BHP Credit Rating Cut at S&P on Lower Price Forecasts

  • Rating cut to A from A+ on lower iron ore, oil and copper
  • BHP says it's committed to maintaining `strong balance sheet'

BHP Billiton Ltd., the world’s biggest mining company, had its credit rating cut at Standard & Poor’s as producers reel from cratering prices driven by concern over faltering growth in China, the largest consumer of raw materials.

The rating was lowered to A from A+ to reflect changes in price forecasts and “very challenging market conditions and increased demand uncertainty over the coming years,” S&P said in a statement on Monday. Ratings for the Melbourne-based miner may be lowered one notch further after it releases earnings on Feb. 23, S&P said.

Plunging commodity prices are piling pressure on Chief Executive Officer Andrew Mackenzie’s pledge to maintain a “solid A” credit rating. The company, which reports first-half profit later this month, may need to raise as much as $10 billion through a share sale and scrap its dividend if it is to retain the commitment, according to Liberum Capital Ltd. analyst Richard Knights.

“There’s certainly a lot of pressure for them to act leading into their next earnings announcement,” Anthony Ip, a Sydney-based credit sector specialist at Citigroup Inc., said by phone. In raising the prospect of a further downgrade following BHP’s earnings result, S&P has effectively set a timeline for the producer to make further cuts to capital expenditure and revise its dividend policy, Ip said.

More Pressure

BHP fell 2.2 percent to A$14.92 in Sydney trading, extending its decline in the past year to 46 percent. The cost of insuring BHP debt rose 2.3 basis points on Monday to 231 basis points, according to data provider CMA. It last month reached as much as 270, the highest since the global credit squeeze of 2009.

S&P also placed rival Rio Tinto Group, the second-biggest miner, on CreditWatch Negative due to lower price forecasts for iron ore, aluminum and copper.

The world’s largest mining companies are cutting dividends, slashing debt, selling assets and accelerating spending cuts as they grapple with declining profits as commodity prices continue to tumble. Pressure on the sector won’t relent in 2016, Rio Tinto Group Chief Executive Officer Sam Walsh wrote last month in an internal e-mail to staff, as the producer imposed a salary freeze for this year.

BHP will cut its dividend payment for the six months to Dec. 31 by half to 31 cents, according to Bloomberg Dividend Forecasts. “The market debate has probably moved on from if they will cut, to how large the cut will be,” Citigroup’s Ip said.

Balance Sheet

The producer “has the strongest credit rating in the sector and remains committed to maintaining its strong balance sheet through the cycle,” BHP said Monday in a statement noting S&P’s review.

The company has an A+ credit ranking at Fitch Ratings, the fifth-highest score, and an equivalent A1 assessment at Moody’s Investors Service, which has the firm on review for downgrade and is contemplating potential cuts for a slew of miners across the world.

Almost every major raw material is worth less now than two years ago, from iron ore to oil to crops and base metals. The Bloomberg Commodity Index, a measure of returns from 22 items, has tumbled 40 percent over that period, touching the lowest level since January 1991.

Metal Prices

“Metal prices have come under pressure because of fears of lower demand from China, and excess supply remains an issue,” S&P said in its statement. “Moreover, particularly relevant for BHP Billiton, the oversupply of crude oil in the market results in very weak oil and Henry Hub gas prices, which we now believe will last over the foreseeable future, putting further pressure on its balance sheet.”

Freeport-McMoRan Inc. slumped after its credit rating was lowered four levels to junk status by Moody’s Investors Service last month and Vale SA had its credit rating cut to the lowest investment grade level by S&P.

Rio Tinto’s A- rating could be lowered one notch “over the coming weeks if the company does not take supportive measures amid the currently weak commodity prices pressuring its cash flows,” S&P said in a separate statement.

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