Creditors at Samarco, a 50/50 JV between Vale and BHP Billiton, could become partners at the struggling Brazilian pellet producer, a media report said this week, as credit rating agency Standard & Poor's (S&P) downgraded the company’s ratings to D, saying a default is a “virtual certainty.”
According to a media report published this week by newspaper Valor, Samarco’s co-owners Vale and BHP Billiton are currently looking at alternatives to pay a $2 billion debt in bonds to banks and bondholders.
One of the discussed possibilities is to give Samarco a two-year grace period, so it can comply with its financial obligations. The second alternative is to negotiate with banks a “cut” in the company’s debt in exchange for a piece in the business, said Valor.
Samarco is reportedly showing banks and creditors the restart of its operations is feasible. The company has been struggling to restart operations and has postponed estimates from Q4 to next year. Vale said a restart at Samarco could happen by the end of 2017.
On the other hand, Samarco also faces a billion-dollar lawsuit, which could result in bankruptcy, the media report said.
This week, S&P said it doesn’t expect the company will make a payment during the 30-day period it has, as the company missed interest payment on one of its senior unsecured notes that was due September 26, 2016.
“Samarco is currently not operating, therefore not generating cash, and has burned its cash position through 2016 to maintain operations idle and meet some contingent liabilities from the dam failure in late 2015,” the ratings agency said.
“Samarco's shareholders, Vale and BHP Billiton, have stated they won't provide financial support to the company. In addition, there are still significant uncertainties to when the company would be able to resume operations,” said S&P.
“In this scenario, we believe Samarco won't make the payment in the next 30 days, and will likely fail to make payments on other financial obligations due in the upcoming months, including interest payments on the other senior unsecured notes. As a result, we expect Samarco to default on all or substantially all of its obligations as they come due.”