Ratings agency Standard & Poor’s (S&P) has downgraded its rating of Anglo American from BBB+ to BBB, on the expectation that the company will “generate material negative discretionary cash flow in 2013-2014”.

This will be the result of high capital expenditure and dividends to shareholders, according to the agency.

“We see the company’s leverage increasing, with funds from operations to debt declining to about 30%-40% in 2013-2014 under our pricing assumptions, compared with 45%-50% that we consider commensurate with a BBB+ rating,” S&P said.

“We are therefore lowering our long-term rating on Anglo American to BBB from BBB+. The stable outlook reflects our view of limited further rating downside potential, given Anglo American’s diversified business risk profile and strong liquidity.”

At the same time, the agency has affirmed its A-2 short-term corporate credit rating on Anglo American, as well as its long-term South Africa national scale rating at zaAA+ and its short-term national scale rating at zaA-1.

“We now expect the company’s leverage to increase above the levels that we see as commensurate with an ‘intermediate’ financial risk profile by the end of 2013 and to remain elevated in 2014, despite potential mitigating actions by management,” the agency said.

It added that because of this, it now assesses Anglo’s financial risk profile as significant. Meanwhile, the stable outlook reflects the expectation that Anglo should be able to hold adjusted funds from operations (FFO) to debt at about 35% in 2013, and at least 30% in 2014.

There is a possibility of a further downgrade in the next 12 months, S&P said, but it is remote, given the company’s strong liquidity position.

“We also believe that the ratings have some financial headroom in case of a deterioration of the business risk profile, for example, in the case of a modest escalation of South Africa-related country risks,” the agency said.

“Upside potential may appear, possibly from 2015, if a combination of management actions and higher commodity prices enable the company to contain debt increases over 2013-2014, so that the ratio of FFO to debt is consistently above 45% in the coming years,” it added.

Anglo’s share price stood at 1,638.5 pence ($25.11) on the London Stock Exchange as of 11:53 BST on Monday April 8, and its market cap stood at £22.9 billion.

Claire Hack


Twitter: @clairehack_mb