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CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements – (Continued)
As of December 31, 2010, 2009 and 2008
(Millions of Mexican pesos)
In order to neutralize those positions and considering contractual limitations to settle the contracts before their maturity date, in October 2008,
CEMEX entered into new derivative instruments with the same counterparties, which represented the opposite position to the exposure
resulting from fluctuations of the economic variables included in the original derivative instruments. As a result, from the date of the
negotiation of the new opposite positions, any changes in the fair value of the original instruments has been effectively offset by an equivalent
inverse amount generated by the new positions. The derivative instruments still exposed to changes in fair value were designated as “Active
derivative financial instruments.” In addition, CEMEX designated the portfolio of original and opposite derivative positions as “Inactive
derivative financial instruments.”
During April 2009, following negotiations with its creditors, CEMEX completed the settlement of a significant portion of its active and
inactive derivative financial instruments held at the beginning of the year in order to reduce the risk of further margin calls. By means of this
settlement, CEMEX recognized in 2009 an aggregate loss of approximately US$1,093, which after netting US$624 of cash margin deposits
already posted in favor of CEMEX’s counterparties and cash payments of approximately US$48, was documented through promissory notes
for approximately US$421, which increased CEMEX’s outstanding debt. Previously, in February 2009, CEMEX and its counterparties agreed
the settlement of a portion of the obligations incurred through derivative instruments. The counterparties permanently withdrew part of the
amounts deposited in such margin accounts at the beginning of the year for an amount of approximately US$392, of which approximately
US$102 referred to active positions and approximately US$290 referred to inactive positions.
As mentioned above, all Cross Currency Swaps (“CCS”) outstanding at the beginning of 2009 were settled in April 2009. In 2009 and 2008,
changes in the fair value of CCS generated losses of approximately US$61 (Ps830) and US$216 (Ps2,421), respectively.
As previously mentioned, all outstanding foreign exchange forward contracts at the beginning of 2009 were settled in April 2009. Until
October 2008, in order to hedge financial risks associated with fluctuations in foreign exchange rates of certain net investments in foreign
countries denominated in euros and dollars to the peso, and consequently, reducing volatility in the value of stockholders’ equity in
CEMEX’s reporting currency, CEMEX negotiated foreign exchange forward contracts with different maturities until 2010. Changes in the
estimated fair value of these instruments were recorded in stockholders’ equity as part of the foreign currency translation effect. The
designation of the original positions as hedges of CEMEX’s net exposure on investments in foreign subsidiaries in stockholders’ equity
terminated with the negotiation of the opposite derivative positions in October 2008. Therefore, changes in fair value of original positions and
opposite derivative positions were recognized prospectively in the statement of operations. Valuation effects were recognized within
stockholders’ equity until the hedge designation was revoked, adjusting the cumulative effect for translation of foreign subsidiaries.
On July 15, 2009, in connection with the derivative financial instruments associated with CEMEX’s perpetual debentures (note 16D), by
means of which the Company changed the risk profile of the interest rates and the currencies of the debentures from the U.S. dollar and the
euro to the yen; and in order to eliminate CEMEX’s exposure to the yen and the yen interest rate, CEMEX concluded the settlement of its yen
cross currency swap derivatives, as well as the forward contracts for US$196 as of December 2008, negotiated to eliminate the variability of
cash flows in yen to be incurred through the CCS until 2010, in which CEMEX received cash flows in yen and paid U.S. dollars. As a result,
a total amount of approximately US$94 was invested with trustees for the benefit of the debenture holders. This amount is being used to pay
CEMEX’s coupons on the perpetual debentures. As a result of this settlement, during 2009, CEMEX recognized a loss from changes in the
fair value of the instruments of approximately US$162 (Ps2,203). As of December 31, 2010 and 2009, the balance of the investment placed in
the trusts amounted to approximately Ps902 and Ps1,011, respectively.
The estimated fair value of derivative instruments fluctuates over time and is determined by measuring the effect of future relevant economic
variables according to the yield curves shown in the market as of the reporting date. These values should be analyzed in relation to the fair values
of the underlying transactions and as part of CEMEX’s overall exposure attributable to fluctuations in interest rates and foreign exchange
rates. The notional amounts of derivative instruments do not represent amounts exchanged by the parties, and consequently, there is no direct
measure of CEMEX’s exposure to the use of these derivatives. The amounts exchanged are determined based on the basis of the notional
amounts and other terms included in the derivative instruments.
I. Interest rate swap contracts
As mentioned above, all outstanding interest rate swaps related to debt at the beginning of 2009 were settled in April 2009. Changes in fair
value of interest rate swaps, including the swap described in the following paragraph, generated a gain of approximately US$9 (Ps114) in
2010, and losses of approximately US$2 (Ps27) in 2009 and US$170 (Ps1,906) in 2008.
As of December 31, 2010 and 2009, CEMEX had an interest rate swap maturing in September 2022 with notional amounts of US$196 and
US$202, respectively, negotiated to exchange floating for fixed rates in connection with agreements entered into by CEMEX for the
acquisition of electric energy in Mexico (note 19C). As of December 31, 2010 and 2009, the fair value of the swap represented gains of
approximately US$35 and US$27, respectively. Pursuant to this instrument, during the tenure of the swap and based on its notional amount,
CEMEX will receive a fixed rate of 5.4% and will pay a LIBO rate, which is the international reference for debt denominated in U.S. dollars.
As of December 31, 2010 and 2009, LIBOR was 0.46% and 0.43%, respectively. Changes in the fair value of this instrument generated a gain
of approximately US$9 (Ps114) in 2010, a loss of approximately US$27 (Ps367) in 2009 and a gain of approximately US$36 (Ps404) in 2008.
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