While Moody’s has retained QR National’s Baa1 stable credit rating, the “credit negative” verdict on the buyback is a sign it could have an impact on the rating in the future.

Announcing the buyback of up to 10% of its issued share capital last week, QR National said it would maintain the flexibility to invest in growth opportunities.

Moody’s said that although QR National had about $A1.8 billion available under an existing credit facility to fund the buyback, it had expected that credit facility would be used for growth and to provide liquidity.

It also said the buyback program came at a time of uncertainty in the outlook for coal demand.

“With growth slowing in China and sovereign debt issues continuing to weigh on Europe, the company is announcing a debt-funded stock buyback in a challenging macro environment when the rest of corporate Australia is implementing austerity measures and capital preservation,” Moody’s said.

“This increasingly challenging environment could hurt volumes as coal producers reassess expansion plans and potentially close loss-making mines.

“For instance, BHP Billiton Limited, one of QR National’s largest customers, recently announced the closure of its Norwich Park coal mine in Queensland and last week reported that it will freeze more than $50 billion worth of expansion projects across Australia.”

Moody’s said QR National hauled less coal than expected in 2011-12, but was able to deliver a strong financial performance thanks to margin management and operating efficiencies.

It said lower spending on rail network expansion and rolling stock had helped QR National keep its debt leverage at conservative levels.

“However, the buyback will increase leverage to a level more in line with our original expectations, thereby reducing the company’s cushion against external shocks to the operating environment,” it said.

QR National shares were down 3c to $3.53 yesterday, in line with market trends.