Fitch: No Impact To Vale's Ratings From Weak Results
Vale S.A. released its third quarter results on Wednesday, October 24. Vale's EBITDA dropped to USD3.7 billion during the third quarter 2012 (3Q'12) from USD5.1 billion during 2Q'12, according to Fitch Ratings. The drop was more pronounced versus 3Q'11, when the company generated USD9.6 billion of EBITDA. The company's weak results reflect harsh market conditions due to low levels of economic activity globally.
Vale, which is rated at 'BBB+' and 'AAA (bra)', has responded to less than ideal market conditions in a manner consistent with Fitch's expectations. Measures taken by Vale include: divesting non-core assets, closing production facilities, reducing capital expenditures and adjusting dividend levels to ensure a strong capital structure that will enable key projects such as S11D and Moatize to be funded without a dramatic change in the company's underlying credit quality.
For the latest 12 months (LTM) ended Sept. 30, 2012, Vale generated USD21.3 billion of EBITDA, a 37% decline from USD33.8 billion during 2011. The company had USD8.6 billion of cash and marketable securities at the end of September and USD30.6 billion of total debt. Liquidity is manageable with only USD2 billion of the company's debt falling due in the next 12 months. Additional liquidity support is provided by a USD3 billion revolving credit line that the company has with a syndicate of 27 banks. This facility had not been drawn upon by the company as of Sept. 30, 2012. In addition to this revolver, Vale has numerous credit lines related to investments. These credit lines are primarily with ECAs and BNDES.
Fitch projects that the company's annual EBITDA will fall to about USD18 million for 2012 and that net debt will be around USD23 million, resulting in a net debt to EBITDA ratio around 1.3x for 2012. This ratio is considered strong for the category given difficult market conditions. Vale has a low production cost structure that would allow it to sustain sales volumes at high levels vis-a-vis its peers during 2013 should the markets conditions deteriorate and remain weak. Under a sever scenario, Fitch forecasts a trough EBITDA for Vale of about USD12 billion. Given the adjustments to market conditions that have been announced by Vale's management, net leverage ratio would likely not exceed 2.0x under an extreme cyclical trough.
Fitch's global growth forecast is 2.1% for 2012, 2.6% in 2013 and 3% in 2014%. These modest growth levels are projected despite forceful monetary policy interventions by the Fed, ECB and BoJ during the second half of the year. They highlight sluggish economic growth in the major advanced economies where economic growth is projected at 1% in 2012, followed by only a modest acceleration to 1.4% in 2013 and 2% in 2014.
In contrast to the weak economic outlook in the developed markets, the outlook is more positive Latin America. Fitch forecasts GDP growth to be 3.9% in 2013 in Latin America and 3.9% in 2014. These figures represent an increase from forecasted growth of 3% in 2012. Key growth engines vis-a-vis 2012 will be Brazil at 4.2%, Peru at 6.2% and Colombia at 4.8%.
Factors that could lead to a negative rating action for Vale and its subsidiaries are: a large, debt-funded acquisition; a change in management's strategy with regard to the conservative capital structure that the company has maintained; or an increase in the government's influence upon the company's capital structure and investment program. A reduction in demand for Vale's products from its Chinese clients and/or a deterioration of its relationship with its customers in China could also lead to a negative rating action. During 2011, China accounted for 32.4% of the company's sales revenues.
Key considerations for a positive rating action would be an upgrade of the Brazilian sovereign rating, a continued commitment to a strong capital structure, broader product and geographic diversification, and/or the resolution of the litigation related to taxes and royalties.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'National Ratings Criteria', Jan. 19, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;
--'Rating Corporates Above Country Ceiling', Jan. 30, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
Parent and Subsidiary Rating Linkage
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