CHICAGO & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has downgraded the long-term foreign currency (L-T FC) and local currency Issuer Default Ratings (IDRs) and senior unsecured debt ratings for Samarco Mineracao S.A. (Samarco) to 'BB-' from 'BBB', and National long-term ratings to 'A(bra)' from 'AAA(bra)'. The Rating Watch on Samarco's ratings has been revised to Evolving from Negative. A full list of rating actions follows at the end of this release.
The downgrade of Samarco's ratings reflects the likely deterioration in the company's credit profile due to the lack of operating cash flow generation. This is due to the stoppage of pellet production of around 30 million tonnes annually, which is likely to be for an extended period of time. The Rating Watch Evolving reflects possible upside to the ratings should Samarco's shareholders, Vale S.A. (Vale, L-T FC IDR 'BBB+'/Rating Watch Negative) or BHP Billiton Plc/Ltd (BHPB, L-T IDR 'A+'/Negative Outlook), or both, provide significant financial assistance to the company to help maintain its financial profile following resolution of all operational and environmental claims, etc.
Absent financial support from shareholders, the uncertainties regarding the ultimate potential size of fines and final clean-up and operational start-up costs, could possibly lead to Samarco facing further rating downgrades.
KEY RATING DRIVERS
Extended Impact on Production
The ratings downgrade reflects Fitch's expectation that Samarco's operations will not resume normally for an extended period of time, most likely of around two years. The company publicly announced a number of interim cash flow generation measures, such as the sale of energy, that are expected to cover its operating costs in the short term. Samarco is currently in compliance with its net debt/EBITDA financial covenant of 4.0x related to USD1.6 billion of its pre-export loans. Due to the absence of cash flow generation, this covenant may be breached during the first half of 2016. Fitch assumes that covenant waivers will be received from the banks.
Additional Liquidity May be Required
Fitch considers Samarco's liquidity position as adequate to service its debt and interest obligations over 2016 and 2017, notwithstanding further large financial penalties in addition to the BRL1 billion (USD263 million) emergency clean-up and social responsibility fund created in November after discussions with the governments of the affected states of Minas Gerais and Espirito Santo. In the event that additional penalties are levied on the company and with a USD1 billion debt repayment due in 2018, additional liquidity may possibly be required from its shareholders.
Shareholder Commitment to Date
Tangible support to date offered by Vale and BHPB include, but were not limited to, personnel, operational, logistical, materials, technical and medical support alongside the cancellation of dividends to be paid to the shareholders. Vale and BHPB also committed to supporting Samarco's BRL1 billion emergency clean-up and social responsibility fund, although Fitch anticipates the cost will be met directly by Samarco.
Fitch's Base Case:
Fitch continues to assume that Vale, BHPB or both, may provide sufficient support to ensure Samarco returns to production. At this stage, the potential total of fines and clean-up costs are difficult to quantify. Previous precedents in Brazil for environmental disasters involving oil companies with severe environmental damage during the last few years have initially begun with charges being filed in the billions, but finally resulting in smaller settlements.
Business Interruption Insurance
Samarco reports significant insurance coverage for property damage, business interruption and civil liabilities totaling over USD1.1 billion combined based on declared value at risk. Business interruption covers one full year of operations. Fitch has assumed less than USD600 million of insurance proceeds being received during 2016, significantly lower than the total coverage stated. Fitch has assumed the business interruption insurance is not contingent upon the findings of the investigation into the cause of the dam accident.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Samarco include:
--Readily available cash balance of approximately USD700 million at YE2015; USD235 million at YE2016 (excluding insurance proceeds); USD430 million at YE2017;
--Business interruption insurance proceeds of USD570 million in 2016;
--Energy sale of 2,300 MWh in 2016 generating USD93 million in revenues;
--Assuming that covenant breaches are waived, pre export loan repayment schedule met until USD1 billion due in 2018, at which point the company is expected to resume operations enabling successful refinancing;
--Cost assumptions include salaries, some taxes (CFEM), interest, fees, overheads, the announced environmental fund and penalties.
RATING SENSITIVITIES
Punitive fines, penalties and clean-up/repair costs beyond Samarco's financial ability to pay, absent shareholder support, may lead to a downgrade. A slower than anticipated resumption of operations that deteriorates Samarco's liquidity position in relation to its short term debt commitments, and inability to execute cash flow generation measures announced in the interim, could also lead to a downgrade absent shareholder support.
Forms of shareholder support may lead to varying degrees of an upgrade.
LIQUIDITY
Following the repayment of USD400 million in pre export loans due at the end of November 2015, Samarco's total debt of USD3.9 billion comprised of USD1.6 billion in pre-export loans and USD2.3 billion of bonds. The USD1.6 billion of pre-export loans are mainly held by six different banks. The pre-export loans have a net debt/LTM EBITDA covenant of 4.0x with USD860 million of pre-export loans being tested on a quarterly basis, and the remaining USD740 million being tested semi-annually.
Samarco reports that complied with all covenants relating to its debt as of November 25, 2015. Fitch projects that the net debt/EBITDA covenant of 4.0x may be breached at the Jun. 30, 2016 test date and assumes that covenant waivers will be agreed with the banks. Including assumed insurance receipts, the company has stated it has the liquidity to meet all of its debt obligations in a timely manner, up until the USD1 billion pre-export loan repayments due in 2018 by which point it assumes a resumption of operations. As of Jun. 30, 2015 Samarco had cash and marketable securities of USD711 million.
FULL LIST OF RATING ACTIONS
Fitch downgrades the following:
Samarco Mineracao S.A. (Samarco)
--Local currency long-term IDR to 'BB-' from 'BBB'; Rating Watch revised to Evolving from Negative;
--Foreign currency long-term IDR to 'BB-' from 'BBB'; Rating Watch revised to Evolving from Negative;
--National long-term rating to 'A(bra)' from 'AAA(bra)'; Rating Watch revised to Evolving from Negative;
--Senior unsecured debt rating to 'BB-' from 'BBB'; Rating Watch revised to Evolving from Negative.
Date of Relevant Rating Committee: Nov. 30, 2015.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995681
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995681
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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