Rinehart Loan Lifts Volumes to Most Since 2008: Australia Credit

Billionaire Gina Rinehart is leading Australia’s busiest syndicated loan market since the global financial crisis with funding for a mine project, even as banks refocus on infrastructure projects for growth.

Company borrowing climbed 45 percent to more than $26.8 billion this year, led by $7.2 billion for the Roy Hill iron-ore mine being developed by Asia-Pacific’s richest woman, according to data compiled by Bloomberg. The last comparable period that was bigger was in 2008. Volumes have risen 5.8 percent even without the Rinehart facility, in line with the 5.5 percent increase in the region excluding Japan.

With resources industry investment being scaled back and bank rivalry curbing interest margins, lenders are chasing fees from other big-ticket projects such as upgrades to highways in Sydney and Melbourne. The Australian government plans to kick start A$125 billion ($116 billion) of infrastructure investment over six years, while companies including Sydney Airport and Newcastle Coal Infrastructure Group Pty have been among the biggest borrowers in 2014.

“The level of new mining investment is obviously lower than it was two to three years back, but you’ve also got a number of large resource projects financed back then that will be due for refinancing over the next few years,” said Robin Dutta, the head of Australian syndications at Australia & New Zealand Banking Group Ltd., the second-biggest arranger of loans last year. “The composition of the pipeline is tilting more to project finance,” he said in a May 19 interview.

Record Package

Rinehart’s debt package, a record for Australian mining, comprised loans and guarantees from five export credit agencies and 19 banks including ANZ, Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp., according to a March 20 statement from Roy Hill Holdings Pty. Equity injections have already helped the project surpass 30 percent of its development, the company said.

Roy Hill’s 10 1/2-year facility may be the last jumbo mining loan for some time. Companies have scaled back spending on new operations and takeovers to improve balance sheets and cut costs after a decade-long commodity price boom ended with key products falling into bear markets. Iron ore extended declines this week, with the spot price dropping below $100 a ton for the first time since 2012 amid concern Chinese demand is slowing. It was at $98.50 a ton yesterday, according to data from The Steel Index Ltd.

Spending Pullback

Rio Tinto Group, the world’s second-largest mining company, plans to curb spending on new operations to about $8 billion in 2015, less than half its outlay in 2012. BHP Billiton Ltd. expects to spend $16 billion during fiscal 2014 on new projects and exploration, down from $22 billion the previous year.

Australia’s state governments are selling assets including ports and electricity plants to release funds to spend on new infrastructure projects. The assets are attracting buyers because of their relative safety and steady cash flows.

“There’s certainly a few project-finance, asset-sale and infrastructure-type bid processes that have been going on,” Gavin Chappell, Westpac’s Sydney-based head of loans and syndications, said in a May 19 interview. “There’s more upside in that area this year than there was last year.”

State Sales

Transactions expected to boost lending volumes include last month’s sale of Queensland Motorways Pty for A$7.1 billion to a consortium led by Transurban Group, which gains control of 70 kilometers (43 miles) of tolled roads, bridges and other infrastructure. The sale is due to complete by the third quarter, according to an April 23 statement by state-backed fund manager QIC Ltd.

The New South Wales state government agreed to lease the Port of Newcastle for 98 years to investors including Hastings Funds Management Ltd. and China Merchants Group Ltd. for A$1.75 billion, according to an April 30 statement. Net proceeds will be invested in projects across the state.

Australian Treasurer Joe Hockey announced an A$11.6 billion infrastructure package in last week’s budget to help boost total federal, state and private-sector investment to A$125 billion by 2020. Finance Minister Mathias Cormann told Bloomberg TV the investment in “productivity enhancing infrastructure” would permanently add 1 percent to gross domestic product.

Steeper Risk

Newcastle Coal Infrastructure Group borrowed the second-largest loan in Australia so far this year, when it completed syndication of a $1.2 billion facility last week to help refinance existing debt, according to data compiled by Bloomberg. Sydney Airport, Australia Pacific Airports Melbourne Pty and Canberra Airport Pty have signed a total of more than $2.7 billion of loans this year, the data show.

Margins on investment-grade corporate loans have fallen by between 50 to 60 basis points over the past 18 months, meaning that the steeper risk premiums afforded by project financing loans are more attractive for some investors, according to ANZ’s Dutta.

There’s “probably a greater risk for price compression in structured deals, namely in leveraged and project finance,” he said. “They’re the areas where you’ve seen a greater influx of liquidity chasing those assets.”

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