Facing up to the crisis

Earlier in the year, the blog looked at the series of disposals made by several multinational cement majors. The aim was generally to reduce debt in the face of negative comment by ratings agencies. These same agencies have since hit the headlines due to their concern over the levels of sovereign debt owed by several countries. Debts were seen to be growing unsustainably or, on the basis of recent performance, were unlikely to get much smaller for very many years to come. Governments have fallen as a consequence and even the future of the Euro is under question.

Given the power of these rating agencies, it’s interesting to see what more recent comments have emerged about cement companies, and how well they have fared in the first 9 months of 2011, given the political turmoil surrounding them. The independence of the largest companies has traditionally been considered “safe”. After all, their annual turnovers exceed the GDP of quite a few countries! But in a new and uncertain world order, could they too be forced to take austerity measures and accept the imposition of unelected “technocrats” by their bankers to bring in changes of internal culture?

Ratings movements in 2011
Heidelberg’s credit rating improved after its disposals, and the company now appears to have a good grip on its operations. The ratings for Holcim, CRH and Cimpor have remained constant (though Cimpor’s Q3 results recently came in below expectations, and this may provoke a change). These companies operate with a superior geographical spread of interests, and hence are relatively less exposed to low-growth mature markets than their peers. They are also less vulnerable to the declining creditworthiness of countries such as Greece and Ireland and less exposed to uprisings in MENA countries where riots have led to regime change. In addition, CRH’s more diverse product portfolio offers more resilient demand patterns and less exposure to energy cost inflation.

Other companies have not done so well. Buzzi-Unicem’s rating was downgraded in September, bringing down that of Dyckerhoff along with it. The outlook for Italcementi’s rating has generally been negative in recent months, with occasional patches of stability. As well as Italy’s debt crisis and Berlusconi’s departure, some activities are open to upset by the continuing uncertainties of the “Arab Spring”. Titan’s long-term rating has also been lowered for very similar reasons.

Despite its series of earlier disposals, Lafarge’s rating has continued to suffer. Downgrades came from various of the big three ratings agencies in March, August and November. As a consequence, step-up clauses on some of its previously-issued bonds will come into effect later in 2011, generating EUR21M additional costs – and that penalty will rise to EUR62M in 2012. The agencies are now looking for more conservative ratings in our sector than a year ago, as the outlook is considered to be “uncertain” – so the goalposts are moving!

Cemex has also been under the spotlight. A bond issue in June carried twice the interest rate of an issue from Holcim. It has remained out of compliance for the year-end covenant on some finance agreements, with the debt ratio increasing from 7.16 at the end of June to 7.20 in September, rather than trending downwards towards its 7.00 covenanted target. Not unexpectedly, a further rating cut to B- popped up from Standard and Poor earlier this month.

In summary, measures taken to regain or retain credit ratings seem very likely to figure in the year-end reports from Buzzi, Lafarge and Cemex, with Italcementi and Titan joining such activities in 2012. Potential vultures will be keeping a close watch for juicy crumbs falling from the tables of those who have fallen upon hard times!

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