S&P affirmed its A+/A-1 ratings for BHP but revised the outlook to negative from stable.
The miner was removed from CreditWatch negative.
“The outlook revision reflects our concerns that continued weakness in commodity prices, combined with BHP Billiton's commitment to a progressive dividend payment, may weaken the company's key financial metrics to below our expectations for the 'A+' rating without offsetting measures by the company,” S&P analyst May Zhong said.
“Despite being the most diversified miner globally, BHP Billiton is particularly exposed to iron ore prices and to some extent, oil prices – both of which have fallen rapidly since late 2014.”
The ratings agency believes BHP has further scope to cut operating costs and capital expenditure and therefore expects the miner to remain cashflow positive.
But S&P warned the company’s commitment to a progressive dividend policy reduced its financial flexibility and hinders its ability to maintain key financial ratios in line with the A+ rating.
“The negative outlook reflects the increased likelihood that BHP Billiton's financial metrics will worsen in 2016 as a result of lower iron ore and oil prices,” Zhong said.
“We anticipate the company will look to implement measures that will limit the financial deterioration, and attempt to maintain its credit metrics at levels commensurate with the 'A+' rating, namely FFO [funds from operations] to debt of 50% or more.
“However, the uncertainties on timing and impact of these actions add to the downside risk of the rating.”
Three weeks ago, S&P dropped its 2015 iron ore price assumption from $65 per tonne to $45/t, its 2016 outlook to $50/t from $65/t, and its 2017 forecast from $70/t to $55/t.
As a result, S&P has placed ratings for iron ore producers BHP, Rio, Vale, Fortescue Metals Group, Anglo American, Exxaro Resources, CAP and Eurasian Resources Group on CreditWatch negative.
Rio was also removed from CreditWatch with negative implications yesterday, but it’s A-/A-2 ratings were affirmed with a stable outlook.
“We expect that low iron ore prices will lead to lower earnings and weaker credit metrics at global diversified mining company Rio Tinto, from a comfortable starting position, but still remain in line with expectations for the current rating,” S&P said.
It comes after Vale, the world’s largest iron ore producer, was downgraded by S&P to BBB from BBB+ with a negative outlook.
“The financial risk profile of Brazil-based iron producer is weakening amid record low iron ore prices and a substantial expansion plan,” S&P said.
Its financial risk profile assessment was also lifted to significant from intermediate, compared with an intermediate rating for Rio and a modest rating for BHP.
BHP shares opened 0.8% lower at $A33.09, while Rio shares were unchanged at $59.90.
