BHP Billiton Ltd’s loan to buy Potash Corp of Saskatchewan Inc has pushed lending to commodity firms to $128 billion this year, the most since 2007, as rising prices for raw materials draw European bank demand.
Miners are taking advantage of borrowing costs — that have halved since last year — to finance acquisitions that will help them add reserves more cheaply than exploration. The world’s largest miner bid for Potash Corp on August 18 using $45 billion of loans, while two days earlier Vedanta raised as much as $6.5 billion for a stake in Cairn India Ltd. In 2007, banks committed a record $220 billion to natural resources deals in Europe, according to data compiled by Bloomberg.
Banks are eager to lend to companies that have hoarded cash during the economic downturn and are now buying into industries poised for growth. Lenders have cut five-year loan margins to companies with single-A ratings to about 85 basis points over benchmark rates, from about 125 basis points a year ago, BNP Paribas SA data show.
“Banks have been going gangbusters in their lending to rock-solid companies like BHP which will have no problem servicing its obligations,” said Suki Mann, head of credit strategy at Societe Generale SA in London. “The commodities sector is the place to be right now. The industry offers leverage to growth in China and prices of their products are still recording pretty good increases.”
Xstrata
The energy segment of stocks in the Morgan Stanley World Index has increased 31 per cent from its 2009 low while the S&P GSCI Spot Index of 24 raw materials is 54 per cent higher.
Banks agreed to shave 40 per cent off the rate they charge Xstrata Plc. The Zug, Switzerland-based company is renewing $1.5 billion of three-year year loans at a margin of 90 basis points and $1.5 billion of five-year loans at a margin of 100 basis points, according to Bloomberg data. The coal exporter will pay 150 basis points over benchmark rates on its debt due next year, Bloomberg data show. One basis point is 0.01 percentage point. “These companies typically have wide geographic footprints which attract international banks,” said Richard Hill, head of EMEA loan syndication at WestLB AG in London.
BHP will pay interest margins between 70 and 140 basis points on a $25 billion one-year term loan that can be extended by another year at an extra fee, according to a regulatory filing on Aug. 20. Margins will rise or fall based on BHP’s credit rating. The lowest rate applies to BHP’s current rating of A+ or higher, and the highest if the company is downgraded to BBB+ or lower.