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28 Oct 2004
MOODY'S UPGRADES BHP BILLITON'S RATINGS TO A1 FROM A2 & BHP OPERATIONS INC'S RATING TO A2 FROM A3; OUTLOOK STABLE
Approximately US$4.2 Billion of Debt Securities Affected
Sydney, October 28, 2004 -- Moody's Investors Service today upgraded the long-term senior unsecured
rating of BHP Billiton and its guaranteed subsidiaries to A1 from A2.
Moody's also upgraded the preferred stock rating of BHP Operations Inc
(BHP Ops) to A2 from A3. This concludes the review for upgrade
that commenced on 3 September, 2004. The ratings outlook
Moody's says the rating upgrade reflects BHP Billiton's strengthened
financial risk profile resulting from 1) solid commodity fundamentals
2) management's continued focus on cost improvement initiatives 3) the
group's planned growth in its productive capacity over the medium
term 4) its growing track record in executing its growth projects which
are key to its ongoing rating stability, and 5) management's
continued focus on maintaining a prudent financial policy.
BHP Billiton's credit profile has benefited from the favorable environment
for almost all of its commodities over the past 18-24 months,
thereby enabling the group to generate strong operating cash flows.
By deploying much of the extra cash to fund its growth projects,
BHP Billiton has reduced net debt, whilst at the same time considerably
enhancing its productive capacity and overall cost structure.
As a consequence, Moody's expects BHP Billiton to generate
considerably improved operating cash flow over 2005-2007 of around
US$6.0-US$7.0 billion per annum under
Moody's base-case scenario. The rating agency expects
BHP Billiton to generate a retained cash flow (RCF)/debt ratio that is
above 60% and Adjusted Debt/Recurring EBITDA of less than 1.5x
over that period. These measures position BHP Billiton well within
the A1 rating category and support its capacity to withstand the inevitable
volatility in commodity prices.
BHP Billiton's strategic growth plan over the medium term revolves
around its pipeline of projects across its commodity segments.
These projects include its Western Australia iron ore long-term
capacity expansion project, Atlantis and Mad Dog oil projects in
the Gulf of Mexico, Ravensthorpe/Yabulu integrated nickel project
in Australia, and the recently sanctioned Spence copper project
Moody recognizes BHP Billiton's continued discipline in project
execution, which has enabled it to successfully commission 17 projects
since the 2001 merger of BHP and Billiton. The rating agency considers
the continuation of such discipline as key for BHP Billiton's rating,
given the large capital expenditure over 2005-07 associated with
BHP Billiton recently announced a capital return to shareholders of up
to US$2.0 billion, which is incorporated in the rating.
Moody's expects other potential capital management initiatives in the
future to be accommodated within BHP Billiton's internal net gearing target
of 35%-40% (based on net debt/net debt plus equity).
The rating agency also expects these initiatives to be accommodated within
the RCF/debt tolerance of 40%-75% for BHP Billiton's
A1 rating. To the extent that more aggressive capital management
initiatives are announced in the future, Moody's would consider
their likely rating impact at that time.
BHP Billiton maintains active third-party trading activities,
with revenues of $6.7 billion -- or 27% of group
consolidated revenue generated from these operations in the fiscal year
ended 30 June 2004. The rating agency expects the level of turnover
to decrease over the next two years. The main purpose of this business
is to support BHP Billiton in extracting further value from the group's
production by meeting its customer needs from its own or external production.
Moody's understands that BHP Billiton will undertake minimal speculative
activities going forward.
The rating agency believes that BHP Billiton has adequate risk management
practices for its trading activities, including the establishment
of Value at Risk and stop loss limits and structures to assess and mitigate
counterparty credit risk. Furthermore, the group maintains
a robust trading governance framework to manage operating risk.
Having said that, Moody's believes that ongoing discipline
in risk management is paramount for the group's third-party trading
BHP Billiton's A1 rating is supported by its well diversified asset
portfolio and leading position in most of its commodity operations,
which are recognized for their low cost profile. The rating also
reflects the group's organic growth potential through its extensive
project pipeline. While capital investment associated with these
projects may limit BHP Billiton's ability to generate free cash
flow in certain years, it is unlikely to materially compromise the
group's financial risk profile.
In Moody's opinion, a positive rating trend could evolve over
time if BHP Billiton 1) continues to demonstrate success in project execution
and 2) maintains RCF/debt of greater than 75% and EBITDA/interest
of over 30x across the cycle.
On the other hand, the rating could experience downward pressure
if 1) BHP Billiton experiences major disappointments in delivering capital
projects or managing operating costs 2) there is material deterioration
in commodity fundamentals 3) BHP Billiton adopts an aggressive capital
management policy, and 4) sustained deterioration is seen in the
group's RCF/debt ratio to below 40% or EBITDA margin to below
15% across the cycle.
BHP Billiton is the world's largest diversified natural resource companies,
with operations including petroleum, iron ore, metallurgical
coal and manganese, alumina and aluminum, energy coal and
base metals, stainless steel materials and diamonds. Headquartered
in Melbourne, Australia, BHP Billiton generated consolidated
turnover of US$22.9 billion (excluding joint ventures) for
the 12 months ending 30 June 2004.
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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