Thursday, November 27, 2008

Rio Tinto is next, after Citibank, GM, Chrysler and Ford

Currently Rio Tinto'd debt stood at $42billions, and market capitalization, by value of shares stood at $36billion, and losing its value fast. True that Rio Tinto assets are quality during commodity boom era.
But things has changed for the worse in commodity sector for the past month. Commodity prices plunging, marked by plunging consumer demand in USA, Europe and now China and India.

this article was cut from bloomberg.

Rio Tinto’s $5 Billion Debt May Be Cut by Moody’s (Update4)
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By Jesse Riseborough

Nov. 26 (Bloomberg) -- Rio Tinto Group, the subject of a failed hostile takeover from BHP Billiton Ltd., may have the rating on $5 billion of its debt cut by Moody’s Investors Service after a slump in prices for metals and raw materials.

Rio tumbled 34 percent in Sydney, its biggest drop in 21 years, after BHP yesterday scrapped the $66 billion bid, raising concern the London-based company may struggle to repay $42.1 billion of debt used to buy Alcan Inc. The “high-level” debt of Rio, whose market value has fallen to $36 billion, was a factor in the ratings review, Moody’s said in a statement.

“The fact that the debt is bigger than the market cap is a pretty nasty situation,” Evy Hambro, managing director of BlackRock Investment Management Ltd.’s $4.7 billion World Mining Fund, told reporters today in Melbourne. “Rio Tinto has got some world-class assets in its portfolio and they will obviously have to find a way of rebalancing the debt and equity mix.”

Rio Chairman Paul Skinner today said he’s “comfortable” the company’s debt position is manageable, paying an average interest rate of 2.85 percent. The company remains committed to asset sales following the Alcan transaction last year and doesn’t need to sell new shares, he said. Moody’s has an A3 rating on Rio’s long-term debt.

Weak Demand

“The review reflects Moody’s expectation that Rio Tinto’s mid-term performance is likely to be adversely impacted by negative market conditions for key metals such as copper and aluminum,” Moody’s said. “Given the slowdown in global steel production, greater uncertainty exists with respect to mid-term volumes and prices in iron ore, an important business segment.”

Rio Tinto fell A$21.89 to A$42.01 at the 4:10 p.m. Sydney time close on the Australian stock exchange. BHP rose 3.9 percent to A$27.25.

“In the last few weeks investors were already starting to focus on the Rio Tinto debt position,” Tony Robson at BMO Capital Markets in Toronto, said today by phone. “That will become more and more of an issue in the weeks ahead.”

Rio Chief Executive Officer Tom Albanese is battling weakening world demand for aluminum that has pushed stockpiles to the highest since 1994 and set prices on course for the biggest annual drop in 17 years. Rio said last month it would review project spending and may delay $10 billion of asset sales to reduce debt from its purchase of aluminum maker Alcan.

‘Debacle for Holders’

The debt acquired to buy Alcan, “scuttled this deal and has cost Rio shareholders very dearly,” Charlie Aitken, head of institutional dealing at Southern Cross Equities Ltd., said today in a note. “For Rio shareholders this is nothing short of a debacle. Instead of a takeover premium they may well be forced to stump up more cash to restore Rio’s balance sheet.”

Moody’s today changed its outlook on $9 billion of BHP’s debt to “stable” from “negative” after the offer was scrapped, the ratings agency said today in a separate statement. Credit-default swaps on BHP tumbled 130 basis points to 320, according to Citigroup Inc. prices yesterday in London. Contracts on Rio jumped 50 basis points to 800.

The swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline the opposite.

Rio’s “high level of debt following the 2007 debt-financed acquisition of Alcan is also a factor in the review,” Moody’s said. “A key factor in the review will be the company’s ability to execute on its divestiture program and reduce debt over the next 12 months, including the $8.9 billion maturity in October 2009.”

Debt Finance

Rio had its rating outlook cut by Moody’s earlier this month to “developing” from “positive.” Australia’s mining and materials companies may face a cooling credit outlook because of the tightening availability of debt finance and the prospect of weakening economics, Standard & Poor’s Ratings Services said Oct. 2. BHP’s ratings weren’t immediately affected by the decision to ditch the Rio bid, Standard & Poor’s Ratings Services said today in a statement.

“The balance sheet is not quite as strong as it could be,” Hugh Young, managing director at Aberdeen Asset Management Ltd. in Singapore, who oversees $45.1 billion in assets including about 1.4 percent of Rio’s London stock, said yesterday by phone. “So that is a matter of concern for all shareholders.”

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