markets' perception was much more negative. The markets are more optimistic now. It has worked and exceeded our own expectations."

The market further applauded Cemex's prudent debt management with a strong reception to a new 2022 bond in October. The $1.5 billion sale drew $7 billion in orders, and brought Cemex back to single-digit yields in the 10-year space.

The final leg in the operation came in November, with the carve-out of 27% of Cemex's non-Mexican LatAm assets. The Colombian IPO of Cemex Latam Holdings raised 2.09 trillion pesos ($1.15 billion), attracting three times demand and placing 85% with international buyers.

"Basically this was the largest IPO in Colombia after Ecopetrol with a majority of foreign investor participation," says Carlos Jacks, chief executive of Cemex Latam Holdings.

Jacks says part of the success of the transaction was due to the appeal of the geographies involved. He says it was the first time for a Colombian ECM transaction that the price range was set and the shares divided into local and 144a tranches at the time of pricing; issuers typically set the geographic breakdown as well as a fixed price only after an extended order period. Bank of America Merrill Lynch, BBVA, Citi and Santander managed the sale.

Cemex is eyeing a less active 2013, with most of the deleveraging expected to come from Ebitda growth. The company was able to remove its most restrictive covenants in 2012 and faces no maturity payments this year.

"We want to keep a clear runway of 24 months without refinancing risk," González says. The company does not foresee the need to access the markets for new capital, though replacing certain debt through liability management exercises is not ruled out.

González says Cemex is optimistic on the housing recovery in the US. "Construction activity in the US is unsustainably low," he says. LF



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