TEXT-S&P Affirms BHP Billiton 'A+/A-1' Rtgs; Otlk Stable

Thu Sep 6, 2012 11:00pm EDT

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Overview

-- We expect that the weak global economy will keep prices of major commodities soft in the next 12 months, which would lower BHP Billiton's earnings in fiscal 2013.

-- We believe BHP Billiton has strong financial flexibility to withstand the near-term tougher trading conditions in the mining and metals industry, in particular iron ore. We expect the company to defer or cut its discretionary capital expenditure should commodity prices stay low.

-- As such, we have affirmed our 'A+/A-1' ratings on BHP Billiton.

-- The outlook on the rating remains stable, as we expect BHP Billiton's financial metrics in fiscal 2013 to be in line with our expectations for the 'A+' rating.

Rating Action On Sept. 7, 2012, Standard & Poor's Ratings Services affirmed its 'A+/A-1' ratings on Australia-based mining company BHP Billiton (incorporating BHP Billiton Ltd. and BHP Billiton PLC). The outlook remains stable.

Rationale

The affirmation reflects our view that BHP Billiton would be able to maintain its financial metrics within our rating expectations despite weakening commodity prices. However, we do expect the metrics to moderate in year ending June 30, 2013, mainly because of lower iron ore revenue. We note that iron ore prices fell sharply to about US$90 per ton currently, from more than US$130 per ton (Fe62% CFR) in the first half of calendar 2012. This is due to aggressive trader and mills de-stocking and slower demand for steel in China. There is a risk that iron ore prices will stay low until the end of calendar 2012. Given that iron ore accounted for 30%-50% of BHP Billiton's EBIT over the past three years, a steep and continuous decline in iron ore prices would moderately reduce the group's earnings and cash flows. In our view, the prospect of weaker commodity prices, together with the increase in debt in fiscal 2012 to fund the company's acquisition of North American shale assets, has diminished the large rating buffer that BHP Billiton used to enjoy.

Nonetheless, we believe BHP Billiton, compared to its peers, has the best asset diversity and is the most financially flexible to respond to weakening commodity prices. Although its planned capital expenditure remains relatively large at about US$22 billion in fiscal 2013, we believe it can reduce capital expenditure to preserve cash. This flexibility was demonstrated during the global financial crisis in 2009, when the company cut its capital expenditure to maintain credit metrics in line with the rating. In addition, high oil prices should generate good cash flows and mitigate the falling revenue from its iron ore or other business segments. The petroleum business accounted for 23% of the group's EBIT in fiscal 2012.

The ratings on diversified resources company BHP Billiton reflect our view of the Australia-based company's excellent market position, substantial portfolio diversification, low-cost operations, conservative financial policies, and solid organic growth pipeline. Partly offsetting these strengths are the company's sensitivity to volatile commodity prices and some exposure to higher-risk emerging markets. BHP Billiton is the world's largest diversified resources company, based on sales turnover and market capitalization. The company delivered strong results in year ended June 30, 2012, with FFO to adjusted debt at about 80% and positive free operating cash flow.

Liquidity

We consider BHP Billiton's liquidity position to be "adequate". Relevant aspects of our assessment of the company's liquidity profile are as follows:

-- We expect that sources of liquidity over the next couple of years will exceed uses by at least 1.0x.

-- At June 30, 2012, the company's capital-market debt maturities for the next two years are manageable, with about US$2.6 billion (including US$995 million of commercial paper) due in fiscal 2013 and about US$3.7 billion due in fiscal 2014.

-- The group has no financial covenants in its debt facilities.

-- We also note that positive cash flow (before dividends, debt service, and capital management) throughout the business cycle is a key management goal.

-- BHP Billiton's financial flexibility stems from its strong access to debt capital markets, a US$4.0 billion undrawn revolving credit facility, and flexibility in managing discretionary capital expenditure.

Outlook

The stable rating outlook reflects our expectation that BHP Billion would sustain a positive free operating cash flow year-on-year and FFO to adjusted debt at more than 60% through the commodity pricing cycle. We expect the company to proactively exercise its financial levers to restore its metrics to this level in the event that its FFO-to-adjusted debt falls to less than 60%. The stable outlook also assumes no sizable debt-funded acquisitions.

The rating could be lowered if: FFO to adjusted debt were to fall to less than 55% or free operating cash flow turns negative for 18-to-24 months. Downward rating pressure could also occur:

-- If the company's growth strategy is not conservatively financed; or

-- If it were to undertake a sizable acquisition that is not consistent with management's strategy of adding further large, long-life, low-cost, and expandable assets; or

-- If it adopts a more shareholder-friendly initiative when commodity prices are weak.

An upgrade is less likely in the near to medium term, unless the company adopts a more conservative financial policy or reduces its earnings volatility.

Related Criteria And Research 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed

BHP Billiton Ltd.

BHP Billiton PLC Corporate

Credit Rating A+/Stable/A-1

BHP Billiton Nickel West Pty Ltd.

Corporate Credit Rating A+/Stable/NR

BHP Billiton Ltd.

Senior Unsecured A+

Commercial Paper A-1

BHP Billiton Finance (USA) B.V.

Commercial Paper A-1

BHP Billiton Finance (USA) Ltd.

Senior Unsecured A+

Commercial Paper A-1

BHP Billiton Finance B.V.

Senior Unsecured A+

BHP Billiton Finance Ltd.

Senior Unsecured A+

Commercial Paper A-1

BHP Billiton Finance PLC

Senior Unsecured A+

BHP Billiton PLC

Senior Unsecured A+

Commercial Paper A-1

BHP Finance (USA) Ltd.

Senior Unsecured A+

WMC Finance (USA) Ltd.

Senior Unsecured A+

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