Standard and Poors has cut FMG debt deeper into junk:
MELBOURNE (Standard & Poor’s) April 22, 2015–Standard & Poor’s Ratings Services said today that it had lowered its corporate credit rating on Fortescue Metals Group Ltd. to ‘BB’ from ‘BB+’. The outlook is negative.
At the same time, we lowered the ratings on the company’s senior secured debt to ‘BBB-‘, from ‘BBB’, and the senior unsecured rating to ‘BB-‘ from ‘BB’. The recovery rating remains unchanged at ‘1’ for the senior secured debt rating, and ‘5L’ for the senior unsecured debt. We have also removed all ratings from CreditWatch with negative implications.
“The downgrades reflect our expectation that Fortescue’s financial risk profile will weaken significantly in the next two years due to low iron ore prices,” said Standard & Poor’s credit analyst May Zhong.
We have revised our assessment of Fortescue’s financial risk profile to “aggressive” from “significant” because we expect the company’s adjusted debt to EBITDA to approach 4.5x and funds from operations (FFO) to debt to fall to about 15% in the years ending June 30, 2015 and 2016 under our base-case iron ore price assumptions. Nonetheless, we expect reduced freight and production costs to mitigate the impact of lower prices.
More importantly, the company’s ability to reduce costs is key to generating a positive cash margin amid lower iron ore prices and to achieving credit metrics in line with the ‘BB’ rating. The company has embarked on a number of initiatives to reduce its C1 production costs materially. In addition, the cost of fuel for vessels that transport iron ore to final destination has dropped materially recently and the Australian dollar has depreciated 14% in the past six months. We expect Fortescue’s C1 costs to reduce to US$18 per wet metric ton and freight costs to be about US$5 per ton in fiscal 2016. Based on these cost guidance, we expect Fortescue’s all-in breakeven cost (including interest expense and sustaining capital expenditure) on a 62% Platts (delivered to China) price to fall to about US$40 per dry metric ton in fiscal 2016. Nonetheless, if Fortescue fails to achieve this cost guidance, its credit metrics would be at risk of further downward revision to the “highly leveraged” category.
Origin also took it in the neck:
Standard & Poor’s Ratings Services said today that it has lowered the corporate credit rating on Origin Energy Ltd. and the company’s senior unsecured issue ratings, as well as Origin Energy Finance’s senior unsecured debt ratings, to ‘BBB-‘ from ‘BBB’. At the same time, we lowered the short-term rating on Origin Energy to ‘A-3’ from ‘A-2’ and the rating on Origin Energy Finance‘s and Origin Energy Contact Finance No.2‘s subordinated debt issue ratings to ‘BB’ from ‘BB+’. The outlook on the long-term rating is stable. “The downgrade to ‘BBB-‘ primarily reflects our view that Origin Energy’s leverage will remain high for longer than we expected because of recent heavy investments. We expect its key financial ratio of debt-to-EBITDA will remain at more than 3x until at least the year ending June 30, 2018, compared to our previous expectation of a recovery in fiscal 2017,” Standard & Poor’s credit analyst Thomas Jacquot said. “Moreover, in our opinion the company has not taken any positive action to support its balance sheet despite the weakening in its operating environment mainly due to lower oil prices, while its capital commitment to the Australia Pacific Liquefied Natural Gas (APLNG) project remains high.”
For some bizarre reason, Santos escaped.
