Rio Tinto divides the rating agencies

Rio Tinto's announcement of its strategic alliance with Chinalco provoked a mixed reaction from the rating agencies. Moody's Investor Service was at one end of the range and Standard and Poor's at the other. Fitch Ratings occupied the middle ground.

Moody's placed the 'Baa1' senior unsecured rating assigned to the Rio Tinto Group under review for possible downgrade but affirmed the 'P-2' short-term rating. While Moody's views the cash injection to be received as positive, enabling significant debt reduction, the broad-reaching investment by Chinalco in key Rio Tinto assets creates uncertainty over the medium to longer term impact on Rio Tinto's earnings and cash generation capacity.

Moody's takes the view that on both a direct and indirect basis, Chinalco's ownership interest is considerably more than the 18 per cent fully diluted stake being touted. Moody's review will include an analysis of the strategic objectives and direction of Rio Tinto post the strategic alliance with Chinalco, as well as potential changes to the governance structure and transparency issues. A further aspect of the review will include an assessment of the source of financing by Chinalco to meet its approximate $19.5 billion investment and the extent to which repayment of debt financed amounts depends upon dividend or earnings flows from its various investments in Rio Tinto assets.

Fitch placed the 'BBB+/F2' ratings that it assigns to the group on Rating Watch Evolving indicating that the ratings could move up, down or remain unchanged upon completion of a review. Should the transaction proceed it would result in significant debt reduction and Fitch would envisage a one notch rating uplift as a result.

On the other hand, the transaction may not proceed due to shareholder objections or regulatory hurdles. Should this result, Fitch believes that the company would fall back on a combination of its free cash flow generation, asset sales and newly arranged debt facilities in order to meet its immediate debt refinance obligations. This could result in the ratings being affirmed or lowered.

S&P affirmed the 'BBB' long-term credit rating assigned to the group with a negative outlook pending the completion of the transaction but placed the 'A-3' short-term rating on CreditWatch with positive implications.

S&P regards the transaction to be positive for Rio Tinto's near-term credit quality overall, and to be a step forward in strengthening liquidity and lowering the group's large debt burden. Accordingly, upon completion of the key components of the transaction, S&P plans to affirm the long-term 'BBB' rating, raise the short-term rating to 'A-2' from 'A-3', and to revise the outlook to stable from negative.

DBNGP Finance Co. had its long-term credit rating from S&P lowered to 'BBB-' from 'BBB', as a result of a perceived lessening of the credit quality of 20 per cent shareholder, Alcoa of Australia. Alcoa of Australia is 60 per cent owned by Alcoa Inc., whose long-term credit rating was lowered during the week to 'BBB-', with a negative outlook. The rating outlook on DBNGP Finance remains negative, reflecting the reliance on equity contributions for the Stage 5B pipeline expansion project.

S&P notes the equity contribution risk is mitigated by spreading the timing of contributions over almost two years from three shareholders—DUET Group (60 per cent; BBB-/Stable/--), Babcock & Brown Infrastructure (20 per cent; not rated), and AoA (20 per cent). While all parties have a strong economic incentive to contribute to the project, the decline in creditworthiness of some of the shareholders of DBNGP, relative to when the rating was assigned, underscores the importance of funding certainty.  

Suncorp-Metway had its credit ratings affirmed by Fitch and removed from Rating Watch Evolving. The ratings were placed on RWE in early October when Suncorp announced that it had been approached by several parties interested in acquiring its banking and wealth management operations.

At the same time Fitch assigned a negative outlook to Suncorp's 'A+' long-term issuer default rating and assigned a stable outlook to the 'A+' insurer financial strength rating assigned to the group's insurance operations. All actions follow Suncorp's announcement that its bad debt provisions could increase to $355 million for the first half of fiscal 2009.

Fitch's Negative Outlook signals its concern regarding the deteriorating outlook and rapid deterioration in the bank's asset quality. The stable outlook on the insurance operations reflects a number of positive factors that place the business on a sound footing and that earnings across the broader group have held up reasonably well.

Following an operational briefing by Macquarie Group the week before last, Fitch downgraded its individual ratings on Macquarie Group and Macquarie Bank to 'B' from 'A/B' but affirmed long- and short-term issuer default ratings of 'A/F1' and 'A+/F1' respectively, with a stable outlook.

The downgrades to the Individual ratings reflect a marked deterioration in the operating environment, which has increased volatility in earnings to a level that is not consistent with an 'A/B' Individual rating. Fitch expects conditions to remain challenging for most of the group's operations.

Moody's completed its review of public sector and mortgage pfandbriefe issues by Hypo Real Estate Bank AG (and Hypo Real Estate Bank International AG, now merged into the former) and affirmed the 'Aaa' ratings assigned to public sector pfandbriefe and 'Aa3' ratings assigned to mortgage pfandbriefe. The ratings were removed from review for possible downgrade.

Moody's relies on specific levels of over collateralisation to maintain the ratings. The bank issued both forms of pfandbriefe under its Australian MTN program.

S&P has again moved on Elderslie MTN Trust Series 2006-1, lowering the rating on the Class B notes to 'B' from 'BB'. The 'A' rating on the class A notes was affirmed and the 'CCC' rating on the Class C note remains on Credit Watch with negative implications.

The lowering of the rating on the Class B notes reflects S&P's expectations of further deterioration in the performance of the transaction due to a lack of credit support. The credit quality of the Class B and C notes is being adversely impacted by continuing charge-offs to the subordinated Class D notes (not rated) and reducing excess spread. The credit quality of the Class A notes is supported by the sequential pay structure of the transaction.