The fixed-income investment management firm’s strategy rides on a wave of hard-currency-denominated emerging-markets debt issues.
Institutional Investor Magazine
May 6, 2014
By Robert Stowe England
The strategy of New York–headquartered fixed-income investment management firm Stone Harbor Investment Partners clicks well with the high yields and potential for price appreciation in bonds issued by cement producer Cemex. The Monterrey, Mexico–based company’s market position and its moves to shore up its balance sheets are even more of a draw. Although it’s engaged in a process of deleveraging, Cemex still controls a large share of the Mexican cement market, as well as having a sizable international footprint. Investing in companies like Cemex has helped Stone Harbor outperform its peers in emerging-markets corporate bond funds, a sector that has attracted increasing interest from institutional investors.
“Cemex was formerly an investment-grade company, but it lost its way a bit in a series of levered acquisitions,” says William Perry, portfolio manager for emerging-markets corporate debt at Stone Harbor. Cemex got into trouble after borrowing lots of short-term money from banks to make acquisitions and then finding itself unable to roll over those loans during the 2008–’09 financial crisis. “They did all the right things: sold off assets, raised equity and extended their maturity profile. Ultimately, they are working their way through a very deep trough in the cement market,” says Perry.
The recovering housing market in the U.S. offers the promise of higher growth in earnings, improving the ability of the company to deleverage and improve its credit profile. “Cemex is definitely geared to a rebound in U.S. housing,” says Perry. Stone Harbor expects earnings to rise because of cement sales to states where Cemex has operations, which include California, Nevada, Arizona, Texas and Florida. Also standing to bolster Cemex’s earnings is Mexico’s Transport and Communications Infrastructure Investment Program 2013–’18. Announced on July 15, 2013, by President Enrique Peña Nieto, the plan includes 60 new roads, seven ports, three passenger railroads, seven airports and enhancements to the nation’s telecom networks, including two new satellites. Investment into the project, expected largely to come from public-private partnerships, is estimated to be worth more than $100 billion.
Management efforts to implement a financial restructuring at Cemex paid off September 26 when Standard & Poor’s raised the rating for the corporation’s long-term credit, from B with a positive outlook to B+ with a stable outlook. “We expect the company to continue improving its cost structure and achieve increased efficiencies, which could result in ebitda margins above 17 percent during 2013 and 2014,” wrote Luis Manuel Martínez, primary credit analyst on Cemex for S&P in Mexico City, in a September 26, 2013, research note.
The same day, Cemex issued $1.4 billion in senior secured notes at 7.25 percent, maturing in 2021. More recently, on March 25, the company issued €300 million ($416.5 million) in senior secured notes at 5.25 percent, due 2021. Its majority-owned subsidiary, Cemex Finance, issued $1 billion in ten-year benchmark bonds at 6 percent due in 2024. The proceeds are being applied to pay off high-interest debt and to finance operations.
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