BHP Billiton Ltd. borrowed more cheaply than higher-rated Australian banks as the world’s biggest mining company returned to its home bond market for the first time in more than a decade.
The miner sold A$1 billion ($1.02 billion) of five-year bonds yesterday in Australia’s largest-ever single issue of non-financial corporate notes, data compiled by Bloomberg show. BHP paid 90 basis points more than swap rates, the data show. The premium for Westpac Banking Corp.’s A$725 million of February 2017 debt, rated a level higher, was quoted at 104 basis points.
“The sale will help to fill a yawning gap for domestic investors starved of non-financial corporate bonds,” said Mark Bayley, a Sydney-based credit strategist with advisory company Aquasia Ltd. “The fact that BHP can price inside major banks highlights this demand.”
Investor appetite helped Melbourne-based BHP narrow its sale premium from the 95 basis points initially offered. Debt issued by companies outside the financial services industry accounted for less than 15 percent of the A$85.7 billion of notes sold in Australia this year, data compiled by Bloomberg show. The company, Australia’s biggest by market value, is delaying projects estimated at $68 billion by Deutsche Bank AG as the nation’s record resources boom peaks.
Chief Executive Officer Marius Kloppers reiterated in August BHP’s commitment to maintain its credit rating, and delayed plans to approve major projects including the Olympic Dam expansion in the state of South Australia, which would have created the world’s largest uranium mine.
The bond sale also came after prices for iron ore, BHP’s biggest earner, rose to the highest in more than a month. Iron ore with 62 percent ferrous content at the Chinese port of Tianjin jumped 6 percent to $110.40 a ton on Oct. 8, the highest close since Aug. 16, according to The Steel Index Ltd.
BHP had $28.9 billion of outstanding bonds in U.S. dollars, euros and British pounds before yesterday’s sale, the data show. The miner has an A+ credit rating from Standard & Poor’s and Fitch Ratings, the fifth-highest grade, and the equivalent A1 from Moody’s Investors Service. The nation’s four largest banks hold AA- debt grades from S&P.
Fiona Hadley, a spokeswoman for BHP, declined to comment on the Australian dollar bond sale and its pricing, according to an e-mailed response to a query from Bloomberg News.
Investors bid for more than A$1.8 billion of the notes, with about 80 percent of the securities snapped up by domestic buyers and the rest sold offshore, according to Paul White, global head of debt syndicate at Australia & New Zealand Banking Group Ltd., joint lead manager on the transaction along with Commonwealth Bank of Australia.
“This transaction was a must have for any large Australian dollar investor,” he said. “The response was the strongest we have seen in this market and sets the benchmark for corporate issuance going forward.”
The extra yield investors demand to hold Australian dollar-denominated industrial debt instead of sovereign securities fell 23 basis points in September to 212, the biggest monthly drop in almost three years, according to Bank of America Merrill Lynch indexes. Spreads on similar debt globally narrowed 10 to 148, the data show, as central bank stimulus in the world’s biggest economies prompted renewed appetite for riskier assets.
“The domestic investor base will likely view the defensive characteristics of BHP’s credit as an attractive place to invest after the strong rally we have seen,” said Ben Byrne, a Sydney-based credit markets analyst at Citigroup Inc. “We are of the view BHP will maintain its credit ratings, even in a plausible downside scenario for commodity prices. The diversity of BHP’s portfolio of assets is superior to that of its peers, providing higher and more stable margins.”
BHP, the world’s third-biggest shipper of iron ore and biggest shipper of coking coal, owns mines, smelters, ports and railroads in Australia, where 52 percent of its long-term assets and 42 percent of its employees are located, according to data compiled by Bloomberg. The company, which traces its local history to a silver, lead and zinc mine set up in the 1880s in Broken Hill, about 1,160 kilometers (721 miles) west of Sydney, is known colloquially as “The Big Australian.”
Rio Tinto Group, Australia’s second-biggest mining company by market value, announced plans yesterday to cut jobs and delay decisions on projects because it expects slower growth in China, its largest customer.
BHP is still spending on new projects as it seeks to boost iron ore production to 220 million metric tons annually from 174 million tons in the most recent financial year. While it shelved a plan to build an outer harbor at Port Hedland in Western Australia, estimated by Credit Suisse Group AG to cost about $22 billion, the miner in August received government approval to build two new berths at the existing inner harbor.
“We are adjusting our rate of forward capital deployment in order to live within our means” over a five-year period, Kloppers said Aug. 22 in a conference call after BHP reported that net income dropped to $5.5 billion in the six months ended June 30 from $13.1 billion a year earlier.
The company has also approved spending of $6.2 billion to develop coal mines and port facilities in Australia, according to its exploration and development report.
“A lot of that spending will be in Australian dollars and they generate U.S. dollar revenue,” Glyn Lawcock, head of resources research for UBS AG in Sydney, said by phone. “While they’ve got an Australian-dollar capital bill, such as the iron ore expansion they’re spending money on at the moment,” it makes sense to borrow in the local currency, he said.
Australia’s dollar has gained 45 percent since the end of 2008, curtailing growth in the country’s tourism and retailing industries. The so-called Aussie bought $1.0223 as of 4:24 p.m. in Sydney.
Reserve Bank of Australia Governor Glenn Stevens noted the exchange rate had remained “higher than might have been expected” given lower commodity prices and a weakening global outlook, when he cut the nation’s benchmark interest rate to 3.25 percent from 3.5 percent last week.
There’s a 76 percent chance he will lower the rate again next month, interest-rate swaps data compiled by Bloomberg show.
Benchmark 10-year government bond yields rose 2 basis points to 3.09 percent, or 137 basis points more than similar-maturity Treasuries.
The Australian government sold A$3.25 billion of 16 1/2-year securities today, its longest-dated offering in three decades, according to the nation’s funding arm.
The Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk rose 1.1 basis points to 155 basis points yesterday in New York, according to CMA prices.
Contracts on BHP tumbled to 87 basis points yesterday from 111 basis points on June 29, according to data provider CMA. A decline reflects improving perceptions of creditworthiness.
Iron ore, Australia’s biggest export by value, has rebounded 27 percent since falling to a three-year low on Sept. 5, after China announced new spending plans for subways and roads to boost economic growth.
The steelmaking ingredient was BHP’s biggest income earner during fiscal 2012, supplying 31 percent of revenue, according to data compiled by Bloomberg. The miner, while acknowledging the slowdown in Chinese steel demand growth, says its “belief in the longer term attractiveness of the iron ore market remains unchanged,” according to an Oct. 8 e-mail.
BHP priced the equivalent of $5.4 billion of notes denominated in euros and British pounds on Sept. 19 in its biggest-ever bond sale, driving offerings abroad by Australian issuers to a record $18.8 billion last month, data compiled by Bloomberg show.
Origin Energy Ltd.’s A$900 million of floating-rate notes due in 2071 and callable in 2016 is the next largest line of Australian-dollar non-financial corporate debt, according to data compiled by Bloomberg.
Australian issuers including Sydney Airport and Transurban Group have priced larger bond sales comprising more than one line of notes, the data show.
“Whilst we are typically not participants in this credit sector, BHP’s unchanged long term strategy and its long standing commitment to a solid ’A’ band credit rating make ‘The Big Australian’ worthy of consideration,” said Greg Stock, who helps manage A$4.5 billion at Perpetual Ltd. “The tenor is preferred to some longer offshore deals and the relative value appears fair. It is no surprise that the deal has been well received by investors.”