From the ABC:
Ratings agency Fitch has declared a debt default for BHP Billiton-Vale joint venture Samarco as “imminent or inevitable” by downgrading the company to “C”.
The two-notch ratings downgrade takes Samarco from CCC, where “default is a real possibility” to C, which is the level immediately prior to an actual default, such as a missed debt payment.
On its website, Fitch describes the C rating as one with “exceptionally high levels of credit risk”.
“Default is imminent or inevitable, or the issuer is in standstill.”
In its note on the downgrade, Fitch said a significant delay to restarting operations at the iron ore mine was the main catalyst for the severe action.
“Given the political climate surrounding the company and an inability to gain traction in obtaining the necessary licenses to restart its business, Fitch now believes that the company will not restart operations until the second half of 2017,” it predicted.
“Previously, Fitch assumed that Samarco’s operations would be able to restart during the first half of 2017.”
Fitch said creditors should brace for the company to come knocking at their doors to seek modified loan conditions within the next couple of months.
“The C rating reflects Fitch’s view that Samarco will be forced to request a standstill or restructure its debt within the next couple of months, as the company seeks to preserve cash for expenses related to obtaining operating permits,” it added.
Fitch said Samarco does not have a lot of cash left, given that it is a long way from returning to production.
Fitch assumes that the ongoing delay for Samarco to regain its operating licenses will result in the company likely running out of cash at some point during the third quarter or fourth quarter of 2016.
In some positive news for Samarco’s creditors, Fitch said there are “above average recovery prospects” if the company does default on part or all of its debt.
However, it added that Samarco would need to return to production at 50 per cent or more of its current capacity for those high debt recovery prospects to be fulfilled.
Fitch warned that there is a “distinct possibility” that Samarco would not be able to return to production at all, in which case recovery prospects would likely be less than 10 per cent.
Any wind down of Samarco will expose BHP directly to enormous reparation costs. It would also destroy the lives of those impacted by the disaster. But stranger things have happened.
