Let's go to Rio

Philip Bayley
The rating agencies all reacted favourably to Rio Tinto's dumping of Chinalco in favour of a US$15 billion rights issue and iron ore joint venture with BHP Billiton. S&P placed the 'BBB' long-term rating assigned to Rio Tinto on CreditWatch with positive implications, noting the possibility of a one notch upgrade after it has assessed the implications for Rio's liquidity, leverage and operational prospects.

Fitch affirmed its 'BBB+' long-term issuer default rating on Rio, removed the rating from Rating Watch Evolving and assigned a positive outlook. Fitch noted that Rio's announcement helps to address previous concerns regarding Rio's liquidity and overall debt burden.

Moody's ended its review for possible downgrade of its 'Baa1' senior unsecured rating on Rio, assigned a stable outlook and said Rio had made an important step in its necessary delevering. Moody's also affirmed BHP's 'A1/Stable/P-1' ratings, while S&P said the 'A+/Stable/A-1' ratings it assigns to BHP would not be immediately affected by the deal.

Mirvac Group's announcement of a $1.1 billion equity raising, underwritten to $863 million, was sufficient for S&P to put the 'BBB-/A-3' credit ratings assigned to the group on CreditWatch with positive implications. This was despite the simultaneous announcement of expected asset impairment charges of $582 million and updated earnings guidance for fiscal 2009.

S&P noted that the investment portfolio write downs were within expectations and the inventory write downs related primarily to non-core development assets. In any event, the proposed equity raising will significantly strengthen the group's financial and liquidity profile and reduce gearing to the low 20 per cent level.

The CreditWatch is expected to be resolved within the next four to six weeks and will incorporate an assessment of future growth strategies, financial policies, earnings mix and the outlook for residential development and investment property markets.

S&P gave a tick of approval to the South Australian state budget, observing that the framing of the budget was consistent with the state's 'AAA/stable' ratings. The budget exceeds one key metric in terms of net financial liabilities being expected to exceed 106 per cent of revenue in fiscal 2012 against a ratings trigger of 80 per cent - 90 per cent, but S&P said this was offset by the peak being only temporary; the result being partly attributable to a change of the discount rate used in the calculations; and South Australia's history of underspending on capital expenditure.

Moreover, S&P noted that the government's reprioritization of some of its capital projects and a revision of its operating expenditure highlights the State's preparedness to manage its finances prudently during the current economic downturn. S&P factored this in to its assessment of the rating.

Moody's also noted that the budget was unlikely to impact the 'Aaa/Stable' rating that it assigns to the State. However, over the next few weeks it will conduct an in-depth review of the budget and its medium-term impact on the financial profile of South Australia.