DBRS Downgrades BHP Billiton Ltd. & BHP Billiton plc to A (low), Changes Trend to Stable

DBRS Limited (DBRS) has today downgraded the Issuer Rating of BHP Billiton Ltd. & BHP Billiton plc (collectively, BHP or the Company) to A (low) from “A” and changed the trend to Stable from Negative. During the fiscal year 2016 ending June 30, BHP’s key credit metrics remained weak relative to DBRS’s standards for an “A” rating and total debt increased by $5.3 billion. DBRS noted the following when the Company’s trends and ratings were last changed on March 19, 2016: “If BHP does not reduce its net indebtedness while its cash flow remains depressed or if its credit metrics do not improve meaningfully from the current levels, a one-notch rating downgrade could occur.” The downgrade primarily reflects the ongoing deterioration of the Company’s key credit metrics, which have moved further below the “A” range to BBB (low), based on the F2016 results.

The trend change to Stable from Negative reflects DBRS’s belief that commodity prices appear to have bottomed in mid-F2016, with iron ore and metallurgical coal posting solid gains in the 40% to 50% range since then, followed by gains of approximately 30% and 10% in oil and copper, respectively. While there may be a future correction for any of a number of factors, sentiment appears to be improving for these commodities, largely due to improving economic indicators for Asian consumers. On that basis, DBRS expects that F2017 will see a modest improvement in BHP’s key credit metrics and that this improvement will likely continue for several years, based on Bloomberg consensus price estimates for its principal commodities (as of August 25, 2016). DBRS’s expectations assume that the Samarco operations will not restart in F2017 and that the situation will continue to be monitored as the process of remediation and re-permitting progresses. Additionally, the Company’s productivity gains, reduced dividend payouts and significantly reduced capital spending now focused on brownfield projects to release latent capacity should help restore flexibility in the credit profile and free up cash flow for debt reduction.

DBRS views BHP’s liquidity as strong, with $10.3 billion in cash and $6.0 billion in availability under the Company’s credit facility at the end of F2016. DBRS believes that BHP has sufficient liquidity to fund the approximate $4.5 billion in maturing debt through the end of F2018, as well as any cash flow deficits. In conjunction with the settlement between BHP, Vale S.A. and the Brazilian government regarding the Samarco dam failure, BHP has written down its value of Samarco to zero and taken a total of pre-tax $2.45 billion in provisions in F2016 to fund the clean-up and repair of damage, create an independent foundation to manage 41 social and environmental rehabilitation programs, repair the tailings facility and advance the regulatory and permitting process necessary to restart the facility. DBRS notes that Samarco’s debt obligations are non-recourse to BHP. Furthermore, DBRS views that BHP’s refinancing risk is modest, given the Company’s long dated maturity profile.

DBRS has reviewed the Company’s latest capital and exploration expenditures (capex) program, as well as its dividend policy, and believes that these programs are manageable. BHP spent $7.7 billion in F2016 and is targeting $5.4 billion and $6.2 billion in F2017 and F2018, respectively. Additionally, the Company has changed from its progressive dividend policy that increased dividends every year regardless of cash flow levels, to a dividend policy that pays a minimum of 50% of underlying attributable profits, contributing to reduced F2016 dividend payments of $4.2 billion compared to $7.1 billion in F2015.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Mining Industry (September 2016) and Rating Companies in the Oil & Gas Industry (September 2016), which can be found on our website under Methodologies.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

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