It is reported that Fitch Ratings has placed the ratings of UK based Rio Tinto Plc and Australia based Rio Tinto Ltd, collectively the Rio Tinto Group, on Rating Watch Positive following the announcement by BHP Billiton of a USD147.4 billion offer for the group.
The affected RT group ratings are as follows:
1. Rio Tinto: Long term Issuer Default rating 'A-' (A minus) on RWP
2. RT: Short-term IDR 'F2' on RWP
3. RT: Senior unsecured rating 'A-' (A minus) on RWP
4. Alcan Inc: Senior unsecured rating: 'A-' (A minus) on RWP
The Rating Watch Positive reflects the share based nature of the transaction and the increased operational scale and commodity diversification that the combined group will benefit from.
Fitch noted that “Both companies' portfolios are predominantly composed of high quality, long life operations with generally lower quartile cost positions. A combination of the two companies will also provide leading market positions in several commodities and the potential for a stronger bargaining pricing position relative to end users. Regulatory clearance, however, may be challenging as a result of the latter. Fitch also considers the merger to offer good potential for cost reduction and other synergy benefits.”
Fitch estimates combined FYE07 adjusted net debt to operating EBITDAR for the pro forma group of 1.3x, which is stronger than for Rio Tinto on a stand-alone basis. Pro forma net leverage could increase to over 2x, should the share buy back proceed. Whilst Fitch believes that base metals prices have peaked in 2007, they are expected to remain at historically high levels over the next 12 months, which, combined with a strong outlook for steel making raw materials, should support the combined group's cash flows over the next 12 months to
18 months.
However, Fitch believes there is a strong possibility that BHP may need to increase its offer to complete the transaction. With any offer premium likely to be debt funded, the likelihood of an affirmation of Rio Tinto's ratings at the current level is increased.
