Standard & Poor’s has downgraded BHP’s credit rating as commodity prices continue to slump.
The downgrade follows S&P’s decision to lower its forecasts for copper, iron ore, and oil, which now make up the key pillars of BHP’s business after its divestment of non-core assets into South32.
It went on to forecast a ‘material drop’
“Under various scenarios, we now forecast BHP could see its ratio of funds from operations to debt fall to 30-40 per cent over 2016 and 2017, well below our threshold for an ‘A+’ rating,” the agency said.
“We are therefore lowering the ratings on BHP to ‘A’ from ‘A+’ and placing [the firm] on CreditWatch with negative implications.”
BHP noted the downgrade, and added that the rating on its senior secured notes has also been lowered from A+ to A, while its subordinated notes fell from A- to BBB+.
Despite this downgrade, BHP remained positive.
“BHP has the strongest credit rating in the sector and remains committed to maintaining its strong balance sheet through the cycle,” it said in a company statement.
Yet S&P is pessimistic on its financial capabilities.
“At this stage, we have no certainty on the company’s response to the challenging market environment,” S&P said.
“We aim to resolve the CreditWatch after BHP releases its financial results, when we will know more about the timing and magnitude of its financial actions.”
BHP opened at shareprice of $15.14, down 2.45% from yesterday's high of $15.52.
However it is not just BHP feeling the pinch, with S&P expecting similar results for other resources companies.
"We now believe many major oil and gas companies’ current and prospective core debt coverage metrics are likely to remain below our rating guidelines for two or three years as the industry adjusts to lower prices," S&P analysts stated.
It has downgraded shell to A+ from AA-, and has placed it on watch for further downgrades.
Rio Tinto is also on watch, with expectations of a potential downgrade “over the coming weeks if the company does not take supportive measures amid the currently weak commodity prices pressuring its cash flows”.