Sasol shrugs off Moody’s downgrading
Moody’s has downgraded Sasol’s long-term rating to Ba1/NP from Baa3 and its short-term rating to Not Prime from P-3. It said it had withdrawn the Baa3 issuer rating and assigned a Ba1/NP corporate family rating.
“The decision to downgrade the ratings to Ba1/NP reflects Moody’s view that Sasol’s financial leverage will remain elevated over the next two years, and that the pace of de-leveraging is vulnerable to event risks and challenging market conditions globally and domestically, as demonstrated over time by the company’s downward revisions of earnings before interest, tax, depreciation and amortisation (Ebitda) forecast on the LCCP.
“The rating agency estimates that free cash flows over the same period will not materially reduce the R138billion debt stock, the majority of which was accumulated as a result of the Lake Charles Chemicals Project (LCCP),” Moody’s said.
LCCP project’s cost ballooned from $8.1bn (R126.7bn) in 2014 to the current estimate of between $12.6bn and $12.9bn. This saw Sasol’s interim gearing for the six months to December increase to 64.5percent from 56.3percent in June 2019.
Sasol shareholders recently launched a class-action lawsuit against current and former executives for failing to disclose material adverse facts about the company's business, operational and compliance policies after budget overruns at the US-based LCCP.
At the centre of the class action is the reduction in expected project returns due to budget overruns during the construction of the LCCP.
Grobler acknowledged the outcomes of the rating agency review and said the group recognised the challenges presented by the current market environment.
“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 LCCP to completion and start de-leveraging. The revised rating profile is not expected to have a material impact on our existing funding costs. As ever, we remain committed to our capital allocation framework and priorities,” Grobler said.
Sasol said on Friday that protecting its balance sheet remained an important priority during the peak gearing phase.
“In this regard, several proactive actions have already been taken, which include a measured financial risk management programme to hedge oil and ethane commodity price and exchange rate exposures, managing costs, increasing working capital efficiency and agreeing additional flexibility on covenants with the lending group,” the group said.
Sasol has suffered losses as a result of the LCCP.
The group said subject to the macroeconomic environment and the impact of Covid-19 on global product demand, Sasol continued to expect the cash flow inflection point to be reached in the second half of financial year 2020 and de-leveraging to start thereafter.
“The overall LCCP cost estimate is tracking $12.8bn, within our previous guidance of $12.6bn to $12.9bn. LCCP is expected to be Ebitda positive in the second half of the financial year 2020 with a contribution of $50million to $100m,” the group said.
Sasol shares closed 5.9percent lower at R159.72 on the JSE on Friday.