BHP Billiton faces battle to hold on to its credit score

BHP BILLITON faces a battle to hold on to its credit score even as lower-rated rivals, including Rio Tinto, have seen their debt outlooks boosted amid the rebound in resource prices.

Credit metrics for BHP will be below limits for existing ratings in the current financial year, according to S&P Global Ratings and Moody’s Investors Service, which grade BHP at their sixth- and seventh-highest rankings, respectively. That will focus attention on its efforts to balance debt reduction against potential acquisitions and returns to shareholders.

Analysts will also be attuned to further fallout from the failed Samarco dam in Brazil.

Large mining peers including Rio, Fortescue Metals and Vale have had ratings upgraded or the outlook on their scores boosted as commodities including iron ore have rallied this year. They have also gained from efforts to lower costs and bolster balance sheets.

Improved prices would not boost BHP profits enough to buoy its rating outlook, while the producer’s oil division would make only a limited contribution this year, according to S&P.

“There has been good progress,” S&P analyst Elad Jelasko said. “But still not sufficient to stabilise the outlook.”

Metrics for the company, presently rated A with a negative outlook by S&P, would remain “slightly below” the threshold for its current score next year, Jelasko said. Volatile metals and oil prices, uncertainties over BHP’s financial policy and liabilities tied to Samarco were key to the credit assessor’s outlook, he said.

“Our balance sheet strength has been maintained with both cash flow and gearing metrics within our target ranges, liquidity of $16 billion (R219bn) and a long-dated debt maturity profile,” BHP said. The producer sought to ensure its strategy supported a solid “A” credit rating, it said in an annual report.

BHP booked post-tax charges of $2.2bn related to financial impacts from the Samarco failure in full-year results for the 12 months to June 30, it said last month. Legal proceedings meant BHP could not reliably estimate the extent of its liabilities, the producer said.

Moody’s, which has the company at A3 with a negative outlook, expected BHP’s metrics to fall below its rating parameters, although they were likely to move in line with its tolerance levels in the financial year beginning next July, analyst Matthew Moore said. To move to a stable outlook, BHP would need to carry out further debt reduction beyond expectations.

With stronger free cash flow projected on improved prices, BHP expected its net debt to fall in the current financial year, chief financial officer Peter Beaven said. BHP’s net debt rose 7 percent to $26.1bn in the year ended in June compared with the previous 12 months, according to filings.

Fitch Ratings has a negative view on the credit as well, although its ranking is the equivalent of one step above that of S&P. – Bloomberg