Benjamin Purvis and David Stringer Sydney
BHP BILLITON’s strategy of focusing on its most profitable operations got no love in the bond market as the less diversified company is seen as more vulnerable to a global resources rout.
Dollar-denominated bonds from the world’s biggest miner lost 0.4 percent this year, the worst result in a Bank of America Merrill Lynch gauge of investment-grade mining notes, which has gained 1.6 percent in 2015. BHP’s debt beat the index in 2014 by delivering a return of 7.1 percent.
BHP, which had its credit rating outlook revised to negative by Standard & Poor’s this month, has been hurt as supply gluts and waning Chinese demand growth have weighed on the prices of crude oil and iron ore, the chief ingredient in steelmaking. The drop in two key resources is hitting the Melbourne-based company harder after it moved to focus more intently on a few commodities by spinning off a swathe of assets this month as South32.
Less diversified
“It has become a marginally less diversified and a smaller company,” Anthony Ip, a Sydney-based credit sector specialist at Citigroup said. “Some would argue that BHP’s credit has been slightly diluted as a result of the demerger.”
BHP bonds slumped 1.5 percent this month, the second-worst performer in the Bank of America gauge, compared with a 0.7 percent loss for the whole index.
The average spread over government debt on BHP bonds widened to 99 basis points as of Monday from 96 at the end of December. The gap for debt issued by Rio Tinto has shrunk to 116 from 125, according to the indexes.
Bonds from Rio have delivered a total return of 1.1 percent since December 31 and paper from junk-rated peer Fortescue Metals gained 4.4 percent, Bank of America data show.
The price of iron ore tumbled 14 percent in the year and slumped to a decade-low of $47.08 (R561.30) a ton on April 2 at the Chinese port of Qingdao, while oil has slipped 43 percent in the past year to less than $60 a barrel in New York.
BHP chief executive Andrew Mackenzie is aiming to halve the size of BHP’s core portfolio to focus on areas including petroleum, iron ore, coal and copper. It hived off 12 assets into South32 and has a further nine it’s also looking to offload. BHP declined to comment on the performance of its debt.
The outlook on BHP’s A+ credit rating was reduced to negative by S&P on May 4 after the credit assessor cut its iron ore price estimates. Moody’s Investors Service rates the miner A1.
The plunge in crude oil prices and BHP’s shareholder dividend policy added to S&P’s wariness about the miner. As part of its review of ratings on the world’s biggest iron-ore suppliers, S&P opted not to alter the stable outlook it has on Rio, which it rates two steps lower at A-.
Exposed
“Continued weakness in commodity prices, combined with BHP Billiton’s commitment to a progressive dividend payment, may weaken the company’s key financial metrics to below our expectations for the A+ rating without offsetting measures by the company,” S&P said. “BHP Billiton is particularly exposed to iron ore prices and, to some extent, oil prices.”
BHP has sold e2 billion (R26bn) of bonds in Europe and A$1 billion (R9.33bn) of notes in its domestic market so far in 2015.
The 2020 maturity Aussie notes were at 92 basis points over the swop rate, based on Commonwealth Bank of Australia prices, compared with a spread of 87 when they were sold in March.
“What went for the rating may also, to some extent, go for the pricing in that BHP was priced for perfection, and we’re not in a perfect world,” said Michael Bush, head of credit research at National Australia Bank. –
Bloomberg