Feb. 6 (Bloomberg) -- Goldman Sachs Group Inc., Citigroup Inc. and five other banks agreed to provide BHP Billiton Ltd. with a $55 billion loan, the biggest ever, to finance its bid for rival Rio Tinto Group.

The loan would top the previous record of 35 billion euros ($51 billion) borrowed by utility Enel SpA in Rome to buy Madrid- based power producer Endesa SA in April. BHP, the largest mining company, offered $147 billion for Rio Tinto, which today rejected the Melbourne-based company's bid as too low.

The loan arrangers may struggle to find investors to participate in the deal as financial firms tighten lending after writing down $146 billion on losses stemming from the collapse of the U.S. subprime mortgage market. Banks are holding $160 billion of leveraged buyout loans that they can't sell, according to data compiled by Bank of America Corp.

``It's surprising these mega transactions still take place,'' Sven Kreitmair, co-head of corporate credit research at UniCredit SpA in Munich, said in an interview. ``Obviously conditions are much more expensive.''

Buying London-based Rio Tinto would give BHP control of a third of the world's iron-ore market and more coal, copper and aluminum than its rivals.

Vale, Xstrata

BHP hired Goldman, Citigroup and UBS AG as advisers when it first announced the bid in November. The miner had agreed on $70 billion of financing before making the offer, the Independent newspaper reported on Jan. 22, without citing anyone.

``The $55 billion is the amount of money that we need, on a very conservative basis, in order to complete that financing picture,'' BHP Chief Executive Officer Marius Kloppers said today in a teleconference from Sydney. ``But obviously you have got to add the base cash flows of both businesses to this,'' he said.

Citigroup and Goldman, both based in New York, are arranging the loan with Barclays Plc and HSBC Holdings Plc in London, Paris-based BNP Paribas SA, UBS in Zurich and Spain's Banco Santander SA, according to BHP's statement. Loan arrangers typically seek to reduce the amount they provide by syndicating the debt to a wider group of investors.

``This deal proves that, despite the current market conditions, the right deals remain bankable at record levels,'' said Nicholas Clark, a partner at law firm Allen & Overy LLP in London, which advised the lenders.

Iron ore miner Cia. Vale do Rio Doce in Rio de Janeiro is getting $50 billion in loans to finance its bid for rival Xstrata Plc in Zug, Switzerland, Dow Jones Newswires reported today.

`Bidding War'

BHP is rated A+ by Standard & Poor's, the fifth-highest investment-grade ranking. Rio Tinto held the same rating when it borrowed $40 billion in August to buy aluminum producer Alcan Inc. Rio Tinto paid annual interest of as much as 32.5 basis points over benchmark rates on a five-year portion of the loan. Its ratings dropped three levels to BBB+ because of the additional debt.

``In a bidding war, they urgently want the financing and will be willing to pay a bit more,'' UniCredit's Kreitmair said. Aluminum Corp. of China and Alcoa Inc. in New York paid $14 billion for a 9 percent stake of Rio Tinto last week.

BHP is offering 3.4 shares for each Rio Tinto share. The company will use $40 billion of the loan to refinance debt Rio Tinto borrowed for its acquisition of Montreal-based Alcan and the remainder will help pay for a share buyback, BHP's London- based spokesman Illtud Harri said in an interview today.

Swaps Jump

The risk of BHP defaulting rose today, according to traders of credit-default swaps. The contracts jumped 21 basis points to 105, Lehman Brothers Holdings Inc. prices show. Credit-default swaps on Rio Tinto climbed 5 basis points to a record 110, CMA Datavision said. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

The yield on BHP's 600 million euros of 4.375 percent bonds due in 2014 rose 1 basis point to 166 basis points over similar- maturity government debt. The spread is four times wider than when the bonds were sold a year ago, Bloomberg data show.

``Banks must be telling themselves it's worth doing the business and BHP is very important to them as a client,'' said Willem Sels, head of credit strategy at Dresdner Kleinwort in London. ``This is an exceptional case and you have to convince banks to come on board. It will come at a price.''

BHP should have no problem refinancing the loan in the bond markets because investors still want investment-grade rated debt, said Peter Matza, policy and technical officer at the Association of Corporate Treasurers in London.

``We are not necessarily surprised there are banks ready to offer finance,'' Matza said in an interview. ``The borrower is an A+ credit, is conservatively financed and there is industrial logic.''

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

Last Updated: February 6, 2008 12:10 EST