BHP Billiton Ltd. raised the most debt to finance a takeover since February 2008, underscoring a credit-market rally that has pushed corporate bond yields to record lows even as the economic recovery sputters.
BHP, the world’s biggest mining company, arranged $45 billion of loans for its hostile takeover bid of Potash Corp. of Saskatchewan Inc., the largest since it agreed to a $55 billion facility for its unsuccessful acquisition of Rio Tinto Group. Melbourne-based BHP plans to refinance the loans with bonds.
Financing costs are falling even after the U.S. economy grew at a less-than-forecast 2.4 per cent in the second quarter. The 10 lowest-yielding U.S. corporate bond deals ever were sold in the past 14 months, according to Deutsche Bank AG, with International Business Machines Corp. issuing $1.5 billion of three-year notes on Aug. 2 with a record-low 1 per cent coupon.
“This could test the market as far as size is concerned,” said Henri Alexaline, a credit analyst in London at BNP Paribas SA, France’s biggest lender. “For this kind of strongly rated company, there’s appetite.”
BHP’s $130-a-share offer for Potash is an “opening shot” that may increase to $160 to $165 a share, Macquarie Group Ltd. analyst Duncan McKeen wrote in a report.
The financing shows that BHP and its banks have confidence in debt markets, said Guy LeBas, chief fixed-income strategist at broker dealer Janney Montgomery Scott LLC.
Underwritten loan
Banco Santander SA, Barclays Capital, BNP Paribas, JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc have underwritten the loan and will offer it to other lenders, according to a statement. TD Securities Inc. will also help manage the loan’s syndication.
“The timing of the acquisition was certainly aided by the cheap cost of issuing debt,” LeBas said from Philadelphia. “Having a group of just six banks underwrite a full $45 billion does point toward confidence in BHP’s credit quality.”
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged at 177 basis points, or 1.77 per centage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.
The spread has widened from this year’s low of 142 basis points on April 21, and narrowed from 201 basis points on June 11. Average yields fell to 3.540 per cent from 3.556 per cent. Relative bond yields in emerging markets widened 3 basis points to 271, according to JPMorgan data. The spread had narrowed to 230 basis points in April, the lowest in more than two years.
Corporate bond risk
The cost to protect corporate bonds in the U.S. and Europe from default rose from a more than one-week low. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 2.6 basis points to a mid-price of 108.3 basis points as of 12:31 p.m. in New York, according to Markit Group Ltd.
In London, the Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings rose 3.6 basis points to 110, Markit prices show.
The indexes typically rise as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
