Market Turmoil Seen Aiding AngloGold's $810 Million Bond Buyback

  • Above-par offer will be `welcome cash infusion' for funds
  • AngloGold seeking to cut debt after selling Colorado mine

AngloGold Ashanti Ltd. will be aided in its attempt to buy back a high-yield bond for cash as tumultuous market conditions are pushing investors to flee all but the safest of assets.

The world’s third-largest gold mining company on Aug. 24 offered to purchase $810 million of bonds with an 8.5 percent coupon at an above-par rate to reduce its debt and interest repayments. That was the day China stocks fell the most since 2007 as government support measures failed to allay concerns that a slowdown is deepening, roiling global markets and sending bond yields surging.

"The current market situation plays into the hands of AngloGold," said Cornel Bruhin, who helps manage $600 million at MainFirst Schweiz AG in Zurich. "It’s a complete risk-off in the markets at the moment. The offer will be a welcome cash infusion for some funds."

AngloGold is seeking to pay back its most expensive debt as gold trades near a five-year low and it prepares for a potential strike at South African operations that account for about a third of production. The offer, $1,075 for every $1,000 of bonds, caused yields to drop 95 basis points to 7.03 percent when it was announced on Aug. 24, compared with a 16 basis-point jump in the JPMorgan Chase & Co. Metals & Mining Index.

AngloGold Bond Yields Fall as Company Makes Buyback Offer
AngloGold Bond Yields Fall as Company Makes Buyback Offer
Bloomberg Data

Shanghai stocks sank the most in eight years on Aug. 24, while the S&P 500 plunged 7 percent and commodity prices slid to a 16-year low. High-yield bonds weren’t spared, with the Bloomberg High Yield Corporate Bond Index rising 3.3 percent that day.

‘No Brainer’

With the AngloGold bonds trading at about 103 cents on the dollar before the offer, a purchase price of 107.5 cents is a “no brainer” for investors in current markets, according to Jon Brager, who helps manage $4 billion at Palmer Square Capital Management in Kansas City. AngloGold has an option to call the bonds for 106.375 cents on the dollar in July.

“Most of the people holding that bond were expecting to get taken out early, and this is what they’ve been waiting for,” Brager said. “I would assume there would be a really high percentage of take up.”

AngloGold will fund the buyback with cash from the sale of its Cripple Creek & Victor mine in Colorado to Newmont Mining Corp. for $820 million announced in June. The offer covers about 65 percent of the $1.25 billion bond.

The debt was sold in July 2013, partly to fund final development stages of AngloGold’s Kibali mine in the Democratic Republic of Congo. Gold’s 26 percent tumble in the preceding six months forced AngloGold to pay an 8.5 percent coupon, making it the company’s most expensive debt.

Gold dropped 0.5 percent to $1,120.22 an ounce at 3:02 p.m. in London, extending this year’s decline to 5.4 percent. The metal touched a five-year low last month.

‘Decisive Step’

"This is another decisive step forward in our strategy of cutting debt and reducing our interest bill," Christine Ramon, AngloGold’s chief financial officer, said Aug. 24. Spokesman Stewart Bailey declined to make any additional comment.

If all investors accept AngloGold’s buyback offer, the company’s gross debt will be twice its earnings, compared with 2.7 times currently, according to Douglas Rowlings, a Dubai-based analyst at Moody’s Investors Service. A 65 percent take-up would reduce this measure to 2.2 times.

That would compare AngloGold favorably with Barrick Gold Corp. and Newmont, the world’s two biggest producers, whose gross debt to earnings are 3.8 times and 2.6 times respectively, according to Moody’s.

"We see this as a positive step in de-gearing the balance sheet," Rowlings said.

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