Metso Must Boost Capital Structure to Avoid Moody’s Cut

Metso Oyj, the Finnish maker of rock crushers that’s spinning off its paper and pulp machine unit into Valmet Oyj, faces a ratings downgrade unless it improves its capital structure, Moody’s Investors Service said.

Metso’s Baa2 credit grade, the second-lowest investment grade, was placed under review by Moody’s in March after the plan to split its business was announced.

“If we were to keep the rating where it is, it would be weakly positioned in the rating category with limited cushion for weaker-than-expected performance,” Matthias Hellstern, a managing director at Moody’s in Frankfurt, said in an interview. “So it would require Metso to improve the capital structure over time.”

Metso will focus on mining, construction and automation after splitting off paper, pulp and power businesses. Gross debt at Metso’s remaining units was 1.1 billion euros ($1.46 billion) as of March 31. Its gearing, or debt-to-equity, was about 31 percent, compared with about 14 percent for the group before the split. Valmet’s assets will exceed its debt. The units remaining with Metso had an operating profit margin of more than 11 percent of net sales last year while its paper, pulp and power business achieved a 4.9 percent margin.

The yield on Metso’s 2.75 percent euro-denominated 2019 bonds fell 2 basis points to 2.90 percent today. The spread to the Euro Benchmarks Curve narrowed 3 basis points to 180 basis points. The shares rose 0.1 percent to 29.05 euros at 10:25 a.m. in Helsinki.

Less Balanced

“Following the spinoff of Valmet, Metso’s portfolio will be less balanced because paper business has different drivers than mining,” Hellstern said. “On the other hand, they’re losing the weaker part.”

A cooling mining boom, led by slowing growth in China, the biggest consumer of commodities, is prompting miners to trim spending globally to halt a profit squeeze. Rio Tinto Group, the world’s second-biggest mining company, is seeking to sell assets and reduce $5 billion in costs. BHP Billiton Ltd., the biggest miner, is targeting an 18 percent cut in capital spending over the 12 months through June.

“If the mining industry starts suffering and reduces its capital expenditure, we expect that this will have an immediate effect on Metso,” Hellstern said. He didn’t specify when the review will be completed.

Standard & Poor’s rates Metso BBB with a stable outlook. Metso bondholders in June approved the compensation offered and an extraordinary shareholders meeting will convene on Oct. 1 to decide on the spinoff, due to take place at the start of the year.

“If we believe that it’s becoming more challenging or takes longer for Metso to get to the capital structure that we would like to see for Baa2, taking into account lower diversification, then we would probably have to downgrade them to Baa3,” Hellstern said.

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