The world's biggest mining company said it remains “committed to maintaining its strong balance sheet through the cycle”, but Moody’s has warned that lower commodity prices are set to weigh on the earnings and cash flow with its outlook on BHP to be remain "substantially weaker" over the next year or two.
"Moody's views current weak commodity prices and softer demand as representing a fundamental shift in the operating environment beyond a normal cyclical downturn,” it said in the statement.
"The negative outlook reflects pricing pressure and weaker fundamentals for the commodities which BHP Billiton produces.”
The ratings agency said that, while the benefits of diversity from the company's petroleum business have been eroded in the current price environment, it still sees this as differentiating factor which is “supportive of BHP Billiton's business profile when compared to other major miners” such as rival Rio Tinto.
The downgrade follows a shocking half year ended December 31, 2015, with BHP’s profit down a staggering 233% and a $5.7 billion ($A7.9 billion) loss, largely due to yet another massive writedown in its onshore US shale interests.
The company also moved from a progressive dividend to a payout based policy, and warned that more cuts could come if conditions don’t improve.
Moody’s said the changes to the firm's dividend policy and capital expenditure plans notwithstanding, which are themselves credit positive developments, it seeks the company’s next 12-24 months will be below historical levels.
Any recovery will take longer than previously expected, increasing credit risk across the commodity sector, particularly given that 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
“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,” Moody’s said.
It said the company could stabilise its ratings if excess cash is applied to debt reduction.
It also reviewed the recent announcement agreement regarding the Samarco dam disaster in Brazil, under which BHP and Vale will fund a 15-year agreement for the restoration of communities and the environment following the November 5 dam collapse that killed at least 17 people, and found the deal was credit positive.
The pair’s Samarco JV will fund a foundation to the tune of up to 9.2 billion real ($A3.2 billion or $US2.4 billion) until 2021, though BHP and Vale will be required to chip in Samarco’s funds if it cannot meet its obligations.
Depending on the progress of remediation, annual contributions between 2019 and 2021 will be $200-400 million annually.
The agreement settles a 20 billion real ($US5.1 billion) civil public claim against Samarco initiated in November by the Brazilian authorities.
If BHP has to step in and co-fund the work Moody’s said it was “manageable within the rating parameters” assuming Moody’s expectations for free cash flow generation.
The company said its rating could fall from if liquidity contracts meaningfully, the company pursues large acquisitions which delay a return to more appropriate credit metrics or materially reduce cash balances, and/or liabilities related to Samarco increase beyond its current expectations.
Moody’s also lowered the rating on BHP Billiton’s senior unsecured medium term note program has been lowered from (P)A1 to (P)A3 and the company’s subordinated notes have dropped from A3 to Baa2.
Standard & Poor's cut BHP's rating last month, dropping it to A on lower estimates for commodity prices and "very challenging market conditions."
