That small puff of dust in the distance there, on the horizon, that would be my horse, said the farmer to himself. Better shut that door then. He did so, and felt better.
On Friday, Moody’s announced what everyone knew: commodity prices have fallen so much that 175 indebted natural resource companies face imminent risk of a credit downgrade. Two-thirds are from the oil and gas sector, the rest miners.
Might the rating agency have spoken up earlier? Last time any one industry had such a meltdown — financials back in 2008 — Moody’s and its brethren waited rather long before saying anything. S&P only began downgrading most of the largest banks at the end of 2008. By that point US bank stocks had lost two-thirds of the market value from their peaks. That year, according to Moody’s, almost 80 per cent of $280bn in worldwide defaults came from the financials and real estate sectors.
Two factors might have impeded financial sector downgrades in 2008, one suspicious and another innocent. The less admirable is the importance of the financial sector as a customer to the ratings industry. More innocently, such was the volume of exotic debt instruments to rate that analysts might well have been overwhelmed.
Now consider the commodity stocks. Mining shares peaked about five years ago, although only in the past year has real destruction threatened, particularly for the more highly levered. Anglo American, for example, was among the top six largest miners by equity value in 2011 but, today, does not make the top 30. Yes, some — such as Brazil’s Vale or Royal Dutch Shell — have suffered a downgrade from one of the agencies but, until now, no blanket warning has been issued.
Neither financial sector excuse works for today’s resource companies, which use fixed collateral and employ proportionately less debt. Commodity prices have been slumping for years. It is at least curious how long it has taken Moody’s to slam the door.
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