S & P downgrades BHP rating, places miner on negative watch
BHP has defended its financial position after its credit rating was lowered by Standard and Poor’s.
Slumping commodity prices have forced ratings agency Standard & Poor’s to downgrade the debt rating on BHP Billiton and place the mining giant on negative credit watch.
The decision came in response to a recent slashing of S & P’s price forecasts for iron ore, oil and copper.
“Under various scenarios, we now forecast that … BHP could see its ratio of funds from operations to debt fall to 30-40 per cent over 2016 and 2017, well below our threshold for an ‘A+’ rating,” the ratings agency said.
“We are therefore lowering the ratings on BHP to ‘A’ from ‘A+’ and placing (the firm) on CreditWatch with negative implications.”
The negative watch coincided with a warning that S & P could cut the debt rating by another notch should BHP’s (BHP) earnings result disappoints later this month.
The ratings agency said it would be closely watching the miner’s controversial progressive dividend policy as well as its capex guidance in particular.
Many analysts have questioned the worth of maintaining the progressive dividend policy during such a tumultuous period on markets, with several predicting it to be abandoned this year.
The pressure will only intensify in response to the action from S & P.
“At this stage, we have no certainty on the company’s response to the challenging market environment,” S & P advised.
“We aim to resolve the CreditWatch after BHP releases its financial results, when we will know more about the timing and magnitude of its financial actions.”
The miner responded to the news quickly, issuing a statement reassuring investors of its strong financial position during a rough period for miners.
“BHP Billiton has the strongest credit rating in the sector and remains committed to maintaining its strong balance sheet through the cycle,” the firm said.
Ahead of the news BHP’s stock rose 0.3 per cent in London trade, outperforming a broadly weaker market.
S&P has previously raised concerns about BHP’s fiscal flexibility, particularly as the miner stood by a decade-long policy of maintaining or increasing investor payouts each half year.
Expectations the miner is preparing to slash its dividend have been mounting, which would represent an about-turn by management but take it in step with rivals such as Glencore PLC which have already cut payouts.
Chief Executive Andrew Mackenzie last year said he was committed to what he described as a solid-A credit rating, as well as BHP’s progressive dividend policy, but the miner has since been buffeted by headwinds from sliding prices to the fallout from one of its worst mining disasters, a deadly dam burst at a mine operated by Samarco Mineração SA, a 50-50 joint venture with Brazil’s Vale SA.
In August, BHP recorded its worst annual earnings result since 2003, and it has since warned of multibillion-dollar writedowns against the value of its assets.
Business Spectator, Dow Jones