Bigger is not always better, at least according to Standard & Poor's. The rating agency recently revised its creditwatch implications for the triple-B-minus rated secured export notes of Southern Peru Ltd. to negative from developing, where they were placed in October.
The action followed the announced merger between Asarco Inc., the controlling shareholder of Southern Peru Copper Co., (of which Southern Peru Ltd. is a subsidiary) and Grupo Mexico S.A., the holding company for Grupo Minero Mexico S.A. de C.V. (GMM).
The combined companies would create one of the world's largest copper companies.
However, according to S&P, Asarco's triple-B rating will deteriorate due to its combination with lower-rated GMM (local currency rating triple-B, watch negative; foreign currency double-B) and unrated Grupo Mexico.
Southern Peru Ltd. issued $150 million in secured export notes backed by export receivables in May of 1997. The deal was managed by Deutsche Bank and Citibank, features a 7.9% coupon and matures in 2007.
S&P is concerned that a lower-rated parent company could affect the ability of Southern Peru to meet the payments to noteholders.
"We need to assess what the plans of Grupo Mexico are regarding the development of the Peruvian mines and further investments in Southern Peru," explained Michael Gorelick, the corporate analyst responsible for Southern Peru Copper at the agency. "If after that analysis we determine that the new parent company will maintain the current financial profile of Southern Peru, we would affirm the triple-B-minus rating on the notes. But if there are material changes in the credit quality of Southern Peru due to Grupo Mexico being a weaker parent company, we will have to lower the notes' credit rating."
Ultimately, the impact of Grupo Mexico over Southern Peru's notes depends on the linkage between the two companies, which will be clearer once the legal structure binding the companies is finalized.
"We continue to work on it and we are in continuous communication with the management of Grupo Mexico and Southern Peru Copper. We hope to reach a conclusion in the near term," said Gorelick.