Tuesday, January 13, 2009

HeidelbergCement Trying to Avoid The Cement Shoes

HeidelbergCement, the world leader in aggregate production which over the past year has lost over 60% of its equity value, and one of the main holdings of recently deceased Adolf Merckle who got caught shorting Volkswagen (for a brief period of time the world's most valuable company after the mother of all short squeezes), is taking proactive steps to address it capital structure according to an e-mailed statement earlier today.

The rocket scientists at S&P recently downgraded Heidelberg from BB- to B+ on concerns over covenant breach in June 2009 and heavy debt maturities in 2010 (roughly €5 billion Tranche B maturing in May 2010). Buffett's henchmen still have the company rated at Ba3. In the emailed statement the company claims it will "take steps to address its capital structure by extending the maturities of its bank financial and strengthening its equity capital positions. The company also plans to sell "non-strategic assets." It is arguable whether the current depressionary environment is one in which roughly 5x leveraged HEI can extract deleveraging multiples for any of its assets. Ironically while the company's market cap is €4.1 billion, its CDS are currently trading at roughly 2500 bps over Libor, a 62% two year default probability. However there is certainly room for upside (or downside depending how you look at it) in the CDS, which hit an all time record wide of 7000 bps equivalent on December 4.

If HEI is caught in a firesale of cement assets, this might make life tough for other big time cement maker, Cemex SA. The company, while not in comparable dire straits as evidenced by its CDS at 600, and its debt leverage roughly half of HEI, could be significantly pressed by a deterioration in already marginal pricing power.

Of course, there is hope for both companies, after all the Ted Spread is down.

************ UPDATE *************

In the Company letter that has been distributed by Bloomberg, but for some reason still having to hit the Company's PR section, most likely due to an incompetent Heidelbergian fraulein currently dancing the night away at some seedy local trance bar instead of caring about German securities disclosure law, HEI states it has hired Morgan Stanley as financial advisor. Heidelberg also claims this action is "independent of the publicly discussed financial situation of HeidelbergCement's shareholder VEM." Also, HEI is betting on the Obama Mega plan and "expects to benefit from the various stimulus packages around the globe". Sounds like a sound business plan. Sphere: Related Content
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