Investing.com -- Moody’s Ratings has altered the outlook for Sasol (NYSE: SSL ) Limited and Sasol Financing USA LLC from stable to negative. The ratings agency has also affirmed Sasol’s Ba1 long term corporate family rating (CFR), Ba1-PD probability of default rating, NP short term issuer rating, P-1.za national scale rating (NSR) short term issuer rating, the Aaa.za long term NSR CFR and Ba1 on all backed senior unsecured instrument ratings issued by Sasol Financing USA LLC.
The change in outlook is due to Sasol’s deteriorating operating performance, largely attributed to low demand in the chemicals market and weak oil prices. This has led to an increase in Moody’s adjusted leverage for Sasol, predicted to reach 3.0x in 2025 and 2026, up from 2.2x in 2024. Sasol’s chemical business has seen falling prices, subdued demand, and continued capacity growth over the last 18 months, resulting in asset impairments and margin deterioration. The EBITDA margin has fallen to 22.5% for the last 12 months to December 2024 from 25% in 2023, and it is expected to further weaken to around 20% in 2025 and 2026.
Despite U.S. tariffs not directly affecting Sasol due to limited exports to the U.S., they present indirect risks such as potential GDP growth slowdown and weakened consumer confidence. The ongoing economic slowdown keeps the chemicals industry under pressure with low demand, while sustained low oil prices pose challenges for Sasol’s fuels business, although the company’s hedging program will partly mitigate these risks.
Sasol’s recently announced cost control measures and a tighter capital allocation strategy, which will reduce capital investments by ZAR15 to ZAR20 billion in the 2025 to 2028 period, are expected to generate marginally positive free cash flow over the next 18 months. However, Sasol’s interest cover will continue to deteriorate towards 4.0x due to higher borrowing costs. The rating affirmation reflects Sasol’s production cost advantage in South Africa, ongoing efforts to improve earnings, good liquidity and prudent financial policy. Sasol’s recent commitment to not pay dividends until net debt is below $3 billion is expected to strengthen the balance sheet in the medium term.
Sasol’s Ba1 CFR is supported by its leading domestic market position in South Africa in liquid fuels and chemicals production, its integrated value chain and business model, and its track record of adhering to a conservative and prudent financial policy and maintaining a good liquidity position. These strengths are offset by exposure to Brent crude oil and commodity prices, the challenging operating environment with depressed chemical prices and low oil prices, and the continued weakening of operating and credit metrics. Sasol also faces internal operating challenges due to lower coal quality and productivity levels.
Sasol remains highly exposed to South Africa’s economic, political, legal, fiscal and regulatory environment, with 50% of the company’s revenue and 35% of non-current assets derived from South Africa as of June 2024. Sasol’s credit rating is constrained at Ba1 or one notch above the South Africa Sovereign rating due to carbon transition risk leading to lower production volumes and higher carbon tax cash outflows.
Sasol’s ESG credit impact score is moderately negative (CIS-3) similar to most other chemical companies as good governance offsets some significant environmental and social risks. Sasol’s very high environmental and social risk exposures are partially mitigated by moderate governance risks, relatively conservative financial policies and strong reporting framework and board structure.
Sasol’s liquidity position is good, as of 31 December 2024, the company had group cash balances of approximately ZAR34 billion ($1.8 billion) and ZAR28.0 billion ($1.5 billion) in bank facilities and available revolving facility (RCF) that expires in 2030. This liquidity position is sufficient to offset forecasts of negative free cash flow generation during the second half of 2025 and 2026 and debt repayments of ZAR1.9 billion ($100 million) and ZAR 13.4 billion ($711 million) in the next one and two years respectively. Sasol is comfortably below its 3.0x net debt/EBITDA maintenance covenant under its RCF and USD term loan, at 1.6x as of December 2024.
The negative outlook reflects the expectation of a prolonged downturn in the chemical sector and low oil prices, which will continue to pressure the company’s credit metrics during the next 18-24 months. Leverage, measured as total debt/EBITDA, is expected to trend towards 3.0x, although this risk is partially mitigated by the company’s good liquidity over the next 12-18 months.
A rating upgrade for Sasol is unlikely due to the negative outlook and Sasol’s medium and long-term exposure to carbon transition risk. Sasol’s credit rating is constrained at Ba1 and no higher than a notch above the South Africa sovereign rating should the sovereign rating trend lower than the current Ba2 rating. However, a recovery of Sasol’s earnings and EBITDA levels that allows the company to generate positive free cash flow on a recurring basis could lead to a stable outlook. Positive rating pressure could also arise if the company demonstrates a clear and sustainable transition to a more environmentally friendly business model without impacting the company’s credit metrics.
Sasol’s rating could be downgraded if debt/EBITDA trends above 3.0x or if there is pressure on liquidity. The rating could also be downgraded if the transition to a cleaner business model with lower carbon emissions results in a substantial decline in volumes and EBITDA, and the EBITDA margin falls below 20%. Downward pressure on South Africa’s rating could lead to pressure on Sasol’s ratings.
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