Sept. 26 (Bloomberg) -- BHP Billiton Ltd., planning to take on the biggest ever corporate loan by buying Rio Tinto Group, is now better able to handle repayments because of surging cash flows, Standard & Poor's said.

The cash generated from BHP's oil, iron ore and coal business will help sustain a proposed $122 billion bid for London- based Rio Tinto as a global credit crunch increases borrowing costs, Craig Parker, a director at S&P in Melbourne, said today.

Turbulence in global credit markets has locked corporates out of capital markets after banks booked more than $522 billion in writedowns since last year. BHP in February agreed to borrow a record $55 billion from Goldman Sachs Group Inc., Citigroup Inc. and five more banks for its Rio Tinto bid.

``BHP itself is generating significant free cash so its reliance upon that bank facility is probably less of a concern then what it was when they first initiated the Rio offer,'' Parker said in an interview. ``The cost of raising that debt still makes economic sense for the merger to proceed despite the fact that the credit crunch has occurred.''

Melbourne-based BHP fell 1.5 percent to A$35.84 at the 4:10 p.m. Sydney time close on the Australian stock exchange. Rio dropped 0.8 percent to A$101. Rio is trading at a record 22 percent discount to BHP's offer, signaling concern amongst investors the bid may fail.

Biggest Debt

BHP also plans to buyback as much $30 billion in stock should the takeover be successful. It had net debt of $8.5 billion at June 30, according to statement on its Web site. Melbourne-based spokesman Peter Ogden declined to comment.

BHP, venture partner in the world's largest exporter of coking coal as well as the third-biggest iron ore shipper, may boost operating cash flow after tax by 57 percent in the current fiscal year, ING Bank NV said in a report dated Sept. 23. Cash flow will jump to $28.6 billion in the year ending June 30 from $18.2 billion last year, ING said.

``BHP has got the benefit of the petroleum division and those prices are helping them to generate substantial free cash,'' Parker said. Iron ore and coal prices are ``going gangbusters,'' he said.

To be sure, BHP's credit rating may be lowered from A+ should its proposed takeover of Rio, the world's biggest mining acquisition, be successful, S&P said in Aug. 1. BHP has offered 3.4 of its shares for every one of London-based Rio's. Moody's Investor Service and S&P have placed the company on negative outlook.

Debt Cost

``They will find that their cost of debt when it comes up for renewal, is going to increase,'' Parker said. ``But that's across the board. They do have an extremely strong set of credit metrics.''

The risk of BHP defaulting on its debt rose to a record this month, credit-default swaps show. Five-year contracts on the company's bonds more than doubled to 137.5 basis points on Sept. 18 compared with 59 on May 16, according to CMA Datavis prices.

The cost, which increases as perceptions of credit quality deteriorate, is equivalent to $137,500 annually to protect a $10 million investment in BHP debt. A basis point is 0.01 percentage point.

BHP plans to take its offer to Rio shareholders after obtaining regulatory approval, probably by year's end, BHP Chief Executive Officer Marius Kloppers said in a Sept. 9 interview.

To contact the reporters on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

Last Updated: September 26, 2008 03:09 EDT