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Rating Action:

MOODY'S UPGRADES BHP BILLITON'S RATINGS TO A1 FROM A2 & BHP OPERATIONS INC'S RATING TO A2 FROM A3; OUTLOOK STABLE

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 is stable.

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 in Chile.

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 these projects.

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 activities

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.

Sydney
Brian Cahill
Managing Director
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100

Sydney
Terry Fanous
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100

No Related Data.
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