InterCement expected to request new leverage covenant waiver - Debtwire

InterCement expected to request new leverage covenant waiver

01 November 2017 - 12:00 am

InterCement will likely need to request a new temporary suspension of a financial covenant on its BRL 1.5bn (USD 460m) domestic bonds due 2022 which limits leverage, despite the expected cash increase resulting from the IPO of its Loma Negra subsidiary, according to two sources familiar with the matter.


Nevertheless, the Brazilian cement producer controlled by Camargo Correa would obtain the waiver “without difficulty,” by the end of the year both of the sources said.


The covenant limits InterCement’s net debt-to-EBITDA to 4.5x, according to the bond prospectus. Banco do Brasil, Bradesco and Banco Indusval relieved it of the need to measure this ratio for FY16. For FY17 and subsequent years, it is again required to meet the covenant.


The proceeds from the Loma Negra IPO might allow the net debt-to-EBITDA ratio to fall to 5.0x-5.5x by the end of the year, according to the first source, down from the 7.5x recorded in 2Q17.


“The company will deleverage naturally [from now on] and gradually, as cement sales in Brazil are expected to start recovering,” the second source said.


InterCement’s net debt-to-EBITDA ratio could go as low as 4x by 1Q18, considering both the Loma Negra IPO and the strong results coming from Argentina, which accounts for around 60% of EBITDA, according to a third source familiar with the matter.


“The Argentine government is investing in infrastructure projects and there is room for a further increase in revenue there,” the third source said. “Business in Brazil will take longer to recover, so the contribution to better results will come mainly from Argentina.”


Argentina EBITDA grew 45% in 1H17 YoY, according to the company’s financials. EBITDA for Argentina and Paraguay has increased 44.2% in 1H17 YoY, to EUR 101.9m. Brazil EBITDA reached EUR 12.5m in 1H17, a 56.8% drop YoY, according to the financials.


An improvement in Brazil would bring a faster reduction of the company’s debt, the first source said. Although, “we cannot foresee when we will see a rebound in the cement market in Brazil as big infrastructure projects have been frozen and the construction business is still moving at a slow pace,” the same source said.


The selling of minority stakes in InterCement subsidiaries is always an option for the company if it is needed, the third source said. “It is always on the table, but it is unlikely that the company will need to divest in order to reduce debt after the Loma Negra IPO,” the same source said.


An Intercement spokesperson declined to comment on the matter.


InterCement’s USD 670.47m 5.75% senior notes due 2024 last traded on 27 October at 94.45, according to MarketAxess.


by Aline Lima and Camila Dias