BHP Billtion saw its stock price drop by more than 45% in 2015 and the trend continues in 2016, as the company’s stock is down by another 16% so far this year.
Matters are moving from bad to worse as the credit rating agency, Standard & Poor announced on Tuesday, that it has lowered the credit rating for BHP Billiton Limited (ADR)(NYSE:BHP), and signaled that the company could face further downgrade, as low commodity prices have mutilated the mining industry.
Standard & Poor reduced the company’s credit rating from ‘A+’ to ‘A’ and believes that the financial health of BHP Billiton will further deteriorate as the downturn will become more severe. Due to intense global glut, prices of BHP’s key products such as oil and iron ore have collapsed to a decade low.
BHP Billiton has a longstanding policy of maintaining or increasing dividend payouts in each year which led to increased concerns by S&P over the company’s financial flexibility.
It is still unclear whether BHP Billiton will announce a dividend cut in its upcoming quarterly results. If the company maintains dividends, questions will loom about how much debt the company will issue, and the consequent impact on its credit rating. In addition to this, BHP’s credit rating has already been put on downgrade review by Moody’s.
Till now, the company’s management has been confident that the combination of existing debt and operational cash flow will be enough to cover all expenditures including dividends, without prompting any downgrade from credit rating agencies. We believe that this is the defining moment for the company in terms of how much operational cash flow it can generate in the current low commodity price environment.
Following a one-notch cut by the rating agency, BHP’s rating has immediately been put under “creditwatch” which is often accompanied by negative implications. The firm cited that it could further downgrade the company’s rating, depending on its quarterly results through which BHP will define its course with capital expenditure guidance and dividend outlook.
The company is left with a couple of options that are under its control including further layoffs and reduction in capital expenditure. The segment for a potential cut in capex in petroleum is due to weak demand across the globe. In 2016 lower royalty payments and tax rates could counterbalance weak earnings, and low commodity prices.
Rumors are mounting that other mining companies will slash dividends which could tempt BHP Billiton to reduce its payout as well, to avoid further downgrades of its credit rating. According to S&P, “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”. The downgrades by credit rating agencies prove costly for the companies as retreatment drives up borrowing costs.
By looking at the current financial health of the company, BHP Billiton can afford to maintain its dividend. However, if the commodity market does not improve, dividend reduction or suspension will become almost unavoidable. Suspending dividends is quite improbable. However if the company decides to reduce dividends, it will give a substantial relief to the balance sheet. If payouts are reduced by 50%, the company may save up to $3.3 billion.
In Augusts’ quarterly filings, BHP Billiton reported its worst annual earnings since 2003. Since then the company has written down billions worth of assets. However, S&P believes that BHP Billiton has a great track record in assessing credit market even in a downturn. Recently, the company issued hybrid notes worth of $6.5 billion.
The rival credit rating agency, Fitch has given long-term issuer default rating of ‘A+’, with a negative outlook. On the other hand, Moody’s has given a long-term rating of ‘A1’ which is currently under ‘creditwatch’ list with potential downgrade.