A recent story by Reuters highlighted concerns about the solvency of one of Mexico's largest corporations, the cement and building materials giant, Cemex (NYSE: CX). The ramifications for the Mexican economy, which has seen its currency fall to 16 year lows, could be huge. Should the company fail to renegotiate the $5 billion in debt it has coming due this year, it could be faced with a cash shortfall as early as the summer.
The likelihood of a government bailout has therefore been on the rise and share prices have moved up accordingly. The major question for Cemex common shareholders will be the same question faced by the shareholders of GM, Ford, and any of the multitudes of banks which have been linked to government bailouts here in the states: will there be any common equity left? In this light it is clear any purchase of Cemex shares, even at these depressed prices, will be a speculative one.
The question for the Mexican economy is how will the debt react? Mexican pensioners own large amounts of Cemex paper and considering the deteriorating financial condition of state oil giant, Pemex, Mexican officials are rightly concerned about the state of the aging population's retirement assets. Furthermore, the sheer scope of Cemex's debt load, approaching 30% of the entire country's private sector debt, means any marked movement in the company's yields could wreak havoc on the country's financial system.
As the risk of financial distress at Cemex rises, the value of the company's debt portfolio dwindles. In a country which has already seen government revenues plummet based on well-documented shortcomings at Pemex, the budgetary impact will be tremendous. Issuing debt in an already tense global credit market will be increasingly difficult at manageable interest rates. Ironically, Mexico may need to bailout Cemex in order to prevent rates from skyrocketing and driving up its cost of borrowing.
While this feeling of being between the proverbial rock and hard place is nothing new to U.S. corporations and shareholders, it is a relatively new dynamic in Mexico, but there the situation is much more acute. In the end, it will likely be the common shareholders of Cemex who suffer the worst. Then again, for Mexico's retirees and its creditors a nationalization of Cemex may be music to their ears.