Ratings agency Fitch has affirmed BHP Billiton’s long-term credit rating at A+ with a negative ratings outlook.
Here’s the basis for its decision.
The ratings affirmation is supported by the recovery in BHP’s financial performance on the back of stronger than expected results and cash-flow generation since mid-2016, and steps taken by the company to strengthen its balance sheet. The group has used free cash-flow generation from the recovery in commodity prices to reduce leverage from 3.4x in the financial year to June 2016 (FY16) to around 1.9x(E) in FY17. We view the recent announcement regarding the classification of BHP’s US shale assets as non-core as being credit-negative for the company’s longer-term business profile as the sale of these assets would take away a material portion of the expected future growth in BHP’s petroleum division.
The Negative Outlook reflects the emergence of several factors which if realised could result in a lower rating. In addition to a potentially weaker operating profile if the US shale assets are sold (weaker future growth profile, reduced commodity diversification), we are concerned that the presence of an activist shareholder on the company’s register could result in an increased level of shareholder-friendly measures such as share buybacks and/or special dividends. Such a move could introduce a higher level of volatility to BHP’s credit profile and lead us to reconsider the ratings benefit we have historically given the company for its stable financial policies and credit profile.
A+ is Fitch’s fifth-highest rating, and indicates that BHP Billiton’s debt is deemed to be investment grade.
The negative outlook indicates that the rating could stay at its present level or potentially be downgraded in the future.
BHP’s Australian-listed shares are trading flat at $25.99 having been up 1% earlier in the session.
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