Singapore 04/03/2016 - Moody’s Investors Service has downgraded the credit ratings of BHP Billion to A3 from A1, while assigning a negative outlook, as deterioration of the company’s earnings and cash flow lead to significantly weaker credit metrics, the ratings agency said Thursday.
Moody's views current weak commodity prices and softer demand as representing a fundamental shift in the operating environment beyond a normal cyclical downturn.
As a result - notwithstanding changes to the firm's dividend policy and capital expenditure plans, which are themselves credit positive developments - Moody's expects BHP's credit metrics to remain substantially weaker over the next 12-24 months than historical levels, it said.
The negative outlook reflects pricing pressure and weaker fundamentals for the commodities which BHP produces and Moody's view that the firm's credit metrics will remain at weak levels for an A3 for the next 12-18 months, before improving to more appropriate levels, it added.
In response, BHP said on the same day that it remains committed to maintaining its strong balance sheet through the cycle.
Last week, BHP had posted a $5.7 billion half-year loss on significantly weaker prices across all its major commodities.
Slowing economic growth in China has materially reduced the demand for base metals, while falling levels of steel production have negatively affected demand for iron ore and metallurgical coal, leading in turn to lower prices, said Moody’s.
Supply imbalances, particularly in iron ore and petroleum products - which are the major earnings and cash flow drivers for BHP Billiton - will maintain their downward pressure on prices for several years, with the strong US dollar further weakening demand, it added.
While lower freight costs and depreciation of the Australian dollar have helped reduce BHP's input costs, the drop in commodity prices has and will continue to significantly impact the company's performance, it noted.
On Monday, ratings agency Standard & Poor’s had reaffirmed BHP’s A credit rating after its cut from A+ in early-February.
BHP’s share price on the Australia Stock Exchange rose 2.78 percent to A$17.74 ($13.06) so far on Friday.