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Banks' Appetite to Lend for Resources M&A May Be Back, Ernst & Young Says
BHP Billiton Ltd.’s loans to fund its $40 billion hostile takeover bid of Potash Corp. of Saskatchewan Inc. may mean banks have a renewed appetite to finance large deals, Ernst & Young LLP said.
This “could have a significant and unexpected bearing on the industry’s capacity to undertake large-scale, debt-financed M&A,” Ernst & Young’s Global Mining & Metals team led by Mike Elliot said today in a report. The bid “implies a renewed appetite among the banks for large deal financing,” it said.
The value of global mining deals in the first half rose 46 percent to $40.6 billion from a year ago, Ernst & Young said, while the value of pending deals, including BHP’s bid for Potash Corp., stood at $140.9 billion. The period saw the return of “large deals” with coal and gold the busiest sectors and Canada the preferred investment location, the report said.
“The magnitude of the BHP Billiton bid reinforces our view that the big deals may be moving back on the table as the credit markets ease and companies seek better returns through acquisition,” the report said.
BHP’s $45 billion loan is the most debt raised to finance a takeover since February 2008, underscoring a credit-market rally that has pushed corporate bond yields to record lows even as the economic recovery sputters. The loan has pushed lending to commodity firms to $128 billion this year, the most since 2007, as rising prices for raw materials draws European bank demand.
‘Possible Downgrade’
BHP’s A1 rating, the fifth level of investment quality, is on review for a possible downgrade by Moody’s Investors Service, reflecting the “substantial increase in debt to fund the transaction,” the ratings company said last month. The cost of protecting the company’s bonds from default rose the most in almost 18 months after making its hostile offer on Aug. 18.
“Acquisition-related loans are likely to include short- term maturities for a significant portion of the loan amount, and could prompt credit rating downgrades for borrowers that risk becoming over-leveraged,” Ernst & Young said.
There was an increase in deals outside China in the half, the report said, citing Japan, India, Singapore and South Korea, driven by competition to secure raw materials. Domestic consolidation in North America dominated the larger deals in the half, it said.
Banco Santander SA, Barclays Capital, BNP Paribas, JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc have underwritten the BHP loan.
To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net
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