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Mining services companies Emeco and Bis Industries are at high risk of defaulting on their debts in the next 12 to 18 months, ratings agency Moody’s Investor Services has warned.
Both the ASX-listed Emeco (EHL) and private equity-owned Bis are carrying high levels of debt and will remain under pressure as conditions in the sector continue to worsen, Moody’s analysts said in a report today.
Other mining services companies Ausdrill, Barminco and Onsite Rental Group have less risk of default due to their lower leverage and better liquidity, but will nevertheless feel the pain of the ongoing downturn in the resources industry.
“The credit profiles of Australian mining-services companies will remain pressured in the next 12 to 18 months as conditions become more challenging, with miners reducing their spending amid weakness in prices and supply-demand fundamentals for commodities,” the Moody’s report said.
The analysts said the mining services groups were being squeezed by mining companies who were both reducing capital spending and renegotiating existing contracts that better reflect the higher competition between service providers.
Moody’s said the revenues of the five mining services companies had fallen by an average of 25 per cent over the 2014 financial year.
“To preserve their margins and liquidity, miners have renegotiated contracts with mining-services providers, reduced project scopes and also perform some previously outsourced services themselves,” Moody’s said.
“As a result, the revenues of the five mining-services companies we rate have declined significantly.”
The analysts noted that mining companies were expected to cut their investments by a further 34 per cent in the year ahead, on top of the already deep spending cuts made in recent years.
The ongoing weak conditions in the sector will increase the uncertainty around the ability of the mining services companies to increase earnings and deleverage.
“Mining-services companies are price takers with limited bargaining power, which increases the pressure on their business profiles in the current market,” Moody’s said, adding that the issues faced by the service companies had been exacerbated by their decisions to raise debt after the 2012 peak in the commodities cycle.
Bis, which is owned by private equity firm KKR, in 2013 abandoned plans for a $1.5 billion IPO amid concerns about the health of the resources sector.