China Rout Infects Aussie Resource Giants as Bond Risk Surges

  • Benchmark CDS index having poorest start since at least 2008
  • Woodside, Crown and BHP worst hit in default swap gauge

Australia’s credit market is having its shakiest start to a year since at least 2008 as the prospects for resource and gaming companies are clouded by China’s market turmoil.

The cost of insuring debt from Woodside Petroleum Ltd. jumped 39 basis points to 226, while casino owner Crown Resorts Ltd. saw its credit-default swaps rise 32 to 285 and BHP Billiton Ltd. contracts increased 25 to 205. They’re the worst performers in the Markit iTraxx Australia index, which climbed 9 basis points so far this month, the biggest early January increase in CMA data that stretches back eight years.

“The concerns have really been around things like China,” said Gavin Goodhand, who helps oversee the equivalent of about $450 million as a money manager at Altius Asset Management in Sydney. “Those moves at the beginning of the year can actually be easily connected to what’s been going on globally with equity markets and concerns about economic growth.”

Global financial markets have been sent reeling by the worsening outlook for the world’s second-largest economy and the inability of policy makers to stem losses in the yuan and Chinese equities. Australia sells more of its commodities to China than to anywhere else and some of its largest firms such as BHP and Rio Tinto Group have been particularly hard-hit by the plunge in iron ore and energy prices.

Resources Pain

While diversified miners are suffering from softer metals prices, Woodside is feeling the impact of crude oil dropping more than 30 percent over the past year. Crown, the second-worst performer in the iTraxx, is being hampered by both the plunge in Macau gaming revenues and speculation that majority shareholder James Packer is looking to take some or all of its assets into private ownership.

The following charts illustrate the moves in the index and the link to commodities.

CHART 1: Crown, Woodside, BHP and Rio Tinto have each seen their debt insurance costs blow out by more than 20 basis points this year, based on CMA prices.

CHART 2: The CDS for all four of 2016’s iTraxx laggards are near multi-year highs, with some around levels unseen since the global turmoil of 2009.

CHART 3: The iTraxx Australia index widened by 34 basis points to 136 in the 12 months through Monday, while the Bloomberg Commodity Index plummeted 26 percent.

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