Standard & Poor's Rating Services (S&P) has announced an update to its criteria for analysing streaming transactions. Under the new criteria, many commodities streaming transactions will be classified as a debt rather than non-debt financing. This approach will impact S&P's analysis of adjusted debt and related credit metrics, which in turn has the potential to affect corporate issuer credit ratings.
In recent years streaming transactions have emerged as an important financing option for mining issuers. A streaming transaction is a transaction where a commodity producer sells forward the right to a share of future production at a preset price, which is typically at a significant discount to prevailing market prices, in exchange for an upfront cash payment. Streaming transactions have proven particularly effective at monetizing by-product production upfront, for example where a base metals miner yields or expects to yield some precious metals by-product through its production process. For many issuers, streaming transactions have provided much needed financing during a period where equity financing has been tremendously challenging.
Streaming transactions have traditionally been viewed as non-debt financing by the major credit ratings agencies, which in turn has impacted their assessment of an issuer's adjusted debt and other credit related metrics in their analysis of an issuer's overall credit rating. The change in S&P's approach has the potential to impact S&P's assessment of these metrics, which could affect S&P's credit rating of mining issuers that have entered into streaming transactions. S&P has emphasized that the change in criteria will only affect a small number of mining companies, and that it does not expect the change in criteria to immediately affect its ratings of any issuers.
In evaluating whether a streaming transaction will be treated as debt for the purposes of evaluating an issuer's credit rating, S&P will focus on the following features:
- Has the transaction been done in lieu of borrowing;
- Is the stream repayable in cash in the event payment is not satisfied via the delivery of product;
- Does the counterparty have recourse to the issuer or a guarantor in the case of an insolvency event;
- Can repayment be accelerated upon an event of default; and
- Whether there is a high level of overcollateralization or security to production coverage or some other mechanism that provides greater certainty of repayment.
At present, none of the other major credit ratings has indicated that it will follow the change in criteria adopted by S&P.
Major and mid-tier issuers considering a streaming transaction should consider S&P's new position as part of their overall assessment of a potential transaction, particularly those issuers who are concerned that their credit rating is sensitive to additional debt.
The complete S&P bulletin is available on its website.
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