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BHP Bond Sale Makes Light of Mining Peak Gloom: Australia Credit

Brookfield Place Tower, which houses the offices of BHP Billiton Ltd., center right, stands amongst other high rise commercial buildings in the central business district of Perth. Photographer:Carla Gottgens/Bloomberg
Brookfield Place Tower, which houses the offices of BHP Billiton Ltd., center right, stands amongst other high rise commercial buildings in the central business district of Perth. Photographer:Carla Gottgens/Bloomberg

Sept. 27 (Bloomberg) -- BHP Billiton Ltd. was able to extend the maturity of its debt in a $5 billion sale, showing investor demand for mining bonds even as much of Australia frets that the best of a record resources boom is over.

Half of the securities sold this week by Melbourne-based BHP had a tenor of 30 years, compared with just 19 percent at its previous U.S. sale in February 2012. The 2043 notes were sold to yield 5.001 percent, compared with an average of 6.353 percent on bonds maturing in 20 to 30 years among debt in Bank of America Merrill Lynch’s U.S. Metals, Mining & Steel Index.

AngloGold Ashanti Ltd. and Barrick Gold Corp. also sold bonds this quarter as signs the global economy is rebounding improve the outlook for commodities. The Australian dollar climbed more than 5 percent since reaching a three year-low in August, as manufacturing picked up in China, the nation’s biggest export market.

“There’s obviously a fair bit of demand there for BHP’s paper and the pricing they achieved is pretty good,” said Scott Rundell, chief credit strategist at Commonwealth Bank of Australia in Sydney. “The U.S. economy is showing an improving trend, Europe is starting to get better and that has to bode well for China, which is showing signs of perking up, and that in turn is good for miners.”

Bond Sale

The producer of coal, iron ore and petroleum sold four separate bonds in its Sept. 25 offering, with maturities ranging from 2016 through to 2043. The $2.5 billion in 30-year notes were priced to yield 130 basis points more than Treasuries, while $1.5 billion of 3.85 percent 10-year notes were sold at a spread of 125 basis points.

The spread over government debt on the company’s previous longest note, a 2042 issue, jumped by 10 basis points to 111 the day the new bond was sold, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The spread widened to 116 yesterday. That security was initially sold last year at a 102-basis-point gap.

Yields dropped worldwide after the decision last week by the U.S. central bank to refrain from tapering stimulus. Interest rates are predicted to rise over the longer term.

Government Yields

Benchmark Australian 10-year yields fell seven basis points this week to 3.87 percent, paring their increase this year to 60 basis points. The Australian dollar bought 93.48 U.S. cents at 3:03 p.m. in Sydney, after reaching 88.48 cents on Aug. 5, the weakest since August 2010.

The Australian government raised A$2.1 billion yesterday, more than four times the minimum sought, in extending the maturity of its debt at a sale of 2035 indexed bonds. The notes priced at 25 basis points more than the government’s 2030 inflation-linked notes, which had been the country’s longest-dated sovereign securities. The spread was at the bottom of the range sought by the government funding arm.

The 30-year U.S. yield will rise to 4.30 percent at the end of 2014, from 3.71 percent, while the benchmark 10-year rate will climb to 3.35 percent from 2.67 percent, according to a Bloomberg News survey of forecasters.

“There’s going to be upward pressure on rate structures through time as the economy normalizes,” said Paul McTaggart, a Sydney-based resources analyst at Credit Suisse Group AG. “Rates are still low by historic standards for borrowing, so it’s quite possible that you probably want to load up as much long term debt at pretty reasonable rates as you could, as you still can do it cheaply.”

The average yield in the Merrill Lynch Mining & Metals index fell to 4.32 percent on Sept. 25, a level unseen since June 19. The average spread over Treasuries this week slipped to 232 basis points, the least since June 5.

Improving Outlook

Miners have been bolstered by an improving global economic outlook. Economic indicators suggest that China is slowing less than previously forecast, and that is helping to buoy commodity prices. The benchmark iron ore price has risen 15 percent this quarter to $133.80 per metric ton, data from The Steel Index Ltd. show.

“The ongoing strength in the iron-ore price is helping,” said Michael Bush, head of credit research at National Australia Bank Ltd. “Iron ore has held up a lot better than most people had envisaged it would do.”

BHP is committed to maintaining a “solid A credit rating,” it said in an e-mailed response to questions yesterday. The miner carries the fifth-highest credit rating of A1 at Moody’s Investors Service, and the equivalent A+ at both Standard & Poor’s and Fitch Ratings.

The cost of protecting BHP’s debt against non-payment dropped to 69 basis points on Sept. 25, the lowest since May 29, according to data from CMA.

Outstanding Debt

Following the latest offering, the company has $35.3 billion in bonds outstanding globally, of which $5.12 billion is due by the end of 2014, according to data compiled by Bloomberg. This week’s transaction is in line with BHP’s funding strategy and won’t increase net debt, the company said.

BHP’s U.S. dollar transaction on Sept. 25 follows a 750 million euro ($1 billion) note sale in April and a C$750 million ($727 million) deal in May, Bloomberg-compiled data show. BHP last sold into the U.S. market in February 2012, when it priced $5.25 billion of debt in a five-part sale.

“From an underlying credit perspective, we remain very positive” about the company, said Bush at NAB. “At current levels, we continue to see longer-term value. There’s probably others in the sector that offer a bit more, but they certainly don’t offer the sort of stability that you would have in some of those higher-grade names.”

To contact the reporter on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

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