The chances have risen that Rio Tinto (RIO) will lose its coveted A credit rating after Standard & Poor’s put the miner on credit watch with a negative outlook – two days after it did the same to its would be suitor, Glencore (which reacted overnight with a huge asset sale and debt cut valued at $US10 billion). That news saw Glencore shares leap 7% in London.
The cut in the outlook from stable to negative by S& P raises the chance of a reduction in Rio’s A- rating over the next 18 months.
In fact it could come much quicker if conditions in China slow further and global commodity prices – especially iron ore, coal and copper – come under further pressure, which is entirely possible.
Glencore’s downgrade was based on similar grounds about commodity prices, but with the added concern about the size of the company’s huge debt burden (some $US30 billion) and continuing reports of a possible deal to buy Rio’s Australian coal assets.
Glencore last overnight revealed a series of measures to combat the downgrade – suspending the company’s dividend after the payment of the current distribution (which could save more than $US2.4 billion), the suspension of copper mining that will take 400,000 tonnes tonnes a year of the metal out of the market, and a share issue to help cut the company’s $US30 billion debt pile by a third over the next three years.
As well it will sell unnamed assets, as well as a stake in its huge agricultural business to a a third party yet to be revealed (but thought to be Chinese).
All up Glencore is looking to raise $US10 billion in the next year or so.
The Glencore move ends any hope it might have of renewing its bid for Rio.
Rio Tinto shares closed down 1.2% yesterday to $A49.15. Rio shares are down more than 26% so far this year.
RIO 1Y – S&P cuts Rio’s outlook
S&P revealed the downgrading in a statement after the UK stock market closed on Friday
“The outlook revision reflects our view that the continued weakness and volatility in commodity prices -resulting from heightened uncertainty on demand from China and, in particular, its challenged steel industry – could weaken Rio Tinto’s key credit metrics,” S&P analysts wrote.
The analysts said the cut to the outlook was despite “Rio Tinto’s robust balance sheet.”
S&P said that that over the next 18 months it could cut Rio Tinto’s rating by a notch, “if its adjusted funds from operations-to-debt ratio stays “meaningfully” below 35% during 2016-17, or if its discretionary cash flow after dividends for 2016 is “more negative” than expected."
"Long-term and short-term credit ratings have been affirmed at A- and A-2, respectively. The current ratings reflect S&P’s view on the company’s “robust” operational performance. This can be partially accredited to cost-cutting initiatives introduced this year.”
