Moody’s cuts Sasol to junk due to Lake Charles – report

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Moody’s cuts Sasol to junk due to Lake Charles – report

2:27 CAT | 06 Mar 2020

Photo. RM

Cost overruns and corporate governance failures at the US project has weighed on the group

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 due to problems at its Lake Charles project in the US.

Moody’s on Thursday lowered the group’s long-term rating to Ba1, the first non-investment grade level, saying the cost overruns at Lake Charles have burdened Sasol with high financial leverage.

Cost overruns at the mega-project 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 downwards its earnings forecasts for the facility.

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 R106.26bn as of Friday morning.

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.

“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 read.

In morning trade on Friday Sasol’s share price was down 5.62% to R160.2, having earlier fallen as much as 7.4%. The company’s share price has almost halved so far in 2020.

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 rating 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.

Davids 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 Puruk, portfolio manager at Aeon Asset Management, said that, with oil now 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 following 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.

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, Sasol should be able to pay down its debt quickly.

Source: Business Day Live