Moody’s downgrades FMG, gives negative outlook

Moody’s has downgraded Fortescue Metals’ corporate family rating and its senior secured and unsecured ratings.

The investors service downgraded the miner’s CFR from Ba@ to Ba3, and downgraded its senior unsecured and secured ratings from Ba1 to Ba2 and B1 to B2 respectively.

Moody’s has also given the iron ore miner a negative outlook.

It comes less than a month after Fitch reaffirmed FMG’s credit rating, stating its Long Term Issue Default Rating was unchanged.

It has also affirmed its long term ratings at BBB- on the secured term loan and note and BB on the unsecured notes.

“The affirmation of Fortescue's ratings comes in spite of the decline in market prices for iron ore, and reflects the company's strong progress in cost reductions,” Fitch said.

However it did give a negative outlook for the miner at the time.

Regarding Moody’s decision to downgrade FMG, it stated that the move reflected the view “that there has been a fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended, resulting in increased credit risk and weaker metrics for Fortescue, as well as the global mining sector”.

“The slowing economic growth rates in China and reducing steel production rates impact demand for iron ore – leading to lower prices. Supply imbalances in iron ore, Fortescue's sole earnings and cash flow driver, will maintain pressure on prices for several years,” it said in its report.

"The downgrade reflects Moody's expectation of weaker performance over the next two years resulting from the significant drop in iron ore prices experienced in 2015 and our expectation that prices will not likely experience any meaningful and sustained recovery through to 2017" Matthew Moore, a Moody's vice president and senior credit officer, added.

However it was positive on the miner’s future performance.

“Fortescue has significantly increased volumes and reduced unit costs over the last 12-24 months,” Moody’s stated.

“Moody's expects the company to continue to work to drive down cash costs while maximizing throughput of its existing operations. Reflecting the improvements in the company's cost profile Moody's expects that Fortescue's operations will remain comfortably above breakeven levels under the rating agency's base case price assumptions and near breakeven under stress price assumptions, which should help to preserve cash and liquidity in this period of lower prices.”

The investor ratings service added, however, that despite the ongoing positive performance the ratings are likely to remain unchanged in the near term given the current iron ore market.

“However, the ratings could be stabilised if Fortescue demonstrates a track record of operating with lower costs of production and an ability to further reduce debt levels in the now lower pricing environment. This would be evidenced by an ability to maintain Debt-to-EBITDA comfortably below 4.0x through all reasonable pricing assumptions.”

Fortescue CFO Stephen Pearce responded to the downgraded positively, stating “it is pleased that Moody’s has recognised Fortescue’s strong performance, stable production profile, and long life, high quality reserves”.

The miner added that the rating update will have no impact on FMG’s debt capital structure.


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