S&P: Vale Indonesia downgraded to 'BB' from 'BB+' on lower perceived likelihood of parent support

(Nov. 6, 2014)--Standard & Poor's (S&P) Ratings Services lowered its corporate credit rating on PT Vale Indonesia Tbk to 'BB' from 'BB+'. At the same time, we affirmed our 'A-' issue-level rating on the company's senior unsecured debt, which Vale S.A. (global scale: A-/Negative/--; national scale: brAAA/Stable/--) guarantees. The outlook remains stable.

The Indonesian government and Vale S.A. reached an agreement to amend its Contract of Work (CoW) providing for the extension of its mining concession up to 2045. As part of the agreement, Vale S.A.(A-/Negative/-) and Sumitomo Corp (A/Stable/A-1) will have to sell 15% and 5%, respectively, of PT Vale's shares within the next five years, thus resulting in Vale S.A losing its control over the company. Even though this change in ownership might not occur immediately, the downgrade reflects our belief that incentives for Vale S.A. to provide financial support are less evident, despite PT Vale's continuing status as a strategic asset.

"PT Vale continues to focus its efforts on reducing costs, as seen in the recent start-up of operations of its coal conversion unit, which significantly reduces fuel costs. As a result, the company's EBITDA margins rose to 34.4% in the 12 months ended September 2014 from 26.2% in the year-earlier period," said Standard & Poor's credit analyst Marcus Fernandes. PT Vale has also benefited from slightly better nickel prices, which we expect to continue due to the tight supply-demand balance in the next couple of years. Still, we view its asset and product concentration?consisting of one mine and nickel production--relatively small scale, and the risks of operating in Indonesia (BB+/Stable/B) result in a "weak" business risk profile. (ends)