LONDON, Nov 27 (Reuters) A merger between BHP Billiton and Rio Tinto might prompt more consolidation in the mining industry and make the sector vulnerable to credit rating downgrades if the world economy slowed, Standard and Poor's said on Tuesday.
Earlier this month, BHP Billiton proposed a takeover of rival Rio Tinto, in a deal likely to be worth around 0 billion.
Rio has so far rejected the overtures but credit agency S&P said more mergers and acquisitions (M&A) were likely to follow if the deal went ahead.
''We think the prospects for further consolidation in the mining industry are high,'' Trevor Pritchard, head of metals and mining at rating agency S&P, told a seminar in London.
''It makes other companies in the metal and mining industry consider their options,'' he added.
The agency expects future mergers to lead to more creditwatch placements and potential downgrades if the deals are financed with debt.
''We see an increased trend that the need to boost returns to shareholders could come at an increased risk to bond holders,'' said director Alex Herbert at S&P's Corporate Ratings group.
A trend within the sector of financial policies becoming more aggressive was worrying, Herbert said, referring to a combination of debt financed M&A transactions, massive capital spending and rising costs.
Higher costs were likely to weigh on bottom-lines.
''Thus weakening financial risk profiles for high spenders could potentially cause downgrades,'' he said.
The main risk was a downturn in the global economy, led by a sluggish performance in the United States, which could hit global demand for base metals and bulk commodities, sending prices lower.
''With cash flows sensitive to sharp price declines -- if the gathering economic clouds threaten a more severe downturn than what we currently expect -- some companies will find that the impact on leverage can be quite marked,'' Herbert said.
The rating agency said there was a 40 percent risk for a recession in the United States and forecast U.S. GDP would grow by 1.9 percent in 2008, down from 2.1 percent in 2007 and 2.9 percent in 2006.
''In such a scenario we could witness a re-leveraging of the industry,'' Herbert said.
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