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Sasol Financing USA LLC -- Moody's assigns Ba2 ratings to Sasol's proposed new bonds

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Rating Action: Moody's assigns Ba2 ratings to Sasol's proposed new bondsGlobal Credit Research - 08 Mar 2021London, 08 March 2021 -- Moody's Investors Service ("Moody's") has today assigned Ba2 ratings to Sasol Limited's (Sasol) proposed issuance. The senior unsecured bonds will be issued by Sasol Financing USA LLC and will be fully and unconditionally guaranteed by Sasol Limited.Sasol's Ba2 corporate family rating (CFR) and Ba2 ratings on its existing senior unsecured bonds issued by Sasol Financing International Limited and Sasol Financing USA LLC are unaffected. The negative outlook is also unchanged.The assigned ratings are subject to review of final documentation and assume no material change in the size, terms and conditions of the transaction as advised to Moody's.RATINGS RATIONALEThe Ba2 ratings assigned to the proposed bonds are the same as Sasol's Ba2 CFR and reflect the pari passu ranking of the debt relative to all of Sasol's other unsecured and unsubordinated indebtedness. The transaction is leverage neutral as the issuance proceeds will be used to repay a portion of Sasol's $3.9 billion revolving credit facility (RCF) of which about $3.0 billion was outstanding as at 31 December 2020. The proposed issuance is credit positive because it extends Sasol's debt maturity profile and further improves the company's liquidity by creating additional availability under its RCF.The Ba2 CFR reflects (1) Sasol's well-entrenched leading domestic market position in liquid fuels and chemicals production; (2) its integrated value chain and business model, underpinned by proprietary technology and control of its supply chain; and (3) the expectation of improving cash flows as Lake Charles Chemicals Project (LCCP) operates at its full potential.The rating also factors in the (1) high debt levels that has eroded Sasol's balance sheet strength in recent years; (2) volatility in prices for Sasol's chemical and liquid fuel products, particularly in the context of the uncertain global macroeconomic environment as a result of the coronavirus pandemic; and (3) high sensitivity of the company's financial performance to changes in the USD/ZAR exchange rate and crude oil prices.Sasol has been addressing its high debt burden by undertaking cash conservation measures and by accelerating its asset disposal programme, which improved the company's financial flexibility and allowed it to reduce gross debt by about $2 billion in the first half of FY2021 (30 June fiscal year-end).On 22 February 2021, Sasol announced that it will not pursue its contemplated rights issue. While Moody's viewed the rights issue as an important pillar in Sasol's deleveraging strategy, it was not incorporated in the rating agency's base case forecast given the uncertainty in timing and size. The absence of a rights issue therefore does not have a negative impact on the current Ba2 rating, although the pace of deleveraging will now be slower than the scenario where the company did raise equity to repay debt. Sasol intends to achieve a net debt position in the range of $4 - $6 billion over the next two years from the current $8.7 billion (excluding lease liabilities).Sasol's credit metrics have improved following a very challenging FY2020 when Moody's-adjusted debt/EBITDA stood at 7.3x, a substantial increase from the 3.6x recorded the year prior. Under Moody's base case forecast, gross leverage is expected to fall to 3.7x in FY2021 after incorporating debt reductions from proceeds of announced asset disposals.LIQUIDITYSasol's liquidity profile is good. As at 31 December 2020, the company had available group cash balances of approximately $1.8 billion and cash flow from operations is forecasted to be about $1.4 billion with capital spending of $1.3 billion for FY2021. The next material maturity is the $1 billion bond due in November 2022.Sasol's $3.9 billion RCF is about $900 million undrawn as at 31 December 2020 and availability under this facility will increase further by the amount of new bonds issued because the issuance proceeds will be used to repay the RCF. The facility matures in November 2024 and the availability reduces to $3.5 billion in November 2022 and to $2.8 billion in November 2023. Sasol also has ZAR8.5 billion available under local funding with various South African relationship banks. Because these domestic facilities are subject to annual renewals, Moody's views them to be a weaker source of liquidity than multi-year committed facilities.The net debt/EBITDA maintenance covenant under major banking facility agreements was waived for the 30 June 2020 measurement date and was reset to 4.0x from 3.0x for the 31 December 2020 test date. Sasol reported a covenant ratio of 2.6x for this latest period and Moody's expects that the company will be compliant under the 3.0x covenant requirement for the 30 June 2021 date.RATIONALE FOR THE NEGATIVE OUTLOOKThe negative outlook reflects the downside risks from macroeconomic uncertainty and volatile product prices at a time when Sasol has high leverage and weak free cash flows.Absent sovereign credit linkage considerations, a stabilization of the outlook would require debt/EBITDA sustained below 4.0x and a track record of stronger liquidity management such that the company is not exposed to refinancing risk in the future.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPositive pressure on the rating in the near-term is unlikely given the current negative outlook. An upgrade would require demonstrated evidence that debt/EBITDA can be sustained at 3.0x or below through economic volatility and commodity price cycles and that liquidity is strong. Given the material credit linkage between Sasol and South Africa (Ba2 negative), any upward rating pressure would also need to be assessed in the context of what the rating of the Government of South Africa is at that point in time.The rating could be downgraded if debt/EBITDA does not trend below 4.0x over the next 12-18 months or if there is pressure on liquidity. A downgrade of South Africa's rating in the near-term is likely to result in a downgrade of Sasol's rating. Sasol's rating could be rated one notch above the sovereign over time if its financial profile and liquidity materially strengthens and it displays a track record of generating material cash flows from its international operations. As Sasol executes on its deleveraging target and evolves under its 'Sasol 2.0' transformation programme, we will continue to assess Sasol's fundamental strength and its exposure to the domestic economy.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.The local market analyst for this rating is Rehan Akbar, +971 (423) 795-65.CORPORATE PROFILEHeadquartered in Johannesburg, Sasol is an international integrated chemicals and energy company that develops and commercializes technologies and operates world-scale facilities to produce a range of product streams including liquid fuels, commodity and specialty chemicals. Sasol generated revenues of ZAR183.2 billion and Moody's-adjusted EBITDA of ZAR31.7 billion for the last 12 months ended 31 December 2020.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. 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