Errington said Wesfarmers fixed charge ratio ("the key metric used by credit agencies in assessing balance sheet risk") is falling.
In 2014's finanical year, the ratio was 3.17x and fell to 2.99x in finanical year (FY) 2015.
Errington added: "With recent drags on earnings from industrial businesses, combined with a step up in rent expenses (Homebase acquisition and Wesfarmers sale and lease back policy), the fixed
charge ratio is forecast to fall to 2.54x in FY16 and to 2.44x in FY17.
"We believe a 2.44x fixed charge ratio could lead to a drop of two credit notches.
"Over the past three to four years, Wesfarmers has invested over two times depreciation in capex (capital expenditure) whilst paying out more than 90 per cent of EPS (earnings per share) as dividends. It has funded dividends by selling (and leasing back) properties, having a balance sheet and credit rating to support.
"However, with the drop in earnings now expected and post its Homebase acquisition (which brings with it more than $600m of annual rent expenses), this strategy now looks to be closing. With a fixed charge ratio forecast to fall to 2.44x, its growth options looks challenged.
"We were critical toward Woolworths entering the Australian home improvement sector (via Masters), and we believe Wesfarmers entering the UK market (via Homebase) will be as equally a compromising decision for Wesfarmers as Masters was for Woolworths.
"Paying $705m for a business generating $40m of EBIT and where that business is smaller scale in a tough industry raises questions. And when a further $1bn is being committed over the next five years to improve the business, we are highly sceptical.
"Homebase dilutes returns on investment as shown above, and we think it comes with material business risk (a new market via a smaller-scale operating position). And with the acquisition debt funded and bringing with it high rent costs, we expect Wesfarmers balance sheet to be compromised. Our DPS (dividend per share) forecasts had been reduced, maintain 'Underperform'."