S&P has affirmed BHP Billiton’s credit rating at ‘A’, removing the company from CreditWatch negative. However, the ratings agency has kept the miner’s credit rating on negative outlook
As part of its 1H16 result, BHP Billiton announced a change to its dividend policy to link dividends more closely to market conditions and operating performance. The change in dividend policy materially increases the company’s financial flexibility. As a result of this and other measures to improve cash flow, S&P has taken BHP Billiton off CreditWatch negative and the company’s ‘A’ rating has been affirmed.
However, BHP Billiton’s credit rating has remained on negative outlook following the latest rating action. S&P makes the following comments on the rating and the outlook:
- The negative outlook reflects the rating agency’s view that further weakness in market conditions, combined with uncertainty regarding BHP Billiton's financial policy, may slow the recovery in its credit metrics over the coming 12 months
- The negative outlook also reflects the uncertainty around the environmental liability stemming from the joint venture Samarco dam disaster. The rating partially incorporates the reputation risk around this, and the imminent agreement with the Brazilian authorities. S&P sees a potential downside if the agreement results in a penalty of over Brazilian real (R) 20bn (USD 5.2bn). However, according to the Brazilian press, the settlement could be for a lower amount. S&P is likely to add 50% of the environmental liabilities to BHP Billiton's adjusted debt given its 50% ownership of Samarco under a joint venture with Vale. The impact on the rating of Samarco would depend on factors including the settlement amount and whether Samarco retained its operations
Even though the rating outlook is negative, we remain supportive of the credit and the company’s ability to manage its way through weakness in the commodity cycle. Essentially, the steps the company has taken around dividend policy and cuts to capital expenditure as well as operating cost improvements has alleviated rating pressure on the company. The move to a payout ratio substantially reduces the company’s dividend burden and is positive for subordinated bondholders.
It is important to note that there is still a level of uncertainty around the Samarco dam failure and we understand a settlement is imminent. Once an outcome is reached, we will provide a further update to investors.
Please contact your FIIG representative for further information and current pricing levels on the BHP Billiton bonds. Available wholesale investors only.