On Friday evening, Standard & Poor's Ratings Services lowered Freeport-McMoRan's (FCX) credit rating two notches to BB from BBB-, which places the company's debt in "junk" territory.
Given the current commodities market, the rating likely comes as no surprise to anyone. The timing however, is a bit of a surprise, as the company's debt burden and broader market worries have been well known for some time.
For investors who rely on the major ratings agencies to make investment decisions, the late downgrade by Standard & Poor's could be damaging. Although Freeport's stock price has been in freefall, investors could have felt assured by the company's former investment grade rating and felt they were following the old investment adage of buying low.
Last month, Moody's downgraded Freeport's credit rating to "junk" just a day after the Phoenix-based natural resources company reported its fourth quarter earnings, citing commodity price worries and an estimated debt/EBITDA ratio of 6x. Admittedly, the Moody's downgrade wasn't exactly ahead of the ball either.
Freeport itself acknowledged concerns about its $20 billion debt load and broader financial picture during its earnings call with analysts last month.
"We can't wish this debt away. We've got to deal with it, and that's the hard decisions that we're making," CEO Richard Adkerson said on the call, in which he also announced plans to reduce capex spending in 2016 to $3.4 billion, down from $6.35 billion in 2015.
As for Standard & Poor's assessment of Freeport, it too acknowledged the company's estimated leverage of 6x and commodity price volatility. Standard & Poor's also said Freeport's operating plan was "aggressive" and could be thrown off by commodity price volatility.
One has to wonder what took Standard & Poor's so long to come to its conclusion, as commodity prices have been on the decline for the last year. Freeport's stock price has also declined 71% over the last year and several of its bonds have been trading well below par -- many well below 60 cents on the dollar -- which suggests creditors have been less certain of Freeport's former investment grade rating.
Meanwhile, Standard & Poor's downgrade happened to come a day before Freeport announced the first of what will likely be many asset sales to shore up its balance sheet. The one sale certainly doesn't mean that Freeport's problems are behind it (they aren't). But a cynic might claim the downgrade came too late.
Additionally, Standard & Poor's said it could lower the rating further if the company was unable to stick to its "aggressive" plan or if its debt to EBITDA ratio remained above 5x.
Perhaps such a downgrade -- if necessary -- will come in advance of the company alerting the public of its troubles.