Fitch Downgrades Samarco's Ratings to 'CCC'

CHICAGO & RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Long-Term Foreign-Currency (LT FC) and Long-Term Local-Currency (LT LC) Issuer Default Ratings (IDRs) and senior unsecured debt ratings of Samarco Mineracao S.A. (Samarco) to 'CCC' from 'BB-', as well as its National Long-Term Ratings to 'CCC(bra)' from 'A(bra)'. In conjunction with these downgrades, Fitch has assigned a recovery rating of 'RR4' to the securities that have been issued by Samarco. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The downgrade reflects Fitch's view that Samarco will not regain the necessary licenses to restart operations before it runs out of cash in 2016. Recently the Minas Gerais branch of the Federal Public Prosecutor's Office filed a class action (Acao Civil Publica) against the company. While this lawsuit is not related to operating licenses, it illustrates the political climate surrounding Samarco and the pressure that could be faced by parties that are responsible for issuing operating licenses.

Fitch believes that Samarco will run out of cash to repay its short-term debt obligations between August and October without these licenses, which would lead to a restructuring of its short-term debt obligations absent an equity infusion from its parents. Fitch believes that Vale S.A. (Vale; rated 'BBB'/Negative Outlook) and BHP Billiton Ltd/Plc (BHPB; 'A+'/Negative Outlook) will not inject cash for working capital purposes and debt repayment without a clear path to a restart of operations in the near term. Samarco has more than USD250 million of restricted cash it cannot use for debt service and other corporate purposes, which if available for use, could push this time frame back a few months.

Fitch maintained its 'BB-' rating for Samarco following the agreement between the company, the Brazilian authorities, BHPB and Vale on March 2, 2015. This agreement, which was ratified by a federal judge on May 5, 2016, covers remediation, mitigation and compensation for the tailings dam accident. At the time of this rating action, Fitch noted that the company should be able to pay its debt as discussed in Fitch's special report: 'Samarco - Binary Outcome' (February 2016), if Samarco's operations resumed in late 2016.

Fitch placed the ratings on Negative Watch concurrent with its March rating action. Fitch stated then, that Samarco had approximately three months to regain the necessary operating licenses required to restart operations and that failure to do so could result in a multi-notch downgrade, notwithstanding tangible shareholder intervention in the form of a capital contribution.

Fitch's decision to downgrade the rating before the expiration of the aforementioned timeframe reflects the agency's perception that restarting operations by the end of 2016 is not achievable given the lack of progress made by Samarco to date. If the company is able to restart operations by the first half of 2017, Fitch believes creditors will receive an above average recovery. If the company is unable to restart operations, Fitch expects a very poor recovery given statements made by the company's shareholders that they will not support obligations to creditors.

KEY ASSUMPTIONS

Fitch's believes the company will not be able to restart operations by the end of 2016 and will run out of cash to support timely payments to creditors within the next five months.

RATING SENSITIVITIES

Receiving an operating license within the next two months would likely lead to material positive rating actions, as Fitch believes that Vale and BHPB would support Samarco financially if it were able to restart operations before the end of 2016. Restarting operations would likely also open the company up to receive export financing, which would further fortify its working capital position and debt servicing needs.

Fitch could downgrade Samarco's ratings to 'C' upon the announcement of a DDE and then to 'RD' following the execution of the grace period. The company would then be rated corresponding to its new capital structure.

LIQUIDITY

Fitch assumes that the ongoing delay for Samarco to regain its operating licenses will result in the company running out of cash during the third quarter of 2016. Access to new financing, as well as financial assistance from shareholders, is expected to be possible once the company resumes operations.

Vale and BHPB have guaranteed the funding for the foundation created as part of the agreement, supporting Samarco in case it is unable to comply with the terms in the short to medium term.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following:

Samarco Mineracao S.A.

--Long-Term Local-Currency IDR to 'CCC' from 'BB-';

--Long-Term Foreign-Currency IDR to 'CCC' from 'BB-;

--National Long-Term Rating to 'CCC(bra)' from 'A(bra)';

--Senior unsecured debt rating to 'CCC/RR4' from 'BB-'.

Fitch has removed the ratings from Negative Watch.

Date of Relevant Rating Committee: May 9, 2016.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor must be disclosed (in bullet points). Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee. This disclosure should appear after the analyst contact information.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004260

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004260

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160510006664/en/

Fitch Ratings
Primary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL, 60602
or
Secondary Analyst
Debora Jalles
Director
+1-312-606-2338
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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