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Global Credit Research - 04 May 2010
London, 04 May 2010 -- Moody's Investors Service has today affirmed the Baa2 senior unsecured
issuer rating of Norsk Hydro ASA (Norsk Hydro) and revised the outlook
to stable from negative following the company's announcement that
it has reached an agreement to acquire Vale's aluminium business
for a consideration of USD4.9 billion.
Moody's rating action reflects the positive impact that the equity
funded purchase of the majority of Vale's bauxite, alumina
and aluminium assets will have on Norsk Hydro's overall credit profile
at a time when, despite the recent upturn in aluminium prices and
demand, the operating environment within the sector remains challenging
amid persistent overcapacity and high inventory levels.
Moody's believes that the acquisition of Vale's Brazil-based
aluminium business is in line with Norsk Hydro's strategic objective
to achieve a balanced ownership throughout the aluminium value chain and
increase its self-sufficiency in bauxite and alumina, which
are the key input factors in the production of aluminium in addition to
energy. This should also give Norsk Hydro the ability to capitalise
on the ongoing shift in value creation that has been witnessed within
the aluminium chain in recent years, as a result of the growing
needs for raw materials of industrialising economies, and in particular
China, which is a net importer of bauxite.
The acquisition of Vale's integrated upstream assets, which
include Paragominas, one of the largest bauxite mines in the world,
and 57% of Alunorte, the world's largest alumina refinery
in which Norsk Hydro already owns a 34% interest, will enable
Norsk Hydro to achieve full backward integration into bauxite and alumina.
The addition of these high quality, efficient assets should help
further enhance the competitive position of Norsk Hydro within the industry
by materially lowering its average cash break-even, and by
the same token, enhance its resilience to future cyclical downturns.
Significantly, Moody's notes that the transaction will be
fully equity funded. The majority of the USD4.9 billion
consideration to be paid by Norsk Hydro will consist in a private placement
to Vale of new Norsk Hydro shares. These will be equivalent to
a 22% ownership of Norsk Hydro's enlarged share capital following
the execution of a NOK10 billion (approximately USD1.75 billion)
rights issue, that Norsk Hydro intends to launch shortly to support
its investment grade credit rating and capacity to implement future projects.
The rights issue has been fully underwritten by several financial institutions
including the government pension fund of Norway (Folketrygdfondet),
which owns 5.9% of Norsk Hydro's share capital.
This covers the USD1.1 billion cash component of the deal as well
as the two instalments of USD200 million payable to Vale in 2013 and 2015
respectively, when Norsk Hydro acquires the residual 40%
stake in Paragominas. As a result, the impact of the deal
on Norsk Hydro's debt position should be limited to the assumption
of Alunorte and Albras debt and its effect on the group's credit
metrics should be more than offset by the substantial incremental cash
flows expected to be generated by the acquired assets. All in all,
Moody's expects that the addition of Vale assets will strengthen
Norsk Hydro's earnings and cash flow generating capacity and help
extend the initial upturn in financial performance and credit metrics
reported by the group in Q1 2010.
Moody's takes comfort from the support demonstrated by the Norwegian
government (which currently owns 43.8% of Norsk Hydro) to
the Vale transaction and the rights issue. While willing to accept
dilution to 34.5% as a result of the private placement to
Vale, we note that the Norwegian government intends to participate
in full to Norsk Hydro's rights offer. It has clearly indicated
that it is anxious to retain negative control (i.e. a minimum
33% stake) in Norsk Hydro and may consider rebuilding its participation
in the future. Moody's believes that this confirms the existence
of a broad political consensus over the maintenance of government ownership
in some of the country's leading corporates, and continues
to see government ownership as supportive of Norsk Hydro's financial
Moody's also notes the substantial liquidity maintained by Norsk
Hydro. In addition to cash balances (NOK2.5 billion at the
end of March 2010), the group benefits from an alternative source
of liquidity that primarily consists in two committed revolving credit
facilities of USD1.7 billion and EUR750 million. Availabilities
under these facilities, which benefit from mild conditionality and
mature in 2014 and 2012 respectively, totalled NOK13.6bn
(USD2.3bn) at the end of March. This leaves the group with
about NOK9bn in available funds after deducting short term maturities
(including Alunorte and Albras debt and excluding the stand-by
facility maturing in December 2013 to be provided by Vale for its share
of these loans).
Moody's previous rating action on Norsk Hydro was the downgrade of its
senior unsecured issuer rating to Baa2 from Baa1 on 18 March 2009 in conclusion
of a review for possible downgrade.
For the assignment of this rating, Moody's has used its methodology
for the Global Mining Industry published in May 2009 and its methodology
for the Application of Joint Default Analysis to GRIs published in April
2005, both of which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Headquartered in Oslo, Norway, Norsk Hydro ASA is a leading
integrated aluminium producer. In 2009, the group reported
revenues of NOK67 billion from continuing operations.
David G. Staples
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms Norsk Hydro's Baa2 and stabilises rating outlook
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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