Fitch Ratings has upgraded UK-based Rio Tinto Plc’s and Australia-based Rio Tinto Ltd’s (collectively, the Rio Tinto Group (RT)) Long-term Issuer Default Ratings (IDR) and senior unsecured ratings to ‘A-’ from ‘BBB+’, respectively. The Short-term IDRs are affirmed at ‘F2′ and the Outlooks on the Long-term IDRs are Stable.
“Through a combination of management action on reducing debt and China’s still insatiable demand for commodities, Rio Tinto has emerged from the financial crisis with its core operating strengths intact and with further improvement in its financial profile expected in 2010,” said Peter Archbold, Senior Director in Fitch’s London Industrials team.
The rating action primarily reflects various measures taken by the group over the past 12 months to reduce absolute debt levels together with Fitch’s expectations regarding further deleveraging and an improvement in the group’s credit metrics over the course of 2010. RT’s pace of deleveraging in H2 2009 – driven by increased commodity prices and asset sale proceeds – exceeded Fitch’s expectations when the agency previously affirmed RT’s ratings on 5 June 2009 following the announcement of its USD14.8bn rights issue.
Fitch believes that RT’s management will continue to prudently balance debt reduction and capex spending in 2010. The agency expects that pricing trends in RT’s core commodities markets – including iron ore and copper – will also remain at a favorable level, generating significant free cash flow (FCF) to enable RT to reduce its debt. Fitch’s base rating case forecasts for 2010 incorporate a relatively conservative price increase of around 20% y-o-y for steel-making raw materials, and an average copper price mid-way between 2009 average levels and the current spot price.
Fitch’s base case forecasts for 2010 incorporate a low double digit increase in group revenues and EBITDAR of approximately USD17-18bn. The company is also expected to be significantly FCF positive (above USD3.0bn) after taking into account updated company guidance on dividends and capex (assumed by Fitch at the higher end of guidance at USD6bn), allowing a forecast reduction in gross leverage to around 1.0x by FYE10. Liquidity in 2010 will likely remain strong with limited near term debt maturities, USD4.0bn of unrestricted balance sheet cash as at FYE12/09, and the aforementioned expectation of significantly positive FCF in 2010.
The rating upgrade does not incorporate any potential benefit which would occur upon completion of the proposed iron ore joint venture (JV) with fellow Anglo-Australian miner, BHP Billiton Ltd/Plc (‘A+’/'F1+’/Stable). One such benefit would be receipt of the approximate USD5.8bn equalisation payment, the amount of which remains subject to finalisation adjustments. This stance does not reflect a lower assumed probability of the JV proceeding, but rather that Fitch believes that the full amount of the equalisation payment is unlikely to be used for debt reduction and that a significant portion could be used to support potentially higher capex outlays.
The Stable Outlook incorporates the expectation that RT’s management will maintain a balanced approach in allocating cash flows between capex and further debt reduction, and that commodity prices do not deteriorate materially from current levels. The completion of the proposed iron ore JV is not expected to affect RT’s ratings. Possible downside rating pressure would be most likely to stem from higher-than-expected shareholder distributions (dividends, resumption of share buybacks) or large debt funded acquisitions.
The RT group rating actions are as follows:
RT: Long-term IDR: upgraded to ‘A-’ from ‘BBB+’; Outlook Stable
RT: senior unsecured debt: upgraded to ‘A-’ from ‘BBB+’
RT: Short-term IDR: affirmed at ‘F2′
Rio Tinto Alcan Inc: senior unsecured debt: upgraded to ‘A-’ from ‘BBB+’
Rio Tinto Finance USA: senior unsecured debt: upgraded to ‘A-’ from ‘BBB+’
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