Whether BHP Billiton Ltd scraps its progressive dividend policy or not, it risks a credit ratings downgrade as the collapse in oil and iron ore shows no sign of abating.
The price to protect BHP bonds from non-payment reached a four-year high of 132.5 basis points on Nov. 13 as the yield premium offered over swap rates surged for its debt.
While the company is graded at the highest “A” level by the three major ratings companies, Bloomberg’s default-risk model indicates its creditworthiness is more in line with the highest “BBB” score, three levels lower.
Iron ore, the top earner for the world’s biggest mining company, has dropped to a four-month low, challenging the company’s strategy of maintaining or increasing dividend payments, while protecting a so-called “solid A” credit rating.
The company is also under pressure following this month’s deadly disaster at its Samarco joint iron ore operation with Vale SA in Brazil, where tailings dams ruptured on Nov. 5 and devastated communities. Eleven people died in the disaster, with 12 still missing. The Brazilian government said it would make Vale SA and BHP pay for the cleanup costs.
Both Standard & Poor’s and Fitch Ratings Ltd have graded BHP at “A+,” the fifth-highest grade, with a negative view on the company. It carries the equivalent “A1” score from Moody’s Investors Service with a stable outlook.
The metals and energy producer targets ratings of “A+” or “A” from S&P and “A1” or “A2” from Moody’s, it said in August. The company declined to provide comment on the prospect of a ratings downgrade.
BHP declined 2.1 percent to A$20.07 in Sydney trading yesterday, as an index of 31 energy and mining companies fell 1.3 percent.
“They are certainly falling below the range of ‘A+,’” as the prices of BHP’s main commodities decline, Perth-based Macquarie Group Ltd analyst Hayden Bairstow said during a telephone interview.
The bank sees a downgrade from “A+” to “A” as likely, he said. A ratings cut to “A” is a possibility, Deutsche Bank analysts including Sydney-based Gus Medeiros said in a note on Friday.
Benchmark iron ore prices have slumped by more than a third this year, while the price of copper has plunged by about a quarter and crude oil has declined about 20 percent.
The cost of insuring BHP’s debt with credit-default swaps has climbed 55.5 basis points since Dec. 31 to 132.1 on Friday, compared with a 45.8 basis point increase for Rio Tinto Group.
The BHP CDS is above the iTraxx Australia index by the most since 2008.
The yield premium over the swap rate on the miner’s A$1 billion (US$723 million) of March 2020 bonds widened to 154 basis points on Nov. 13, based on prices from Australia & New Zealand Banking Group Ltd, having been sold at a gap of 87 basis points in March.
With commodity prices tumbling, investors including Argo Investments Ltd have questioned whether BHP should continue to target increases to dividend payouts.
“If current prices persist, we expect the board to reduce the dividend to preserve the credit rating,” UBS Group AG analysts including Glyn Lawcock wrote in a note on Friday.
BHP might be better served using funds to target bargain acquisitions as the commodities collapse forces competitors to sell assets, according to Jefferies Group LLC.
“We don’t have to make any decisions on what the dividend is until next February,” Chairman Jac Nasser told investors Thursday at an annual meeting in Perth.
“What we are committed to throughout all conditions is a strong balance sheet,” he added.
Underlying profits slumped 52 percent in the year to July, BHP reported in August as it also cut its forecast on peak steel demand in China.
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