Now that Cemex’s decade-long effort to regain the investment grade rating is near, America’s largest cement producer is studying its first sale of sustainability-linked bonds, in a move that could expand its investor base.
After aggressively reducing its debt levels in recent years, Cemex said last week that the much coveted return to investment grade could arrive in 2022. That is driving plans to attract a new group of creditors to finance projects that meet certain environmental or social objectives, said the top executives of Cemex in an interview in New York.
Cemex already considered the possibility of selling bonds linked to environmental, social and governance initiatives at the beginning of the year, but decided to raise 1.75 billion dollars in junk bonds denominated in dollars because that market was “very attractive,” the vice president explained in the interview. of Finance, Maher Al-Haffar.
Net debt with respect to Ebitda will be reduced to three times, so the company expects the credit rating to be higher and borrowing costs to decrease. The company, based in San Pedro Garza GarcÃa, Mexico, already has a credit line of more than 2 billion dollars linked to sustainability.
“We have done it on the bank side and we would love to do it on the bond side,” Al-Haffar said.
Companies in sectors that emit large amounts of carbon, such as cement manufacturing, are attracted to this loan structure because of its flexibility to help them reduce their environmental footprint. Italian energy giant Eni SpA became the first oil company to sell euro bonds linked to reducing carbon emissions earlier this month. India’s largest cement maker, UltraTech Cement, raised $ 400 million in February from a sale of bonds linked to sustainability. Brazilian pulp and paper producer Suzano raised $ 1 billion in bonds linked to sustainability on Monday.
“At some point, all types of financing will be green, that’s how I see it,” Cemex CEO Fernando González said in the June 24 interview.
Since defaulting last decade, Cemex has struggled to regain its investment grade rating. The company has reduced its debt by approximately $ 7 billion since 2012, when it reached $ 17.3 billion. In the most recent quarter, it stood at $ 10.4 billion. The debt was paid off by selling billions of dollars in nonessential assets over the years and cutting costs.
The 10-year dollar bonds that Cemex placed in January yield 3.6%, compared with average yields of 6.14% for its junk-rated peers and 2.44% for its investment grade, according to the Bloomberg Barclays indexes.
Companies and countries around the world have issued a record $ 37.4 billion in sustainability-linked bonds so far this year, according to data compiled by Bloomberg. That figure could reach between $ 120 billion and $ 150 billion by the end of this year, said Marilyn Ceci, global director of ASG debt capital markets at JPMorgan Chase & Co.
Climate targets
A sale linked to sustainability dovetails with two of Cemex’s goals: to return to investment grade and produce net zero carbon emissions by 2050.
González said in the interview that any further asset sales would be part of his growth strategy for North America and Europe, rather than reducing leverage.
“This whole trend towards investment grade will open up many opportunities for us to restructure different parts of our debt pile over the next 12 to 24 months,” added Al-Haffar.
Meanwhile, Cemex is investing more in energy efficiency and expanding its use of renewable energy. Additionally, climate targets are now a factor in the compensation of the company’s top management.
This might not be enough to attract some ESG (environmental, social and corporate governance) investors, should the company go ahead with a sustainable bond. Investors and analysts around the world have questioned whether these values are truly green, pointing to the lack of ambition in the goals that companies commit to meet. More traditional ESG debt restricts the use of bond proceeds to specific projects that meet environmental standards.
Nuveen, the $ 1.2 trillion fund manager, steers clear of sustainability-linked bonds because the debt structure is “poor,” wrote in a blog last month Stephen Liberatore, ASG’s head of fixed income and impact investing strategies. Nuveen rejected deals from a high-yielding US issuer and an Indian cement company because the structure gave issuers “too much freedom” to invest the proceeds, he said.
Furthermore, the prescribed penalties “did not create a sufficient incentive” for companies to try to make substantial changes to their carbon footprint, Liberatore noted.
Cemex’s double objective could serve as motivation. Now more than ever, credit rating companies are taking environmental and social risks into account. Moody’s Investors Service cited ESGs as important credit considerations in 85% of private sector rating actions in 2020, up from just 32% in 2019, the company said in a report released Monday.
Being a climate laggard can also be costly for businesses. Issuers can reduce interest costs by 0.15 percentage points or more by selling green bonds. North American pipeline operator Enbridge managed to cut its borrowing costs by 5 basis points when it sold $ 1 billion in ESG debt last week.
ESG and sustainability-linked debt should also perform much better for both the issuer and the investor in times of increased volatility, Al-Haffar said.
“We believe that sustainable financing gives Cemex access to a broader investor base, which ultimately favors more efficient price discovery, while offering the opportunity to reaffirm our conviction to address climate change.” , he pointed. “Sustainable stocks tend to be more price resistant throughout business cycles, which should provide significant returns to investors during periods of risk aversion.”
