BHP Sells $6.5 Billion of Hybrids as It Seeks to Protect Rating

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  • Mining giant priced five-part deal in dollars, euros, pounds
  • Anglo-Australian miner balancing credit rating and dividends

BHP Billiton Ltd. sold the equivalent of about $6.5 billion of bonds in dollars, euros and pounds using debt instruments that help protect its credit rating.

The world’s largest miner sold $2.25 billion of dollar-denominated hybrid notes due in 2075 that can be bought back after 10 years and another $1 billion of similar maturity that can be repurchased after just five years. It also sold 2 billion euros ($2.3 billion) of hybrids in two separate tranches and 600 million pounds ($929 million) of U.K. debt. The euro and pound issues each have tenors of more than 60 years with the possibility of early redemption by the issuer.

BHP is seeking to protect its A+ credit grade after Standard & Poor’s and Fitch Ratings Ltd. placed it on negative watch, citing headwinds from declining commodity prices amid an economic slowdown in China, the world’s biggest consumer of raw materials. Hybrid bonds protect credit metrics because they are treated as half debt and half equity by rating agencies.

“The bonds’ structure means BHP can take on more debt without risk of being downgraded,” said Jens Vanbrabant, the London-based head of investment-grade bonds at ECM Asset Management. “At the moment, BHP is a safe haven among its peers.”

Repay Debt

The proceeds of the raising will be used for general corporate purposes, which may include repaying debt, BHP said in statements announcing the sales. It’s the largest hybrid issue after Electricite de France SA’s 6 billion euro deal in 2013, equivalent to more than $8 billion at that time, data compiled by Bloomberg show.

The dollar bonds callable in 10 years yield 6.75 percent, while those redeemable in five offer 6.25 percent. They’re the company’s first dollar issues in more than two years. 

The sale in Europe’s common currency comprised 1.25 billion euros of bonds callable in 5 1/2 years that yielded 4.75 percent as well as 750 million euros of securities that can be redeemed in nine years at 5.625 percent. The sterling bonds, BHP’s first in three years, can be bought back after seven years and yield 6.5 percent. 

“They’re taking on high-cost debt for that freedom to keep that dividend,” said Henry Peabody, who helps manage $1.2 billion for the Eaton Vance Bond Fund in Boston. “It’s an expensive way to finance what is hopefully a shorter-term dip in their focus, commodities. I think the credit markets would reward them for trimming the dividend instead.”

Commodities Rout

Iron ore, BHP’s biggest-earning product, has tumbled more than 30 percent in the last year, while the benchmark for oil has halved. Copper and coal are also weaker.

The miner reported a 52 percent plunge in underlying full-year earnings in August, highlighting Chief Executive Officer Andrew Mackenzie’s challenge as the company attempts to trim spending, along with debt, while it also boosts dividend payouts for shareholders.

Credit-default swaps on resource firms including Glencore Plc and Anglo American Plc are among the worst-performing of 125 investment-grade companies in the Markit iTraxx Europe Index in the past month. Contracts on Rio Tinto Group are the worst performers in the Australian iTraxx index in the period, while the cost of insuring BHP has risen 41 basis points this year to 118 basis points.

“Coming to market now is brave,” said Jonathan Pitkanen, London-based head of investment-grade credit research at Columbia Threadneedle Investments, which manages about $200 billion in fixed income globally. “The mining sector has been the weakest asset class for a couple of months and corporate hybrids in general haven’t performed well either, so it’s arguably a dangerous cocktail when you combine the two.”