Moody’s downgrade forces drastic action from Sasol    

By Xolisa Phillip, in Johannesburg
Posted on Wednesday, 25 March 2020 08:44

Sasol has struggled due to debt and poor investment choices. Shutterstock

For the first time in a while, Sasol will ask for leniency from its lenders, in a sign of the extraordinary times in both the domestic market and others around the globe.

“We need to make sure there is sufficient flexibility. Give us four to five weeks,” said Sasol CFO Paul Victor in a conference call, during which CEO and president Fleetwood Grobler and members of the company’s executive team updated the market.

Plague of internal and external crises

Fleetwood and his team have their work cut out, they concede as much.

They are contending with a multitude of factors, including: a plunging oil price, a floundering exchange rate, a plummeting stock price, the COVID-19 crisis and a debt load that looms large over Sasol’s balance sheet.

READ MORE Sasol’s sorry saga continues

Debt and ratings

Worse still, Moody’s Investors Service downgraded the Johannesburg Stock Exchange-listed energy and petrochemicals company to subinvestment grade, also known as junk status, citing its massive $10bn debt.

In the same breath, Moody’s changed Sasol’s outlook from negative to stable, saying it projected “improving credit metrics as … [the Lake Charles Chemical Project] begins to contribute to group earnings.”

S&P Global Ratings has kept the company’s rating unchanged.

Grobler said: “These significant external shocks have converged to create the perfect storm. The impact of this fallout on Sasol has been dramatic, considering our financial position.”

Although worried about Moody’s actions, Victor revealed Sasol’s creditors will give the company room to be downgraded a further notch down before they pull the plug on its debt covenants.

READ MORE: Oil & Gas: Sasol to start drilling in new Mozambique fields

In terms of S&P, lenders have given Sasol breathing room for a downgrade of two notches down from where it is currently rated before taking any drastic action.

Tactical plan

In response to the external shocks, the company, whose operations span Southern Africa, Eurasia and the Americas, has devised a suite of mitigation measures.

These include:

  • A cash-conversation programme across the business to enhance the cash generating capacity of the company;
  • Working capital optimisation and reprioritising capital expenditure to achieve $800m and $200m in savings;
  • Accelerating the asset disposal programme to realise proceeds of a $2bn target by no later than the end of financial year 2021;
  • As a last resort, Sasol with conduct a rights issue, which requires shareholder approval at an AGM that is still to be called. In addition, the company would have to fulfil several conditions precedent before going this route. Its executives remain cautiously optimistic a rights issue will not be necessary.

No heads will roll, but contractors and incentives will be cut.

Grobler insists the company is not looking to downsize its workforce. However, it is hard luck to some segments of Sasol.

Certain studies, and cost and consulting fees will be halted immediately. The company is stopping spend on all non-essential projects such as IT systems upgrades and all non-permanent labour.

Sasol is also considering a total headcount freeze throughout its operations and not paying some incentives in the current financial year for certain staff categories.

Achieving optimal gear in balance sheet

“As an additional measure, Sasol is engaging its lending groups to discuss appropriate flexibility on covenants. Preliminary engagements have been supportive. But these discussions are at an early stage.

  • Sasol will continue to pursue all active balance sheet management initiatives to make sure we keep at least $1bn-$2bn in liquidity, given the high level of market volatility,” said Grobler.

Sasol will take the drastic steps with a view to pay down $6bn of its debt, to remain with a $4bn debt level by the end of financial year 2021.

READ MORE Sasol has a golden chance with green fuels

“We are in [talks] with our bank[ing] consortium to discuss an uplift in covenants. That process is ongoing. It takes four to five weeks.

  • “The plans we have devised will be shared with the banks in greater details, those will then go to the banks’ credit committees. We anticipate that around the first week in May, we will be able to give an update on the outcome of the process,” said Victor.

Still liquid despite problems

Grobler and Victor assured the market Sasol can maintain sufficient liquidity headroom over the next 12 to 18 months as it sees its plan unfold.

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