World Economy

BHP Needs $10b Stock Sale

BHP Needs $10b Stock SaleBHP Needs $10b Stock Sale

BHP Billiton Ltd. needs to raise as much as $10 billion in a sale of new stock to its investors if it wants to keep its credit rating, according to the top-ranked analyst covering the world’s biggest mining company.

As prices for key commodities such as iron ore and oil have tumbled, BHP’s stated goal of retaining its A+ credit rating at Standard & Poor’s and A1 rating at Moody’s Investor Service is under pressure, Richard Knights of Liberum Capital Ltd. wrote in a note on Friday. Raising $5 billion to $10 billion through a share sale to existing investors is required to fill the shortfall in cash flow to keep the rating, he said, Bloomberg reported.

“Slashing capital expenditure and even cutting its dividend to zero are not sufficient for BHP to realistically retain a ‘solid A’ credit rating, if spot commodity prices and currencies persist,” said Knights, who’s the top ranked analyst covering BHP’s London shares according to Bloomberg data. “Given that the company continues to be married to the idea of a ‘solid A’ rating throughout the cycle, a rights issue looks likely.”

Miners have been battered by headwinds from slowing growth in China, their biggest customer, and gluts in metals to energy markets. That’s forced competitors to scrap dividends and sell assets, while smaller rivals such as Glencore Plc and Freeport McMoran Inc. have already sold shares to strengthen their finances.

Melbourne-based BHP spokeswoman Eleanor Colonico said the producer declined to comment on Liberum’s note.

  Downgrade Review

Last month, Moody’s put BHP’s rating on review for a possible downgrade, citing the probability of weak commodity prices persisting for years that would significantly reduce its earnings and cash-flow generation.

“What we are committed to throughout all conditions is a strong balance sheet,” BHP Chairman Jac Nasser told investors at the company’s annual meeting in Perth in November. He added that a decision on its dividend would not be made until February.

The Melbourne-based miner could raise as much as $15.4 billion through a share sale to allow it to buy assets of distressed rivals, Bank of America Corp. analyst Jason Fairclough wrote in a note to clients earlier this month. Such a sale might accelerate the distress of more indebted companies in the industry and force the sale of quality mines, according to Fairclough.

While investors would likely support a share sale aimed at raising capital for an acquisition, there probably would be less backing if such action was to bolster BHP’s balance sheet on concern price declines will persist,  Michelle Lopez, a Sydney-based investment manager at Aberdeen Asset Management Ltd., which holds the producer’s shares, said by phone. “There’s still a lot within their own means that they can do, so I don’t agree that this would be the right time to be raising capital at all if it’s just for prudence,” she said.