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Alumina Sees Savings in Dollar Swaps Market: Australia Credit

Alumina Sees Savings in Dollar Swaps Market
Alumina, partner with Alcoa in the worlds biggest producer of the material used to make aluminum, sold $350 million of convertible bonds in May 2008 to fund production expansion in Brazil and refinance debt. Photographer: Carla Gottgens/Bloomberg

Alumina Ltd., Alcoa Inc.’s partner in Melbourne, may consider selling its first bonds in Australian dollars and take advantage of the currency swaps market where savings are almost double the 10-year average.

The five-year Australian dollar basis swap has risen 0.3 basis point this month to 21.8 basis points, offering a bigger discount to exchange debt in the local currency to U.S. dollars, according to data compiled by Bloomberg. The World Bank and Germany’s Landwirtschaftliche Rentenbank are among borrowers in Australia that have cut funding costs with the transaction.

“A lot of people are borrowing U.S. overseas and swapping into Australian dollars,” Judith Downes, Alumina’s chief financial officer, said in an interview. “You could potentially get a few extra basis points by doing it in the opposite direction.”

The swaps market may bring savings for other mining companies with U.S. dollar revenue, ranging from Perth-based Fortescue Metals Group Ltd. to Aston Resources Ltd., as they expand production to meet Chinese and Indian demand for raw materials. The nation’s biggest resources boom in a century is fueling economic growth as the currency trades at the strongest level since it was floated in 1983.

The basis swap measures the cost of switching interest based on the London interbank offered rate for payments linked to Australia’s bank bill swap rate. It peaked at 48 basis points in November 2009, and averaged 11 basis points in the past 10 years, Bloomberg data show. The higher the level, the greater the discount for borrowers in Australia swapping proceeds to the U.S.

World Bank Discount

“Since the financial crisis the basis swap range has shifted higher and basis curves are structurally steeper,” said Sally Auld, a Sydney-based interest rate strategist at JPMorgan Chase & Co. Basis swaps are likely to remain at similar levels for the time being, she said.

The swaps market is offering discounts even though Australia’s benchmark interest rate is 4.75 percent. The U.S. Federal Reserve has held its benchmark rate near zero since December 2008.

The World Bank’s International Bank for Reconstruction and Development sold A$600 million ($654 million) of 5.5 percent October 2014 notes on Jan. 18 that were priced to yield 49.25 basis points more than similar-maturity government debt, Bloomberg data show.

That rate equated to about 10 basis points less than Libor, once swapped into U.S. dollars, the data show. IBRD priced $2 billion of floating-rate bonds due July 2011 in June to yield 5 basis points more than Libor.

Mining Boom

The Reserve Bank of Australia, which forecasts economic growth of 4.25 percent this year, raised the benchmark lending rate by 175 basis points from October 2009 to November 2010 to control prices as the mining-investment boom drove unemployment below 5 percent.

Consumer prices may rise an annual 3 percent in the next five years, according to the gap between yields on government bonds and inflation-indexed notes.

The yield on the 10-year government note fell 3 basis points to 5.42 percent as of 12 p.m. in Sydney today, or 211 basis points more than similar-dated Treasuries.

The nation’s dollar soared 17 percent in the past 12 months, the third-best performance among 16 major currencies tracked by Bloomberg. The so-called Aussie traded at $1.0897 as of 12:02 p.m. in Sydney today, after touching a record $1.0948 yesterday.

Alumina, partner with New York-based Alcoa in the world’s biggest producer of the material used to make aluminum, sold $350 million of convertible bonds in May 2008 to fund production expansion in Brazil and refinance debt. The company, which in February reported a swing to full-year profit as metal prices rebounded, had net debt of $353 million at Dec. 31, according to its 2010 annual report.

‘Active Eye’

The sale of more securities is an option, though the company isn’t actively pursuing it at the moment, Downes said.

“We keep a very active eye on watching the market in terms of instruments that we could use for debt funding at any point in time,” she said.

Standard & Poor’s raised the company’s credit rating to BBB, the second-lowest investment grade, from BBB- this month, citing higher dividend payments from Alumina’s 40 percent-owned Alcoa World Alumina and Chemicals business and its “conservative financial management.”

Alumina’s profit may rise to $286 million this year, according to the median of nine analyst estimates compiled by Bloomberg. That compares with $35 million last year. Morgan Stanley this month raised its 2011 price forecast for aluminum by 8 percent.

U.S. Dollar Sales

Australian companies have sold $31.4 billion of U.S. dollar bonds this year, 84 percent more than the same period in 2010, Bloomberg data show.

The extra yield investors demand to own corporate bonds in the U.S. currency instead of similar-maturity government debt has fallen 20 basis points to 146 basis points this year and touched 145 on April 8, the lowest since October 2007, a Bank of America Merrill Lynch index shows. Spreads on Australian dollar corporate bonds have narrowed 35 basis points to 162.

Fortescue, Australia’s third-largest producer of iron ore used in steel production and the seventh-biggest issuer of high-yield bonds in the U.S. last year, has said it may sell more notes. Brisbane-based coal mining company Aston Resources and copper producer OZ Minerals Ltd., based in Melbourne, have also said they are considering U.S. dollar issues.

“The cross currency basis swap is affected by the demand for currency flows,” said Ben Byrne, credit analyst at Nomura Australia Ltd. High demand to “swap U.S. dollar borrowing back to Australian dollars has increased the costs of doing this, providing an opportunity for issuers to benefit from doing the reverse.”

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