Teck credit ratings maintained in junk territory despite refinancing

, International

Don Lindsay, president and CEO of Teck Resources.

Teck Resources Ltd. took steps to improve its balance sheet on Monday. The Vancouver-based miner launched a US$1 billion private debt offering, with the proceeds being used to repay debt coming due between 2017 and 2019. The likely effect is to push out the company’s debt maturities. Teck also cut a deal with lenders to extend a credit facility.

However, both Standard & Poor’s and Moody’s Investors Service maintained their prior credit ratings on the company, which are below investment grade in so-called “junk” territory. S&P has a B+ long-term rating, while Moody’s has a B3 rating. Both rating agencies maintained a negative outlook, citing high debt and (in S&P’s case) commodity price risk.

“We consider the planned bond issuance as positive to Teck’s liquidity position but not to an extent that warrants a rating action,” S&P analyst Jarrett Bilous said in a statement.

“In our view, the company’s estimated core credit ratios are weak for the ratings and heavily dependent on sustained improvement in metallurgical coal, copper and zinc prices to reach levels we consider commensurate with the ratings.”

Teck had $8.6 billion of debt at the end of the first quarter. And while the company maintains very healthy liquidity, Moody’s expects Teck to consume about $1.25 billion of free cash flow in 2016 and 2017 due to its commitments to the Fort Hills oil sands project.

“Absent improvement in commodity prices beyond Moody’s expectations, asset sales, equity issuance (which management has ruled out) or other inorganic actions taken by management, leverage will increase,” analysts Jamie Koutsoukis and Donald Carter said.

They noted that even after the proposed refinancing, Teck is still expected to have US$600 million of unsecured debt coming due by 2019. “There could be medium-term refinancing challenges,” they said.

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