Holcim’s CHF775 Million Non-Cash Impairment Is Credit Negative

Holcim’s CHF775 Million Non-Cash Impairment Is Credit Negative

Last Monday, Swiss cement maker Holcim Ltd (Baa2 negative) announced a CHF775 million ($812 million) non-cash impairment for the fourth quarter of 2011. Of that amount, CHF415 million was related to its investment in AfriSam, a South African cement producer, and CHF328 million was related to the group’s Spanish and Eastern European activities. The remaining CHF32 million relates to the final closure of two small plants in the US. The impairment is credit negative, signaling that market conditions in Spain and certain Eastern European markets have further deteriorated over the past few months, without any signs of a strong recovery ahead. This deterioration will force Holcim to adjust its expected projections, which underpin the valuation of these specific assets on its balance sheet.

Holcim held a 15% stake in AfriSam after it sold its majority stake in the company to a Black-Economic-Empowerment (BEE)-compliant consortium in 2007. It has supported AfriSam technically and financially ever since. As part of the impairment, Holcim will write off a CHF292 million notes issue subscribed in 2009 as well as accrued interest and currency movements. In Spain and Eastern Europe, Holcim will be writing off property, plant and equipment (PP&E), and goodwill as a result of weaker growth expectations in these markets over the next five years. These impairments will have no cash impact.

The absence of cash restructuring costs softens the impact of the charges, but further deterioration in market conditions could trigger such restructuring costs over the next 12-18 months. Holcim has already streamlined its operations to adjust capacity to current utilisation levels.
We are also concerned that Holcim’s news could foreshadow further asset and goodwill impairments and cash restructuring measures at other building materials companies. Several European competitors, such as Lafarge (Ba1 stable), HeidelbergCement (Ba1 stable) and Italcementi (Ba1 negative), paid high prices for assets before the global financial crisis of 2008-09. These companies might have to readjust the book value of those assets, which could be accompanied by cash-restructuring measures as capacity utilisation remains a low 50%-60% in the US and Western Europe on average, with some exceptions. If volumes deteriorate further over the next 12-18 months, more capacity adjustments will be required, which would lead to pressure on cash flow generation and credit metrics.

Holcim’s current credit metrics are below our expectations for the Baa2 rating category, with retained cash flow/net debt of 15.4% as of the 12 months to 30 September 2011, versus our expectations of around 20%. We expect Holcim to gradually improve its credit metrics over the next two years, but continued weakness in some of the group’s markets could make it more difficult to reach our threshold.