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Potash Bonds Converging With BHP’s Following Bid: Canada Credit

BHP’s Potash Bid May Augur Record for Resource Deals
Commodities companies, including miners, oil producers and chemical makers, have announced $362 billion of takeovers so far this year. If they maintain that pace, they will eclipse thePhotographer: Derick E. Hingle/Bloomberg

Potash Corp. of Saskatchewan Inc.’s borrowing costs are converging with those of BHP Billiton Ltd. as the world’s biggest mining company makes a hostile $40 billion takeover bid for the fertilizer producer.

The yield on Potash’s $500 million of 4.875 percent notes due in 2020 fell to 3.645 percent yesterday as the price of the security rose 0.86 cent to 109.9 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. BHP’s 6.5 percent bonds due in 2019 fell 0.78 cent to 123.42 cents on the dollar, pushing their yield up to 3.35 percent.

Debt investors are betting that a successful takeover of Saskatoon, Saskatchewan-based Potash would lift its credit rating closer to that of BHP, which is ranked as much as three steps higher. BHP went directly to shareholders with a $130-a- share bid for Potash today, after management called an earlier offer at that price “grossly inadequate.”

BHP’s bid “offers potential upside” for Potash bondholders, said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management Inc., with $24 billion in assets under management. “At a minimum, it would make the credit rating A on both sides, which would potentially open it up to new investors. I don’t see a downside of more than one notch of credit rating” for BHP, he said.

BHP, based in Melbourne, Australia, is rated A1 by Moody’s Investors Service, or three steps higher than Potash’s Baa1. Investors demand an extra 99.4 basis points in yield to own the 2020 notes issued by Potash rather than government debt, compared with a 70 basis-point premium for the BHP bonds.

Spreads Steady

Elsewhere in credit markets, yield spreads on Canadian corporate debt held steady yesterday at an average 141 basis points. The spread was as wide as 154 points on June 16 and as narrow as 114 points on March 19. Overall yields rose to 3.78 percent from 3.74 percent, which was the lowest since February.

The yield on Canada’s benchmark 10-year government bonds jumped 4 basis points to 2.97 percent, as the price of the 3.5 percent security maturing in June 2020 dropped 32 cents to C$104.50 ($101.25).

Demand for the safest and most liquid assets drove the yield on the 10-year debt below 3 percent on Aug. 11 for the first time in more than 15 months. It fell as low as 2.92 percent, the least since April 24, 2009.

In the new-issue market, Manulife Financial Corp., Canada’s largest insurance company, said yesterday it intends to issue $900 million of 4.079 percent notes maturing on Aug. 20, 2015. Tembec Inc. said its Tembec Industries unit completed a $255 million private sale of 11.25 percent senior secured notes due 2018.

Mortgage Rate

Bank of Nova Scotia, Canada’s third-largest bank, and Montreal-based National Bank of Canada, the No. 6 lender, said yesterday that they lowered their five-year closed mortgage rate by 0.1 percentage point to 5.49 percent.

Statistics Canada said in a release that international investors bought a net C$6.96 billion of Canadian bonds in June. The last time foreigners sold more of the nation’s bonds than they bought was in December 2008.

Potash, which listed $2.72 billion in long-term debt on June 30, has been borrowing to expand capacity at mines in Saskatchewan and New Brunswick for potassium-bearing minerals used in fertilizers. The company’s most recent issuance was $500 million in 3.75 percent six-year notes in September.

Balance Sheet

“BHP has a solid balance sheet,” said Ric Palombi, a money manager in Calgary at McLean & Partners, which oversees more than C$1 billion. “If Potash comes under BHP’s umbrella, that’s positive for Potash’s debt.”

After rejecting BHP’s all-cash bid, Potash adopted a so-called shareholder rights plan as a defense. Potash may make a “credit-harming defensive move” to thwart a takeover, according to Gimme Credit analyst Carol Levenson.

Gimme Credit downgraded Potash’s credit score yesterday to “deteriorating,” concluding that the company is now “in play,” which could leave Potash or its buyer burdened with more debt.

Tighter bond spreads between Potash and BHP show debt investors are betting a merger will take place.

“There’s certainly a probability that the deal gets done, but it’s not 100 percent,” Levington said. “It’s not like” the bonds “have moved on top of each other,” he said.


Potash Chief Executive Officer Bill Doyle called BHP’s offer yesterday “highly opportunistic” on a conference call with analysts. At the same time, he appeared to invite a higher bid from BHP or an offer from another company. “We’re not opposed to a sale of the company, but we certainly are opposed to someone stealing the company,” Doyle said yesterday in a phone interview from Chicago.

The cost of insuring BHP’s debt rose today, with credit-default swaps on the company climbing 19.5 basis points to 100.5, according to data provider CMA.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

BHP said it arranged $43 billion of financing to back its hostile takeover bid for Potash. The mining company put in place new multi-currency term loans and revolving-credit facilities, according to a statement today.

BHP’s bid is at a 16 percent premium to Potash’s closing share price on Aug. 16 and represents a 46 percent discount to the company’s record-high price of $239.50 reached on June 17, 2008. Potash shares surged 28 percent to $143.17 yesterday.

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