Fitch leads on Citigroup and Rio Tinto

Not surprisingly Citigroup and Rio Tinto were the subjects of rating action by the big three rating agencies last week. Following the US$326 billion rescue of Citigroup, Fitch Ratings moved on Monday to downgrade its issuer default rating on both Citigroup Inc., and Citibank NA, to 'A+' from 'AA-', removing them from Rating Watch Negative, affirmed the 'F1+' short-term credit ratings and placed a stable outlook on the ratings.

In taking this action Fitch acknowledged the support provided by the rescue package and observed that the downgrade of the issuer default ratings would have been greater without it and it was the "overarching" reason for the stable outlook on the ratings.

Indeed, the individual financial strength ratings on both entities were lowered to 'C' from 'B'. Fitch said Citigroup will continue to face pressures from an expected US recession and continuing economic difficulties globally.

Both Moody's Investors Service and Standard and Poor's have had their 'Aa3/AA-' (Citigroup Inc.) and 'Aa1/AA' (Citibank NA) long-term credit ratings respectively, on review for possible downgrade since September 29. The ratings remain on review but the rescue will change the focus of the reviews and may reduce the severity of any downgrades that result.

Like Fitch, Moody's expects the greatest impact will be on the 'B' bank financial strength rating that it currently assigns. S&P said it expects the long-term credit ratings assigned to the group will be downgraded by no more than one notch but it will also assess the stand alone credit risk of the group, which is likely to be lower.

While the Tier 1 capital ratio of the bank will approach 15 per cent as a result of the rescue package, Fitch and Moody's expressed concern about increasing reliance on hybrid securities in its capital structure. There will be a need to generate or attract common equity to address this.

BHP Billiton's (BHPB) abandoning of its takeover bid for Rio Tinto (Rio) has exposed Rio to the full impact of its takeover of Alcan on its credit quality. Again Fitch moved quickly to downgrade the issuer default and senior unsecured credit ratings assigned to the group, to 'BBB+' from 'A-', and removed the ratings from Rating Watch Positive (anticipating a successful BHPB bid). A negative outlook was assigned to the ratings and the short term 'F2' rating was affirmed.

Fitch observed that Rio is entering a severe global recession and associated cyclical commodity downturn, saddled with a substantial debt burden from the acquisition of Alcan. Fitch expects Rio will prioritise debt repayment from operating cash flows and asset sales.

However, the negative outlook reflects concerns about liquidity, given the maturity of US$8.9 billion of debt in October next year, and the potential for further delay in asset sales. Fitch warns that should there be no asset sales in 2009, further downgrade action could be triggered.

Moody's placed the 'A3' long-term credit rating that it assigns to the group on review for possible downgrade but affirmed the 'P-2' short-term rating with a stable outlook. Moody's similarly expects that Rio's mid-term performance will be impacted by negative market conditions. Its review will focus on the steps that Rio can take to maximise cash generation and therefore debt reduction, from reducing capital expenditures and production costs, to the potential for asset sales.

S&P appears to have taken the harshest view, amending the CreditWatch on its 'BBB+/A-2' ratings to negative from developing but warning that "a clear and deliverable deleveraging strategy is needed to mitigate negative pressures that could result in a lowering of the long-term rating of up to two notches". S&P noted that there was no impact on the 'A+/Negative/A-1' ratings it assigns to BHPB. The negative outlook will remain until the strategic direction of the group has been assessed.

Moody's, however, revised the outlook on the 'A1' senior unsecured rating assigned to BHPB to stable from negative. Moody's said BHPB's abandonment of its bid for Rio "removes the risk of a significant increase in debt related to the acquisition". The stable outlook also assumes that BHPB will continue to manage its capital in a manner that is consistent with the prudent approach that it has exhibited in recent years.

In other local rating actions there was some positive news and plenty that wasn't. Moody's affirmed its long term 'Baa2' rating on GPT Group and raised its short term rating to 'P-2' from 'P-3'. While Moody's had initiated a review for possible downgrade in July, this action mirrors that of S&P two weeks ago when GPT said it hoped to raise $1.6 billion of capital. Moody's waited for the capital raising to be completed.

S&P raised its underlying rating (SPUR) on MPC Funding Ltd to 'BBB+' from 'BBB' and placed a positive outlook on the SPUR. MPC Funding is the funding vehicle for the development of the Melbourne Convention Centre. S&P notes that risks associated with the project have reduced with the construction phase now 93 per cent complete. Nevertheless, bonds issued by MPC Funding are credit wrapped by FSA, which remains rated 'AAA/WatchNeg/--' by S&P, at least. See more on this below.

Fitch placed its 'BBB-' issuer default rating on Oz Minerals Limited on Rating Watch Negative after the company surprised the market with the announcement that it was still negotiating an extension on US$420 million of debt which was to mature effectively on Friday. Fitch said it will resolve the Rating Watch once negotiations are completed. Presumably, it won't have long to wait.

S&P withdrew its ratings on Babcock & Brown International last week, at the company's request. This followed S&P lowering its rating on the company to 'CC', the week before. Last week, Moody's again lowered its ratings on Babcock & Brown Infrastructure Group (BBI) to 'B1' from 'Ba2', a two notch downgrade, and left the rating on review with direction uncertain. BBI is now the only rated entity in the group.

Moody's said the rating action reflects "the strained liquidity position of BBI and Moody's concerns that asset sale plans may not be completed in time to alleviate the high liquidity challenges facing BBI" and went on to note that to the extent that BBI resolves its liquidity challenges, and establishes a sustainable liquidity platform, the ratings could be raised to the mid to high 'Ba' range.

Boral Ltd had its senior unsecured rating from Moody's lowered to 'Baa2' from 'Baa1' as a result of Moody's resolving its review initiated in August. The 'P-2' short-term rating was affirmed and the outlook on the ratings is stable. Moody's said the rating action "reflects the challenging nature of Boral's operating environment, which has weakened the company's key metrics to levels more appropriate for a Baa2 rating" and noted that further deterioration in Boral's financial performance could lead to negative rating pressures.

Moody's placed its 'Baa1/P-2' rating on Qantas on review for possible downgrade after Qantas warned of materially lower FY2009 earnings. Qantas revealed a rapid deceleration in consumer demand for air travel has been observed as a result of the global economic crisis and that this is unlikely to be offset by the recent fall in oil prices.

Moody's review will focus on the likely impact on Qantas' businesses should the economic downturn prove to be sustained, along with the stability of Qantas' earnings and cash flows in comparison to past systemic events. Qantas' capacity to minimize the impacts of such a downturn through additional cost savings, capital deferment, capacity reductions and other measures will also be assessed.

Moody's also moved the outlook on the 'Baa1' rating assigned to Brisbane Airport Corporation to negative from stable in anticipation of a likely slowdown in passenger growth at a time when the company has large and partly debt-funded capital expansion plans. Credit metrics are expected to weaken.

Prolonged underperformance relative to its financial policies and forecasts of a likely continuation before any improvement becomes evident, led S&P to revise the outlook on the 'BBB+/A-2' ratings assigned to ElectraNet Pty Ltd, to negative from stable.
In affirming the 'BBB+/Negative/A-2' ratings it assigns to Wesfarmers, S&P noted the 'BBB+' long-term rating on Wesfarmers could be lowered if the group fails to materially progress its deleveraging efforts to bring its financial and debt-maturity profile in line with rating expectations by fiscal 2010, or if there were material missteps in the Coles transformation and integration process. Near-term debt-funded acquisitions could also lead to lower ratings.