Moody's affirms Fortescue's ratings following credit negative first half results; outlook stable
Global Credit Research - 17 Feb 2015
Approximately $9.1 Billion of Debt Securities Affected
Sydney, February 17, 2015 -- Moody's Investors Service has today affirmed Fortescue Metals Group Limited's corporate family rating (CFR) of Ba1. At the same time Moody's has affirmed FMG Resources (August 2006) Pty Ltd's senior unsecured notes rating of Ba2 and senior secured rating of Baa3. The outlook on all ratings is stable.
The affirmation follows today's results announcement by Fortescue, which has shown the impact of a substantial decline in the price of iron ore for the first half of the financial year ended 30 June 2015 (1H FY15), with revenue declining by around 17% and EBITDA falling by around 55%. This is despite production increasing around 53% and costs reducing around 9% over the previous corresponding period.
RATINGS RATIONALE
"Fortescue's weaker results, which are principally due to the decline in the price of iron ore during the period, are credit negative, says Matthew Moore, a Moody's Vice President and Senior Analyst.
"Fortescue had a very strong financial profile going into the industry downturn, and which had provided a solid cushion for the rating", Moore says, adding "However, the weak price environment seen in the last few months has substantially reduced Fortescue's headroom within the rating.
"Further deterioration in industry fundamentals and in the iron ore price - relative to our base case sensitivities of around USD65-70/t (62% Fe index price) - could pressure the rating and/or outlook in the absence of any countermeasures", says Moore.
With slowing global steel-production growth rates, combined with increased iron ore production capacity, we believe that iron ore prices remain vulnerable to the downside and we expect continued volatility.
The decline in the price of iron ore has led to sharp declines in Fortescue's revenue and EBITDA generation in 1HFY15, despite a more than 50% increase in production levels and 9% decrease in cash costs over the prior period. The decline in EBITDA has caused credit metrics to weaken from the strong levels for the rating achieved in FY14 and we expect that credit metrics will be near or slightly above our tolerance level for the rating in FY15. Leverage as measured by adjusted debt-to-EBITDA increased to around 2.4x in the twelve months to December 2014 and we expect this to increase further to around 3.0x for the financial year ended June 2015. For the Ba1 rating we expect debt-to-EBITDA to be sustained below 3.0x.
The stable outlook reflects the limited near term refinancing risk, as well as our expectation that Fortescue will continue to generate sufficient earnings and cash flow to maintain solid liquidity. The outlook also reflects our expectation that the company will continue with its debt reduction plans and maintain its significant production increases and cost reduction progress, such that credit metrics are sustained at acceptable, albeit weakly positioned, levels for the rating.
"Fortescue's liquidity remains solid and we expect cash balances, combined with operating cash flow, to be adequate to cover expected cash uses and potentially allow for further debt reduction over the next 12-24 months under our base case price sensitivities" says Moore.
The company had around USD1.6 billion of cash on hand at 31 December 2014. This is down from USD2.6 billion in the quarter ended 30 September 2014 and reflects the early repayment of USD500 million of debt with cash and around USD660 million of tax payments.
"The outlook or rating could face negative pressure if the company is unable to sustain production levels, sustain and further reduce its cost profile, or embarks on any material further expansions or shareholder-friendly initiatives, such that credit metrics do not remain in line with Moody's expectations" says Moore, adding, "Continued pressure leading to iron ore prices sustained below our sensitivity cases could also place negative pressure on the rating and/or outlook".
Financial metrics that Moody's would consider for a downgrade include Debt-to-EBITDA exceeding 3.0x or RCF-to-Debt sustained below 15% on a consistent basis.
The rating is not likely to experience any positive momentum over the next 12-to-18 months reflecting the current operating conditions the company is facing and our expectations for iron ore prices.
Fortescue Metals Group Limited based in Perth, is an iron ore producer engaged in the exploration and mining of iron ore for export, mainly to China. Fortescue is Australia's third largest iron ore producer and exporter as well as one of the world's largest producers and sea-borne traders.
The principal methodology used in these ratings was Gobal Mining Industry published in August 2014. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
In sintesi: non ho capito un bel nulla!
