The outlook on Ausdrill’s Ba2 corporate family rating and the Ba3 senior unsecured rating on the $US300 million ($A317.3 million) 144A notes issued by Ausdrill Finance was changed to negative from stable.
"The outlook change to negative reflects the challenging operating conditions in the mining services sector and the resultant uncertainty around the company's operating performance,” Moody’s vice president and senior credit officer Arnon Musiker said.
"Whilst Ausdrill's financial profile has been sufficiently resilient to manage the deteriorating operating environment to date, the ongoing challenges faced by the mining industry have reduced Ausdrill's headroom within the rating.”
Moody’s expects the weakness in earnings to exert upward pressure on financial leverage, despite Ausdrill’s efforts to reduce debt.
"The weakening in commodity prices and general decline in sentiment in the resources sector is leading to deferred capital expenditure, production cutbacks and focus on operating cost reductions,” Musiker said.
“Apart from a higher likelihood of contract cancellations, these trends will increase competition in the mining services sector, which will translate into falling revenue and declining margins.
"The outlook change also reflects our expectation that Best Tractor Parts, which is a fleet rental operator and supplier of refurbished equipment acquired by Ausdrill during early FY13, continues to face particular challenges due to the downturn in demand from the resources sector.”
Moody’s said its rating recognised the measures available to Ausdrill, including workforce reductions and the deferral of capital expenditure.
The ratings agency forecast a debt to earnings ratio of 2.3x, however, the rating could be downgraded if gross adjusted debt to earnings consistently exceeded 2-2.5x but could revert to stable if the company was able to sustain debt to earnings below the 1.5-1.9x range.
Moody’s also warned that negative rating pressure could result from sustained negative free cash flow and/or widespread contract cancellations.
Ausdrill flagged a net profit after tax of $A35-45 million for the 2014 financial year, down from $90.4 million for FY13.
