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BHP Billiton just had its credit rating cut, and may have to rethink its 'progressive dividend policy'

Ryan Pierse/Getty Images

Credit ratings agency Standard & Poor’s (S&P) cut BHP Billiton’s long-term credit rating overnight, citing “very challenging market conditions and increased demand uncertainty over the coming years”.

The agency reduced the company’s long-term credit rating one notch, lowering it from “A+” to “A”.

“The rating actions follow our recent update to our price assumptions for most commodities, including key elements of BHP Billiton’s portfolio such as iron ore, copper, and coking coal,” said S&P in a statement following the decision.

“Under our revised assumptions, taking into account the company’s financial policy and public guidance, we forecast a material drop in BHP Billiton’s results in the coming 18 months, with key credit metrics well below the levels we consider to be consistent with an ‘A+’ rating.”

Alongside the rate cut, S&P also placed BHP Billiton’s rating on watch negative, indicating that another reduction may be forthcoming in the months ahead.

BHP Billiton’s controversial “progressive dividend policy” was cited as one factor behind the decision.

“The CreditWatch placement reflects the possibility that we could lower the rating by another notch if the company remains committed to its progressive dividend policy while its cash flows are pressured by lower commodity prices,” said S&P.

“At this stage, we have no certainty on the company’s response to the challenging market environment. We aim to resolve the CreditWatch after BHP Billiton releases its financial results, when we will know more about the timing and magnitude of its financial actions.”

BHP Billiton dividend policy aims to increase or maintain the dividend per share in US dollar terms at each financial half year.

This obviously worked well in the upswing phase of a commodity price cycle, not so much when the cycle is turning lower.

Commodities such as iron ore and crude oil – two key commodity markets to BHP Billiton – have fallen by over 70% since 2011 and 2013 respectively.

The steep declines, coming as output from the likes of BHP Billiton and others ramped up, has pressured profitability across the sector.

Other global mining giants such as Vale, Glencore and Anglo American have all recently suspended dividend payouts in an attempt to mitigate the downturn in commodity prices.

In a statement following the S&P downgrade, BHP Billiton wrote that it “has the strongest credit rating in the sector and remains committed to maintaining its strong balance sheet through the cycle.”

BHP Billiton shares listed in Australia have fallen by over 66% since 2011, and 58% since August 2015. The scale of the decline, in part, reflects the belief that the company would have to abandon its progressive dividend policy given ongoing weakness across commodity markets.

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