Mining companies are getting back into financial shape and have cut the sector’s pool of distressed bonds by at least $60bn, providing another boost to the industry’s outlook as commodities enter a bull market.
Anglo American and Glencore are among companies whose notes no longer feature in the ranks of distressed US-dollar denominated debt after selling assets and cutting dividends to bolster their balance sheets, according to Bloomberg Intelligence. The amount of metals and mining bonds trading at distressed levels fell this month to $26bn from a peak of $86bn in February, the data show.
“There has been a large degree of self help, whether that’s through asset sales or cost cutting or capex rationalisation, to improve cash flow,” said Anthony Ip, a credit sector specialist at Citigroup in Sydney. “At the macro level, you’ve got the rally in commodities prices and the market appears more comfortable with China risks, so that’s helping sentiment.”
Commodities have entered a bull market, ending a five-year rout, as supply constraints drive up prices in everything from soybeans to zinc, while Citigroup said last month that raw materials had turned a corner following the biggest price collapse in a generation. Mining companies have trimmed loss-making output, lowered costs and scrapped pledges to continue boosting payouts to investors to mitigate the impact of tumbling prices.
Notes issued by the likes of copper producer Freeport-McMoRan and iron ore miner Fortescue Metals Group also are no longer trading at distressed levels, according to Bloomberg Intelligence’s Richard Bourke. The analysis examined bonds with more than $100m outstanding that were trading with option-adjusted spreads greater than 1 000 basis points. Spreads that wide are often considered a definition of distress, according to Bourke.
Moody’s Investors Service, which began a sector-wide assessment of mining in January that prompted 36 rating downgrades, last month upgraded the outlook on Anglo’s Ba3 senior unsecured ratings from negative to positive as a result of better-than-expected asset sale receipts. Anglo in April agreed to sell its niobium and phosphate businesses for $1.5bn.
Miners have announced $27bn of pending and completed asset sales this year, including China Molybdenum’s $2.65bn agreement to buy Freeport’s stake in the Tenke Fungurume copper-cobalt mine. That’s easing concern over producers’ debt even with raw materials prices trading about 50% lower than a 2011 peak.
Others haven’t been able to withstand pressure on prices. Coal producer Peabody Energy and iron ore miner Magnetation LLC are among companies to file for bankruptcy amid the slump. Sydney-based Australian steel and iron ore supplier Arrium appointed a voluntary administrator in April after lenders rejected a $927m recapitalisation plan.
The recent rally in materials prices probably isn’t sustainable as demand remains muted – particularly in China – and as supply continues to grow in some sectors, according to Matthew Kence, a Boston-based senior vice president credit at Standard Life Investments, which manages about $372bn of assets globally. The World Bank on Tuesday cut its outlook for global economic growth this year to 2.4% from a 2.9% estimate in January.
“While the better balance sheets and liquidity positions certainly lessen the near-term risks to these credits, and bond prices have reacted to this, ultimately fundamentals still matter,” Kence said in an e-mailed response to questions. “We view the backdrop as not overly favorable for commodities, with global growth just muddling along and the risk of a strengthening dollar looming.”
While prices will remain under pressure over the next 12 to 18 months, Moody’s will continue to examine actions by individuals producers in assessing their ratings, Matthew Moore, a senior analyst at Moody’s said by phone.
“One of the things that we’ll continue to look at is the ability of companies to execute on things like asset sales for debt reduction,” Moore said. “We’ve also seen companies like Fortescue go out and buy back some of their debt as well, which is improving the position of that company in its rating level.