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Moody’s Cut Rio Tinto’s Credit Rating: Cited Commodity Downturn

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Rio Tinto downgraded

Moody’s Investors Service lowered Rio Tinto’s (RIO) credit rating on February 24, 2016. It downgraded Rio’s senior unsecured ratings by one notch to “Baa1” from “A3.” The outlook for the new rating remains negative. A “Baa1” rating is the eighth highest rating in Moody’s corporate system and signifies moderate credit risk.

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Credit rating for peers

Credit rate cuts are not unique to Rio Tinto. Its peers have also been downgraded recently by credit rating agencies. Standard & Poor’s cut the ratings of Kinross Gold (KGC) and Anglo American (AAUKY) below investment grade last week. Freeport-McMoRan (FCX) has also been cut to junk status by Standard & Poor’s and Moody’s. BHP Billiton’s (BHP) rating was downgraded one notch to “A” by Standard & Poor’s in February 2016.

Why Moody’s downgraded Rio Tinto

Moody’s downgrade of Rio Tinto reflects Moody’s view of a prolonged downturn in the commodities (COMT) space. According to Moody’s, “There has been a fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended, resulting in increased credit risk and weaker metrics for Rio Tinto as well as the global mining sector.”

Moody’s also added, “Consequently, ratings need to be recalibrated to reflect expected performance over a more protracted challenging operating environment.”

In the next part of this series, we’ll see what measures Rio is taking to weather the prolonged downturn that’s ahead for commodities. We’ll also see why a rating downgrade from Moody’s couldn’t be avoided.

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