Sasol cut to junk status by Moody ’ s
• Moody’s downgrades group after tough 12 months
Chemicals group Sasol, whose share price has fallen more than 60% over the past 12 months, has been cut to junk status by Moody s Investors Service on high’ debt and problems at its Lake Charles project in the US. Sasol’s share price ended down 5.9% at R159.72 on Friday, having earlier fallen as much as 7.4%.
Chemicals group Sasol, whose share price has fallen more than 60% over the past 12 months, has been cut to junk status by Moody’s Investors Service on high debt and problems at its Lake Charles project in the US.
Sasol’s share price ended down 5.9% at R159.72 on Friday, having earlier fallen as much as 7.4%. The share price has almost halved so far in 2020.
Moody’s on Thursday lowered the group’s long-term rating to Ba1, the first noninvestment-grade level, saying the cost overruns at Lake Charles Chemicals Project (LCCP) have burdened Sasol with high financial leverage.
Cost overruns at the megaproject prompted the firing of its co-CEOs in 2019 and caused the group to delay its financial results twice. An explosion at the facility earlier in 2020 led it to revise its earnings forecasts for the facility downwards.
The group reported that it had long-term debt of R121.28bn as of its half year to end-December, up 6.3% from the previous comparative period.
This exceeds its market capitalisation of just under R100bn on Friday evening.
Sasol said on Friday it had already taken several steps to manage financial risk, including hedging oil and ethane commodity price exposure, as well as managing costs and increasing working capital efficiency.
“We recognise the challenges presented by the current market environment and acknowledge the outcomes of the ratings agency reviews,” said CEO Fleetwood Grobler.
‘PROJECT COMPLETION’
“We remain focused on managing the factors within our control — delivering safe, strong and stable operational performance and protecting the balance sheet as we bring the Lake Charles Chemicals Project to completion and start deleveraging,” he said.
The revised rating profile is not expected to have a material effect on existing funding costs, the group said. “Sasol maintains a long-term commitment to an investment-grade credit rating,” the statement said.
Kagiso Asset Management head of research Abdul Davids said it was surprising to note that, according to Moody’s, Sasol — because of its debt levels — had been in breach of the ratings agency’s investment-grade band since 2018.
Davids said the downgrade did not appear to immediately affect Sasol’s cost of finance. “Clearly a lot of their debt has fixed coupons and they have a bit of floating rate,” he said. “The issue is when they go back to the market to refinance the debt.”
About $1bn is due for refinancing by the end of 2020, but the bulk of it is three to five years out, Davids said.
He said the downgrade was also a sign of the times as Moody’s would have considered the worsening macroeconomic environment, the implications of the novel coronavirus and a softer oil price outlook.
Zaid Paruk, portfolio manager at Aeon Asset Management, said that with oil now
WE REMAIN FOCUSED ON DELIVERING SAFE, STRONG AND STABLE OPERATIONAL PERFORMANCE AND PROTECTING THE BALANCE SHEET
hovering below $50 a barrel, it presented a significant risk to the group if Sasol had not hedged oil above that level. He said Aeon still expected significant price volatility after Opec discussions and lower demand as a result of the coronavirus.
“We believe talk of a rights issue may be premature for now as LCCP appears to be on the revised track, and [there is no] clarity on additional hedging, asset sales and coronavirus effects,” he said.
According to Davids, with as much as $600m of earnings before interest, taxes, depreciation and amortisation (ebitda) expected to come from the Lake Charles project in the 2021 financial year, the chemicals group should be able to pay down its debt quickly.