This is another candidate for accelerating the Mining GFC:
Moody’s Investors Service (Moodys) has today downgraded the senior unsecured ratings of Anglo American plc (AAL or the company) and its subsidiaries to (P)Ba3 from (P)Baa3 and converted the company’s Baa3 long-term issuer rating into a Ba3 corporate family rating (CFR), in line with the rating agency’s practice for corporates with non-investment-grade ratings.
Concurrently, the rating agency downgraded the rated senior unsecured guaranteed debt instruments at Anglo American Capital Plc to Ba3 from Baa3, AAL’s short-term ratings to (P)NP from (P)P-3 and the company’s national scale ratings to Baa2.za/P-2.za from A3.za/P-1.za.
At the same time, Moody’s assigned a Ba3-PD probability of default rating (PDR) to AAL. The outlook on all ratings is negative.
This rating action concludes the review for downgrade process initiated by Moody’s on 10 December 2015.
RATINGS RATIONALE
Today’s downgrade of AAL’s ratings to Ba3 from Baa3 primarily reflects Moody’s assessment that the company now faces a higher business risk due to deterioration in commodities market conditions and a longer and more uncertain deleveraging period than previously expected.
Moody’s assessment of a higher business risk reflects concerns over the potential for a further deterioration in AAL’s bulk commodities portfolio, particularly in iron ore, amid low commodity prices. AAL has a large portfolio of bulk commodities assets, including iron ore, where it is implementing further cuts to unit costs in 2016 to support at least a free cash flow neutral position. In response to falling prices, in December 2015 Anglo American announced the broad restructuring initiative that is expected to result in a material downsizing of its production portfolio and reorganisation of the existing activities over the next few years. The downgrade to Ba3 rating incorporates high execution risk associated with this restructuring plan as challenging market conditions are likely to slow the pace of the portfolio transformation.
The downgrade also reflects a significant deterioration in AAL’s debt capacity and its debt protection metrics that occurred in 2015. The leverage increased as a result of the precipitous drop in prices for AAL’s key commodities, with current spot prices below the company’s average realised prices in 2015. Moody’s estimates AAL’s leverage, as measured by Moody’s adjusted gross debt/EBITDA ratio, to be around 4.2x in 2015 (versus 2.6x in 2014 and 3.3x LTM 1H 2015), after the projected decline in AAL’s adjusted EBITDA of around 35% in 2015.
Moody’s expects that weak production currencies, including the South African Rand and Brazilian Real, will continue to cushion AAL’s profitability. However, assuming relatively stable earnings in 2016-17 based on Moody’s current base case price assumptions for AAL’s key commodities, the rating agency does not expect AAL to generate sufficient operating cash flows to deliver substantial organic debt reduction in the next two years. The price declines also offset the management team’s success in driving costs down since 2013, and the company targets to deliver $2.1 billion in further savings over the next two years.
Moody’s notes that AAL is working on plans to reduce debt as part of the restructuring plan and indicated it may consider divestments to help reduce debt in the near term. Pending further announcements by the company, the rating agency believes that divestments of non-core assets would be difficult to execute in the current environment, particularly at valuations to allow deleveraging from the current level. While Moody’s recognises that AAL retains a number of options to raise capital and to accelerate debt reduction, the rating agency considers the deleveraging prospects to be uncertain and does not factor future divestments into its base case assessment.
Finally, the downgrade of AAL’s ratings reflects Moody’s view that the current environment is not a normal cyclical downturn, but a fundamental shift in the operating environment for the global mining sector. The Ba3 rating therefore takes into account the ongoing wholesale recalibration of Moody’s ratings in the mining industry initiated earlier this year. With the downturn likely to be deeper and longer than previously anticipated, the rating agency believes that price risk remains to the downside, given global economic uncertainties and slowing growth in China.
LIQUIDITY POSITION
The Ba3/Ba3-PD ratings recognise that AAL maintains a defensive cash balance, estimated at close to $7 billion at the end of 2015. The group also has around $7.9 billion of funds available under its committed credit facilities (as reported at end-H1 2015), which includes unguaranteed bi-lateral facilities at its South African subsidiaries that have financial covenants. The rating assumes that the group will continue to manage its bank relationships effectively.
Moody’s expects that AAL will maintain sufficient resources-at-hand to meet its near-term bond and bank maturities. in December 2015, AAL said it targets $2 billion in divestment proceeds in 2016 that will add to cash balances, if executed, and will help to cover costs of the forthcoming restructuring.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects uncertainty with respect to AAL’s ability to execute on the restructuring and to substantively reduce debt and strengthen its balance sheet. The outlook also captures the risk of further price compression in iron ore, copper, platinum or a delayed recovery in the diamonds market beyond 2016-17.
STRUCTURAL CONSIDERATIONS
AAL has a complex multi-layer organisational structure. The Ba3/Ba3-PD corporate family ratings are assigned at the level of AAL, the group’s top holding company (UK domiciled). AAL indirectly holds majority stakes at various production companies in different jurisdictions, including without limitation South Africa, Chile and Australia.
The group issues bonds at the level of Anglo American Capital Plc, a subsidiary of AAL. The bonds are issued on senior unsecured basis and benefit from the senior unsecured guarantee from the top holding company.
The group also maintains significant long-term and working capital senior unsecured loans, as well as trade payables obligations, at the level of operating companies, including in South Africa and Brazil. Moody’s views the current capital structure as transitional, given the stated intent to reduce debt as part of the ongoing operating restructuring.
WHAT COULD CHANGE THE RATING DOWN/UP
The rating could be downgraded if the company’s leverage, as measured by Moody’s adjusted debt/EBITDA, were to remain above 4x. The rating could also be downgraded if the company’s liquidity profile were to meaningfully contract, as Moody’s expects AAL to use cash balances and/or bank facilities to repay its maturing obligations.
An upgrade would require the company to demonstrate successful progress in its restructuring programme and sustained solid performance as AAL is reshaping its portfolio. A delivery beyond current expectations on the restructuring, strong liquidity, positive free cash flow generation and reduced leverage, with Moody’s adjusted debt/EBITDA maintained below 3.5x, would put positive pressure on the ratings.
Definitely a candidate for the knackers.
