Standard & Poor’s has just downgraded conglomerate 3M Company’s (NYSE: MMM) corporate credit and senior unsecured ratings to “AA-” from “AA.”  It affirmed the “A-1+” short-term credit rating and the new outlook is listed as STABLE.

The downgrade reflects a decline in still very strong debt-protection measures as the economic weakness cuts EBITDA levels and debt levels are rising.

The company recently issued about $1.7 billion in debt and 3M’s total debt to EBITDA rose to 1.4x at year-end 2008 versus 0.8x in the previous year.  S&P does not expect any deleveraging near-term.

S&P believes that 3M will generate significant discretionary cash flow over the next two years.  This can be used to repay maturities and increase its pension funding, but S&P also noted that the company would likely retain the majority of its cash flow to bolster its balance sheet and to offset the leverage.

When you read through some of the data, this almost sounds like an “upgrade” rather than a downgrade in the current credit environment.  The magnitude of the cut is small, and a STABLE rating takes forward cuts off the table for a while.

Shares are up 1.7% at $49.58, and the 52-week range is $40.87 to $83.22.

Here you can see how the downgrade compares to S&P’s downgrade of rival conglomerate General Electric (NYSE: GE).

JON C. OGG

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