Freshly junked Anglo American launches jumbo bond buyback

By Robert Smith

LONDON, Feb 18 (IFR) - Anglo American (LSE: AAL.L - news) is looking to buy back up to US$1.3bn-equivalent of its outstanding bonds, as the mining giant looks to tackle short-term maturities and signal its strength despite losing its investment-grade rating.

Anglo is targeting a total basket of US$5.4bn-equivalent of euro, sterling and US dollar bonds, with maturities ranging from December 2016 to September 2018.

The tender was announced hours after S&P downgraded the mining firm two notches to BB, becoming the third rating agency to strip Anglo of an investment-grade rating this week.

The global miner also announced further details of its restructuring plan on Tuesday, laying out a series of potential asset sales to reduce debt.

One high-yield bond investor said that while he thought a bond tender was a possibility, he did not expect a buyback to emerge so soon.

A banker close to the deal said that the tender had been planned "for a while", however.

"We thought it was worth waiting the company's announcement this week and then the ratings actions before launching," he said.

The company is funding the purchases from its available cash, which stood at US$6.9bn at the end of 2015. But the banker said that Anglo has also signed a two-year revolving credit facility that will be equivalent to the amount of 2017 and 2018 bonds purchased, to make the exercise liquidity neutral.

CEO Mark Cutifani said on Tuesday that the company aims to reduce net debt to less than US$10bn by year end, from US$12.9bn at the end of 2015.

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While buying back bonds with cash will not improve the mining firm's net debt, it has other benefits.

The banker said that the lower interest expense will bolster free cashflow while buying back bonds below par offers one-off gains, although he added that Anglo will have to incur some costs by cancelling interest rate swaps.

"I think they're really making a bit of a point around reducing short-term debt and short-term refinancing needs," he said.

Anglo American's bond prices have plummeted in recent weeks, particularly at the long-end, with its 750m 3.25% 2023 note plunging as low as 60.50 after Moody's downgrade earlier this week.

But bond prices had recovered even before the buyback was announced on Thursday, with the same note bid at 69.50 before the tender was announced.

It rallied more than a point to a 70.80 cash price after the tender's announcement, before trading back down to 69.40 according to Tradeweb.

A second investor said there were a lot of factors contributing to the price movements.

"Some of it is macro with improving markets and commodity prices. But it's also to do with short-covering and repositioning after the downgrades, as high-yield guys are more constructive on the name," he said.

"The Glencore refinancing also shows that banks have confidence in commodities, particularly as it was oversubscribed with no maintenance covenants."

Mining and trade house Glencore (Xetra: A1JAGV - news) announced that it had raised US$8.4 billion in commitments as part of an early refinancing of its short-term debt on Wednesday.

While Glencore has not announced a large scale formal bond tender since the commodities downturn, the banker noted that it has bought back small amounts of bonds on the open market.

The first bond investor said that Anglo's buyback had caught some people in the market offside and left some "lazy shorts" shaken up.

"The sell side has been happy to trash this name but the turnaround plan is perfectly achievable and liquidity is sound," he said. (Reporting by Robert Smith; editing Helene Durand, Alex Chambers)