Anglo Cut to Junk by Moody's as Metal Rout Hinders Debt Cuts

  • Anglo says it has `strong liquidity' and impact is limited
  • Company will update investors on its turnaround plan Tuesday

Anglo American Plc’s credit rating was cut to junk by Moody’s Investors Service as slumping commodity prices inhibit the London-based miner’s efforts to reduce debt and sell assets.

“The company now faces a higher business risk due to deterioration in commodities market conditions, and a longer and more uncertain de-leveraging period than previously expected,” Moody’s said in a statement Monday.

Platinum-maker Anglo is seeking to turn around its fortunes with a drastic downsizing plan. The company is set to report full-year results Tuesday and update investors on its move to reduce by more than half the number of mines it owns and eventually lower employee numbers to 50,000 from 135,000. Anglo lost 75 percent of its market value last year as investors questioned its survival given billions in debt and metal prices at six-year lows. The company also mines copper, diamonds and iron ore.

Moody’s, which lowered Anglo’s senior unsecured ratings to Ba3 from Baa3, said a target of raising $4 billion by selling mines would be difficult to achieve.

“In this environment, executing disposals is going to be very, very difficult,” Philipp Lotter, managing director of EMEA corporate finance at Moody’s said by telephone. “This is not just a cyclical downturn, this a prolonged structural adjustment of the sector.”

Profit Squeeze

The meltdown in commodity prices has prompted miners to accelerate spending cuts by optimizing operations and cutting dividends as well as divesting some assets as they grapple with declining profits and large debt piles. Glencore Plc’s rating was cut to the lowest investment grade at Standard & Poor’s this month while BHP Billiton Ltd. also had its rating cut on concern faltering growth in China may sap prices further.

Anglo said by e-mail that it had a “strong liquidity” position with about $15 billion in cash and undrawn facilities with only $1.6 billion of bonds maturing this year.

“The operational and financial impact of the credit rating downgrade is limited,” it said in the statement. “Anglo American is taking the necessary steps to further strengthen its balance sheet with the objective of returning to a solid investment grade credit rating.”

‘Further Pressure’

Still, Moody’s said it could downgrade Anglo further unless it improves adjusted gross debt to earnings before interest, taxes, depreciation and amortization, which is currently about 4.2 times.

“The rating would come under further pressure if that ratio was not brought below 4 relatively quickly,” Lotter said. “We need to assume a fairly bleak outlook.”

The downgrade “reflects a significant deterioration” in Anglo’s debt capacity and that Moody’s doesn’t expect it to deliver a substantial debt reduction in the next two years, according to the statement. There’s a risk that Anglo’s iron-ore business could deteriorate further, Moody’s said.

Moody’s put Anglo on review for a downgrade in December because of slumping commodity prices and its plans to reduce production.

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