* BHP Australia shareholders to help fund British entity's dividends
* Australia shareholders may see lower franking credit
* Shareholders to vote on proposal in Oct, Nov
By Melanie Burton and Cecile Lefort
MELBOURNE/WELLINGTON, Sept 23 (Reuters) - BHP Billiton BHP.AX BLT.L plans to alter its dividend funding policy to ensure a promise on payouts to the miner's British shareholders is met, a move that could come at a cost to its Australian shareholders.
Under a proposal by dual-listed BHP, its Australian company will effectively make payments to the British company to enable dividends to be paid. The British entity's ability to pay dividends has been hit by the spin-off of South32 S32.AX from BHP in May, which has reduced its available capital, and by sliding commodities prices.
The funding by the Australian arm will enable BHP to meet the terms of the 2001 merger of BHP and Billiton under which dividends had to be paid equally to both sets of shareholders.
But the payment will mean Australian shareholders of BHP will lose out on getting tax benefits, or franking credits, on that sum. Australian investors are entitled to franking credits, which allow them a tax credit for tax already paid by the company.
BHP, which revealed the proposal on Wednesday, said it doesn't expect any impact on its ability to pay fully-franked dividends in future, given the $25.4 billion franking credits available on its books.
The British and Australian sets of shareholders of BHP will vote on the proposal in October and November, respectively.
HYBRID ISSUE
BHP's Australian shares fell 4.4 percent on Wednesday, amid a 2 percent drop for the broader Australian stock market, as weak economic data from China, the nation's top trading partner, rattled investor confidence. ID:nL4N11R3E2
Separately, the Anglo-Australian miner said it will issue hybrid capital securities, a mix of debt and equity, to pay off short-term debt. The firm has around $28 billion of outstanding debt, according to Thomson Reuters data.
The move is aimed at protecting its A-plus credit rating by Standard & Poor's which is expected to come under pressure because of its dividend policy and a commodities downturn.
The security will not convert into shares, it said.
The company did not disclose the amount it was targeting raising from the issue. Phil Bayley, a debt capital market consultant at ADCM in Sydney, said he expected $2 billion-$3 billion to be raised as the issue could include multiple currencies.
"It could be the case, that they will put those funds into PLC. But perhaps they're looking for external growth opportunities now," said analyst David Lennox of Fat Prophets in Sydney.
BHP has mandated Bank of America Merrill Lynch (NYSE:BAC), Barclays (LONDON:BARC), BNP Paribas (PARIS:BNPP) and Goldman Sachs (NYSE:GS) as joint bookrunners for the planned hybrid raising, according to IFR, a company owned by Thomson Reuters.