Junk prices on Vale debt barely budge on S&P cut
By Paul Kilby
NEW YORK, Jan 29 (IFR) - S&P's decision to downgrade Brazilian miner Vale to just a notch above junk on Friday had little impact on its bonds, which were already trading at sub-investment grade levels, said traders.
The company's 4.375% 2022s and 5.625% 2042s were essentially flat on the day at 69.50-70.25 and 59.50-60.50, respectively, after S&P cut Vale to BBB- from BBB, with a negative outlook.
"It is already being priced as a BB- credit or lower," said a New York based trader, noting that the 2022s are now trading with double digit yields.
The 2022s were yielding around 5.85% in early November, just before a dam burst at a joint venture operation in the State of Minas Gerais.
The associated cost of that environmental disaster plus plummeting commodity prices have served to sink bond prices to today's levels.
Compensation for civil and environmental damages at the Samarco mining site, which Vale jointly owns with BHP Billiton, could reach R$20bn if the court rules in favor of the federal government's claim, S&P said today.
"(This) would raise Vale's leverage metrics by about 0.5x because we would proportionally consolidate half of that compensation into the company's numbers," the rating agency said.
S&P also highlighted a continued softening in the iron ore market - conditions that are forcing Vale to divest noncore assets to finance its large capex plans.
The rating agency sees net debt to Ebitda growing to six times by year end, even if it completes planned asset sales. Thereafter, it should fall back to 4.0-4.5 times by the end of 2017, it said. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)
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