Cemex 2012 Annual Report Download - page 88

Notes to the
consolidated
financial
statements
88
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As of December 31, 2012 and 2011, CEMEX had granted a guarantee for a notional amount of approximately US$360, in
connection with put option transactions on CEMEX’s CPOs entered into by Citibank with a Mexican trust that CEMEX established
on behalf of its Mexican pension fund and certain of CEMEX’s directors and current and former employees in April 2008,
as described in note 23C, which fair value, net of deposits in margin accounts, represented a net liability of approximately
US$58 ($740) and US$4 ($58), as of December 31, 2012 and 2011, respectively. Changes in fair value were recognized in the
statements of operations within “Other financial income (expense), net,” representing a gain of approximately US$95 ($1,198)
in 2012, a loss of approximately US$92 ($1,145) in 2011 and a gain of approximately US$5 ($69) in 2010. As of December
31, 2012 and 2011, cash deposits in margin accounts were approximately US$76 ($975) and US$225 ($3,141), respectively.
16E) Risk management
Since the beginning of 2009, with the exception of the capped call transactions entered into in March 2010 and March 2011
in connection with CEMEX’s 2015 Notes, 2016 Notes and 2018 Notes (notes 16B and 16D), CEMEX has been reducing the
aggregate notional amount of its derivatives, thereby reducing the risk of cash margin calls. This initiative included closing
substantially all notional amounts of derivative instruments related to CEMEX’s debt (currency and interest rate derivatives),
which was completed during April 2009. The Facilities Agreement significantly restricts CEMEX’s ability to enter into derivative
transactions.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market interest rates. Changes in the market interest rates of long-term debt with fixed interest rates only affects CEMEX’s results
if such debt is measured at fair value. All of CEMEX’s fixed-rate long-term debt is carried at amortized cost and therefore is not
subject to interest rate risk. CEMEX’s exposure to the risk of changes in market interest rates relates primarily to its long-term
debt obligations with floating interest rates. As of December 31, 2012 and 2011, CEMEX was subject to the volatility of floating
interest rates, which, if such rates were to increase, may adversely affect its financing cost and increase its net loss. CEMEX
manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to reduce its interest costs.
As of December 31, 2012 and 2011, approximately 35% and approximately 52%, respectively, of CEMEX’s long-term debt was
denominated in floating rates at a weighted average interest rate of LIBOR plus 456 basis points in 2012 and 454 basis points
in 2011. As of December 31, 2012 and 2011, if interest rates at that date had been 0.5% higher, with all other variables held
constant, CEMEX’s net loss for 2012 and 2011 would have increased by approximately US$25 ($315) and US$40 ($550),
respectively, as a result of higher interest expense on variable rate denominated debt.
Foreign currency risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes
in foreign exchange rates. CEMEX’s exposure to the risk of changes in foreign exchange rates relates primarily to its operating
activities. Due to its geographic diversification, CEMEX’s revenues and costs are generated and settled in various countries and
in different currencies. For the year ended December 31, 2012, approximately 21% of CEMEX’s net sales, before eliminations
resulting from consolidation, were generated in Mexico, 19% in the United States, 7% in the United Kingdom, 7% in Germany,
6% in France, 6% in the Rest of Northern Europe geographic segment, 2% in Spain, 3% in Egypt, 4% in the Rest of Mediterranean
segment, 6% in Colombia, 8% in the Rest of South America and the Caribbean, 3% in Asia and 8% in CEMEX’s other operations.
As of December 31, 2012, approximately 81% of CEMEX’s financial debt was Dollar-denominated, approximately 17% was
Euro-denominated, approximately 1% was Peso-denominated and immaterial amounts were denominated in other currencies;
therefore, CEMEX had a foreign currency exposure arising from the Dollar-denominated financial debt, and the Euro-denominated
financial debt, versus the currencies in which CEMEX’s revenues are settled in most countries in which it operates. CEMEX cannot
guarantee that it will generate sucient revenues in Dollars and Euros from its operations to service these obligations. As of
December 31, 2012 and 2011, CEMEX had not implemented any derivative financing hedging strategy to address this foreign
currency risk.