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Moody's downgrades BHP Billiton

Dean Mouhtaropoulos/Getty Images

Moody’s has downgraded BHP Billion’s credit rating, dropping the global mining giant two notches to A3 from A1.

The ratings agency also placed the miner on watch negative, indicating that there is a further risk of an additional downgrade.

A3 is the seventh highest level of creditworthiness on Moody’s ratings scale and leaves the company four notches above junk status.

“The downgrade reflects the deterioration in the company’s earnings and cash flow, which has led to significantly weaker credit metrics,” says Moody’s.

Moody’s suggests that current weakness in commodity prices, along with softening demand, represents a fundamental shift in the operating environment beyond a normal cyclical downturn.

“As a result — and notwithstanding changes to the firm’s dividend policy and capital expenditure plans, which are themselves credit positive developments — Moody’s expects BHP Billiton’s credit metrics to remain substantially weaker, over the next 12-24 months, than historical levels and to be more appropriately aligned with a rating of A3,” says the agency.

“The negative outlook reflects pricing pressure and weaker fundamentals for the commodities which BHP Billiton produces and Moody’s view that the firm’s credit metrics will remain at weak levels for an A3 for the next 12-18 months, before improving to more appropriate levels.”

Here’s Moody’s on what could prompt a further downgrade to the rating.

The ratings could be downgraded should BHP Billiton’s leverage, as measured by adjusted debt/EBITDA remain above 2.0x; (CFO — dividends)/debt is less than 35%. Ratings could also be downgraded 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 our current expectations.

Moody’s suggested that it may return BHP Billiton’s credit watch to stable if the company “demonstrates a sustained debt/EBITDA ratio below 2.0x and a (CFO-dividends)/debt ratio at a minimum of 35%.”

Yesterday BHP Billiton, along with Brazilian miner Vale, struck an agreement with authorities in Brazil on the cleanup of the fatal Samarco iron ore mine disaster, setting the costs around $US2.3 billion, or almost half previous claims, over the next six years.

The agreement is subject to court approval and appears to set a ceiling of $US2.3 billion on payments for the next six years. Beyond that, funding is unclear. The final bill could be as high as 30 billion Brazilian reals ($US7.7 billion), according to Brazil’s attorney-general Luís Inácio Adams.

BHP Billiton’s profitability, and share price, has been hit hard by slumping iron ore and crude oil prices.

Even with a recent bounce, the Australian-listed shares of the company have fallen by more than 50% from August 2014, extending the slide from April 2011 — the time when the spot iron ore price were trading at record highs — to 62%.

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