S&P downgrades BHP Billiton and eyes cut to Rio Tinto's credit

The credit agency said after recently cutting its price assumptions for commodities such as iron ore, oil, and copper due to the mitmatch between demand and supply, BHP could suffer from its ratio of funds from operations-to-debt falling to 30%-40% over the next two years.

As a result it has cut the company's credit rating to 'A' from 'A+', with the creditwatch category reflecting the possibility that the rating may well be cut by a further notch after the group's earnings release in late February, largely depending on the announced dividend policy and capital expenditure guidance.

"Under our revised assumptions, taking into account the company's financial policy and public guidance, we forecast a material drop in BHP Billiton's results in the coming 18 months, with key credit metrics well below the levels we consider to be consistent with an 'A+' rating," the agency said.

Cuts to forecast commodities prices for iron ore, aluminum, and copper affect Rio Tinto, so S&P feels it could also reduce its the 'A-/A-2' corporate bond rating by one notch after group's earnings release in early February, so has slapped it with a 'creditwatch negative' tag as well.

"Our price deck assumes that steel production in China will not recover in 2016, after having contracted in 2015 for the first
time in many years. We believe that commodity prices will remain very volatile while the impact of China's slowdown plays out."