HOTLINE: Bonded to BHP

As contagion swept through the eurozone and Chinese trade data reinforced impressions that the powerhouse economy is cooling off, BHP Billiton this week priced €2 billion-worth ($2.55 billion) of bonds under a medium-term note programme, which will raise €20 billion overall.

The six-year and twelve-year bonds will yield 2.125% and 3% respectively, while its US ten-year notes issued in February yield 2.875%, a rate that many sovereign nations would have cause to envy, as the chart from the Trading Economics website illustrates. 

It comes as little surprise that the enfants terribles of the eurozone family are seen as far riskier debtors than BHP, which has in recent weeks signalled its intention to curb spending.

But even Australia, which was one of the only western nations not plunged into recession as the global financial crisis struck, borrows at a higher rate than the miner to which it plays host.

Hotline, who cannot remember the last metal market story he wrote that did not mention China, also views it as a little peculiar that the Asian economy borrows at a higher rate than BHP.

As Ernst & Young said in a piece for Metal Bulletin, large-cap miners are enjoying such favourable rates in the bond markets that equity financing has largely become unnecessary – which may provide some small relief to exploration-stage miners that would struggle to compete with the likes of BHP for nervous equity investors’ cash. 

BHP ceo Marius Kloppers is keen to preserve the company’s impressive standing in debt markets, as well its favourable credit ratings. Its stable long-term A+ and A1 ratings from Standard & Poor’s and Moody’s, respectively, are among the highest awarded in the mining segment.

BHP’s large-cap peers have equally seen their standing in debt markets grow surer in recent years as they have used cash from stronger, higher-priced sales to reduce leverage, buy back shares, and reinvest in assets that will allow them to remain their competitive positions globally.

Freeport McMoran, for example, recently issued three tranches of debt totalling $3 billion, the most costly of which yields 3.55%.

That money, in turn, was used to fund the early redemption of older bonds that paid out 8.75%, a rather more onerous rate that did not reflect the fact that miners now are in ruder financial health than most of the countries they are mining in, and not far off some of the countries they are listed in.

The comparison only takes you so far, of course.

Those seeking security in an uncertain world cannot, as yet, emigrate to BHP Billiton.

editorial@metalbulletin.com