Moody's cuts Sasol deeper into junk, but shares rise on fuel hedging


Rating agency Moody’s has downgraded petrochemical company Sasol's corporate family rating to Ba2 from Ba1. Ba2 is the second notch of non-investment, or junk grade. 

"Sasol has been caught at the intersection of a series of credit negative developments, including a significant deterioration in the operating environment from a combination of the collapse in oil prices, widening impact of the coronavirus outbreak and weakening of South Africa's sovereign credit quality," said Moody's, adding that this came "at a time when its balance sheet has reached peak gearing because of Lake Charles Chemicals Project (LCCP) related capital spending." 

Despite the downgrade, however, Sasol's shares rose by 20% on Tuesday after it announced a hedging programme to address the plummeting global oil price.

In a statement it said it had hedged approximately 80% of Synfuels produced in the fourth quarter of 2019 at approximately US$32 per barrel, which is above the current global oil price.

Moody's, meanwhile, said it had also placed the petrochemical company's rating on review for downgrade, meaning Sasol could fall even deeper into non-investment grade. 

"The ratings have been placed on review for downgrade to assess the significant downside risks that the company is exposed to through the weakening in the global economic outlook, volatility in oil prices and heightened refinancing risk," Moody's said in its rating action. 

The action comes four days after Moody's lowered South Africa sovereign credit rating to junk. 

The ratings agency anticipates that South Africa’s 21-day lockdown to combat the coronavirus outbreak will create more uncertainty for the company’s financial performance.

Moody’s also expects that the negative effect from the coronavirus pandemic will extend to the second quarter of 2020 with significant improvements expected to emerge in the second half of the year.

In the event of uncertainty in which the virus could continue for longer or not, Sasol’s EBIDTA is anticipated to be between 25% to 40% lower than previously forecast.

Sasol, in its statement, said its plans to mitigate the impact of the coronavirus and a lower global oil price include a cash conservation programme, an accelerated and expanded asset disposal and partnering programme, and a "potential rights issue of up to US$2 billion which remains subject to the progress of other initiatives". 

It has about about $2.5 billion of liquidity.

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