Vale Debt Rating Cut On Iron Ore Price Drop

Brazilian mining company Vale SA was downgraded late on Thursday by the Standard & Poor's credit-rating agency over concern that a drop in iron ore prices will erode revenue at the world's largest producer of the main steel-making ingredient.

 

New York-based S&P reduced the company's rating to "BBB," the second-lowest investment grade level, from "BBB+." S&P had cut the company's rating to BBB+ in January.

 

A BBB rating means a company has "adequate capacity to meet financial commitments, but (is) more subject to adverse economic conditions" than higher-rated companies, according to the agency. S&P, which took Vale off a "credit watch," said the outlook for Vale's rating was negative.

 

On Thursday, Rio de Janeiro-based Vale reported a $3.2 billion loss for the first quarter, its third-straight quarterly negative result. The price of iron ore <.IO62-CNI=SI>, the product responsible for the bulk of Vale's revenue, has fallen nearly 50 percent in the last year as economic growth in China, the largest maker of steel, slows.

 

Meanwhile, Vale, along with its main rivals BHP Billiton Ltd and Rio Tinto Ltd, has been expanding production to take market share away from higher-cost rivals. Unlike BHP and Rio Tinto, Vale still has substantial investments to make to finish an expansion plan focused on giant new mines in Brazil's Amazon.

 

"The downgrade reflects the significant pressure that the combined effect of lower iron ore prices and sizable investment levels are expected to have on the company's leverage in 2015 and 2016," Standard & Poor's credit analyst Diego Ocampo said in Thursday's statement.

 

Vale Chief Financial Officer Luciano Siani said S&P's decision was premature at a time when iron ore prices have "not found their just level" and as the company is raising output and cutting costs.

 

"We are disappointed by the short-term vision of S&P," he said in statement. We hope that the ratings agencies will have a view beyond the cycle that is in line with our average debt tenor of nine years. The sharp reduction in risk spreads of our bonds shows that we are not alone in this view."

 

On Thursday, the cost of insuring Vale debt for 10 years fell to about 303 basis points, or 3.03 percentage points, the lowest in nearly four months, from about 321 basis points on Wednesday, according to Thomson Reuters data.