Moody's Investors Service has today downgraded the senior unsecured ratings of Anglo American plc and its subsidiaries to Baa3 from Baa2, its short term ratings to P-3 from P-2. Concurrently, Moody's downgraded the company's national scale rating to A3.za from A2.za and kept short term national scale rating unchanged at P-1.za. Moody's has also placed all ratings on review for downgrade.
The rating action follows the announcement by the company of the broad restructuring initiative that is expected to result in a material downsizing of its production portfolio and earnings/cash flow generation levels and be accompanied by a proportionate reduction in debt in the near term. The company expects to provide full details of the forthcoming portfolio reorganisation and new leverage targets in early 2016. The downgrade also takes into consideration the company's increasing leverage profile, as prices across its metal/minerals exposures continue on a downward trajectory, which has accelerated in 2015. Based upon current trading levels for the company's key exposures, fourth quarter 2015 performance is expected to evidence a continuing weakening trend.
"We have downgraded Anglo American's ratings to Baa3 primarily because of its weak leverage position and the increased potential for further earnings deterioration as a result of commodity price pressures," says Elena Nadtotchi, a Moody's Vice President -- Senior Credit Officer and a lead analyst for Anglo American. "The decision to place all ratings on review for further downgrade reflects the exceptionally wide operating and financial review and high level of uncertainty about the future business profile of the company. The Baa3 rating is currently supported by the expectation that the company will be able to maintain its current strong liquidity position throughout the restructuring period and will take steps to improve its cash flow and debt position."
RATINGS RATIONALE
Before taking into account potential portfolio changes in 2016/2017, the Baa3 rating reflects the weakened leverage profile of the company, which remains substantially outside of the Baa2 rating guidance of debt/EBITDA below 3x in 2015 and, likely, in 2016. The downgrade also reflects the higher likelihood of further earnings contraction, given the heightened pressure on the company's key commodity markets and Moody's declining price expectations for iron ore, coal, copper, weak market in diamonds, as well as the company's lower iron ore production guidance for 2016/2017.
Anglo American is taking measures to improve its cash flow generation from the existing assets. It has delivered significant unit cost savings, helped in part by weaker production currencies in 2015, however, these gains could not fully match the pace of decline in commodity prices. Looking ahead, it aims to deliver about $2.1 billion in additional efficiency gains over the next two years (representing about one third of its 1H 2015 LTM EBITDA). It also plans to reduce its capital investment from $4.1 billion in 2015 to about $2.5 billion in 2017 and has cut the dividend (around $1 billion in 2014), so we expect it to turn FCF positive in 2017. Anglo American targets additional $2 billion in divestment proceeds in 2016 that will help covering costs of the forthcoming restructuring.
The exceptionally wide-ranging strategic and operational review announced by the company raises uncertainty about the business risk assessment. The company said that it plans to downsize the production portfolio and concentrate on its best assets in the later-cycle commodities, including diamonds, copper and platinum, which we expect will retain a stronger long term growth outlook. Anglo American will significantly reduce the number of its production assets to around 20 (compared to 36 assets targeted previously) and aims to dispose or idle the remaining assets over a period of time. We see the proposed restructuring as a fundamental repositioning of the business, which while positive over the longer term, will substantially raise execution risks in 2016/2017. Challenging market conditions will likely slow down the pace of the portfolio transformation.
Rating Outlook
The ratings were placed under review for downgrade in view of uncertainty about the proposed strategic portfolio restructuring, including its scope, timing and costs, as well as the leverage profile that will be targeted by the company. As part of the review we will look to assess execution risks arising from the forthcoming restructuring plan and the targeted financial profile.
Liquidity Position
The Baa3 rating is materially supported by the expectation that the company will maintain its strong liquidity position throughout the restructuring period. At the end of 1H 2015, the group reported $7 billion in cash balances and maintained $7.9 billion of funds available under its committed credit facilities, including unguaranteed bi-lateral facilities at its South African subsidiaries, that have several financial covenants. The rating assumes that the group will continue to manage its bank relationships proactively.
The group has limited refinancing requirements with about $1.9 billion in bonds and loans maturing in 2016. It will also face $2.9 billion and $3.6 billion in maturing bonds and loans in 2017 and 2018 respectively.
Drivers of Rating Change
Pending further details on the targeted portfolio and the restructuring measures that the company plans to execute over 2016/2017, the Baa3 rating is currently supported by the strong current liquidity, the group's size and scale, and expectation of consistent conservative financial management by Anglo American. As soon as the company provides more guidance on the future size and scale of the business and target financial metrics, we will better be able to assess implementation risk and whether the balance of business risks and metrics remain appropriate for a Baa3 rating.
Weaker liquidity or a greater deterioration in the operating performance, causing a delay with the recovery in the leverage metrics from the current levels, or return to negative FCF generation, will likely put negative pressure on the Baa3 ratings.
The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
