Investment Insights

Anglo American long-term rating cut two notches to 'BBB' on market downturn

Outlook negative.

Standard & Poor's
24 February 2009 17:30

Standard & Poor's Ratings Services said today it lowered its long-term global scale corporate credit and senior unsecured debt ratings on diversified mining group Anglo American PLC by two notches to 'BBB' from 'A-'. At the same time, the short-term global scale corporate credit rating was lowered to 'A-3' from 'A-2'.

In addition, the South Africa national scale long-term rating on debt issued by Anglo American SA Finance Ltd. (guaranteed by Anglo American PLC), was lowered to 'zaA+' from 'zaAA+', while the 'zaA-1' South Africa national scale short-term debt rating was affirmed.

"The two-notch downgrade reflects our expectation of much lower profits, cash flows and--with adjusted debt of about $14 billion arising from previous acquisitions--weaker leverage for Anglo American in 2009, due to a sharp downturn in metals and minerals prices," said Standard & Poor's credit analyst Alex Herbert in London.

Standard & Poor's said the group will likely be highly challenged to maintain credit metrics consistent with the previous 'A-' rating--notably a ratio of funds from operations (FFO) to adjusted debt of about 40%.

Given the uncertainty about the depth and duration of the market downturn, and the level of future metals and minerals prices, where forward visibility is very low, the outlook is negative.

"The negative outlook reflects the continued high level of uncertainty about the depth and duration of the economic downturn, and the level of future metals and minerals prices, where forward visibility is very low," said Mr. Herbert.

"We factor into our expectations a decline in FFO in the order of 60% in 2009 to about $3.0 billion. A ratio of FFO to adjusted debt of about 30% is consistent with the ratings."

Against the weak market backdrop, however, there is a clear possibility that Anglo American may underperform relative to Standard & Poor's analysis.

"In our opinion, during the currently harsh downturn, this ratio could fall to around 20% in 2009, depending on market prices this year, and on the impact of corrective steps from management," said Herbert.

Standard & Poor's expects Anglo American management to continue to respond proactively by cutting costs, lowering spending, as well as preserving liquidity and taking measures to protect credit ratios.

"Ratings stability could be established if the group is able to sufficiently mitigate the impact of the market downturn through its corrective actions and by improved market conditions. Downside pressure could increase if metals and minerals prices, including contract iron ore and coal, weaken beyond our expectations, or if management's response is inadequate," concluded Herbert.

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