High debt levels, the global economic downturn and BHP Billiton's decision to pull its takeover proposal have prompted credit ratings agency Fitch Ratings to remove Rio Tinto from its 'rating watch positive' list.
High debt levels, the global economic downturn and BHP Billiton's decision to pull its takeover proposal have prompted credit ratings agency Fitch Ratings to remove Rio Tinto from its 'rating watch positive' list.
The agency said it had downgraded the miner's long-term issuer default (IDR) and senior unsecured ratings from A- to BBB+, and said the outlook on the long-term IDR is negative.
Fitch said it took particular concern to Rio's debt position, occurring from the Alcan acquisition, and the current financial crisis and associated commodity downturn.
It said while it believed Rio will prioritise debt repayment, it noted the miner's previously flagged plans to delay the $US15 billion asset disposal program.
Meanwhile, Fitch said its negative outlook on Rio's long-term IDR reflected liquidity concerns regarding a $US8.9 billion debt maturity from tranche A of the Alcan acquisition due in October next year, which had been extended by one year.
"The Negative Outlook also reflects the potential for a further delay in the company's asset disposal programme," Fitch said.
"At present the ratings incorporate an expectation that these disposals will be spread over the course of 2009 and into 2010. However, should credit market conditions not allow any asset sales during 2009, this could trigger negative rating action."
The announcement is pasted below:
Fitch Ratings-London/New York/Sydney-26 November 2008: Fitch Ratings has today downgraded the Long-term Issuer Default (IDR) and senior unsecured ratings of UK-based Rio Tinto Plc and Australia-based Rio Tinto Ltd (collectively, the Rio Tinto Group (RT)) to BBB+ from A- (A minus). The ratings are removed from Rating Watch Positive (RWP). The Outlook on the Long-term IDR is Negative. These rating actions follow yesterday's announcement by BHP Billiton (BHP) that it will not seek to complete its previously announced conditional, all share offer for RT, and therefore resolves the RWP which Fitch originally placed on RT's ratings on 6 February 2008.
The full list of RT group ratings is as follows:
- RT: Long-term IDR: downgraded to 'BBB+' from 'A-' (A minus); off RWP; Outlook Negative
- RT: Short-term IDR: affirmed at 'F2'
- RT: Senior unsecured debt: downgraded to 'BBB+' from 'A-' (A minus); off RWP
- Alcan Inc: Senior unsecured debt: downgraded to 'BBB+' from 'A-' (A minus); off RWP
RT is entering a severe global recession, and associated cyclical commodity downturn, saddled with a substantial debt burden from its October 2007 acquisition of Alcan. Today's rating downgrade principally reflects Fitch's concerns regarding the company's elevated debt levels in the context of the sharp decline in commodity prices.
While Fitch believes that RT's management will prioritise debt repayment from operating cash flows over the next 12 months, the previously flagged delay in the company's USD15bn asset disposal programme means that RT's forward leverage measures and general credit metrics for FYE09 and beyond now fall outside the agency's parameters for the 'A-' (A minus) rating category - including net leverage (net debt/EBITDAR) of 3.0-4.0x based on a more severe downturn in metals prices.
The recent fall in commodity prices has been unusually sharp and correlated and in part reflects selling by financial commodity investors and end-user destocking. Fitch believes there is the potential for prices to stabilise once this process is complete, nonetheless in the context of a weakening global economic growth in 2009 the risk to prices is on the downside (for additional commentary see Fitch's "Global Economic Outlook", dated 4 November 2008, available on www.fitchratings.com). Fitch believes that the current cyclical downturn will see peak-to-trough price falls of around 55-65% in some base metals, and that the 2009 benchmark iron ore price settlement is likely to see a year-on-year reduction in contracted prices of 20-30%.
The Negative Outlook partly reflects liquidity concerns related to a significant USD8.9bn debt maturity (Tranche A of the Alcan Acquisition facility) due in October 2009 (already termed out from its initial maturity of October 2008), which will require at least partial refinancing with another debt facility, or repayment via asset sales. The Negative Outlook also reflects the potential for a further delay in the company's asset disposal programme. At present the ratings incorporate an expectation that these disposals will be spread over the course of 2009 and into 2010. However, should credit market conditions not allow any asset sales during 2009, this could trigger negative rating action. Fitch will continue to closely monitor RT's operational and financial performance, including its capacity to de-leverage from operating cash flows, as well as the timing of asset sales.
