Miners feel the pressure

Mining credits were under pressure on Wednesday following a ratings downgrade.

Moody's cut its rating on Anglo American to Baa2 from Baa1, citing the deteriorating cash flow metrics and higher leverage ratio that the agency expects to see over the next12-18 moths.

This trend will be driven by higher capital expenditure in an unfavourable climate of weak commodity prices. Anglo's leverage ratio is expected to increase from 2.6x to above 3.0x in 2014, a level that is clearly inconsistent with a Baa1 rating.

In some respects, Moody's action isn't a surprise - S&P downgraded Anglo to the equivalent BBB in April. However, unlike S&P, Moody's left the company on negative outlook, and this probably explains the market reaction today.

Anglo's spreads widened 13bps to 193bps, making it the worst performer in the Markit iTraxx Europe by some distance. Like other names in the sector, Anglo has lagged behind the broader market in 2013 and its high-beta status saw it widen sharply during the recent sell-off.

Anglo has a strong liquidity position and considerable undrawn credit lines. But it is also committed to maintaining, at the least, its dividend through the current cycle and has significant bond redemptions this year.

Its investment grade rating is not yet in doubt, but its worsening financial position, persistent industrial relation problems in South Africa and large capex requirements could result in continued spread volatility.

In the US, Barrick Gold (324bps, +22) was the worst performer, perhaps in response to Anglo's downgrade. Barrick, however, has plenty of its own problems and is one of the most volatile credits in the US investment grade universe. US retailers, such as Kohl's (150bps, +13) were also under the cosh.

After the Bank of England unveiled its new monetary policy framework today - policy apparently won't be tightened until unemployment falls below 7% - attentions will now turn to the Bank of Japan. However, the Bank is not expected to make any major decisions at the end of its policy meeting tomorrow.

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