Downgrade alerts hit resource sector

Moody’s Investors Service has put the world’s energy and mining companies on high alert for rating downgrades as the collapse in commodity prices puts major stress on their balance sheets.

In total, the credit rating agency placed 120 oil and gas companies and 55 mining companies under review. Nineteen of the energy firms are Canadian, along with 12 of the mining firms.

Moody’s said there is a risk that energy prices could recover “much more slowly” than many companies expect. It was even more negative on the mining industry, saying China’s economic slowdown is a “fundamental shift” for the sector that requires a major recalibration of supply.

Credit downgrades could have a significant impact on the financing costs for these companies.

They would be particularly damaging for companies looking to borrow money in the near future, and for com- panies such as Barrick Gold Corp. and Yamana Gold Inc. that are barely clinging on to investment- grade ratings and could get downgraded to speculative or “j unk” status.

The reviews are expected to be completed within a “relatively short timeframe,” Moody’s said, with most of the energy reviews done by the end of March.

The Moody’s warning was bad news for resource companies, but it certainly wasn’t surprising.

Commodity prices have fallen significantly in recent weeks, with Bloomberg’s commodity index down more than seven per cent since the start of January alone.

Shrinking revenues are making it tougher and tougher for these firms to support their debt loads. And given that commodity markets are oversupplied and the economic data out of China remains negative, the situation may not improve anytime soon.

Moody’s noted that it expects to downgrade the ratings for most of the Canadian miners under review by at least one notch, and many of them could have multi-notch declines.