BHP seeks hybrid as corporate market reels from Glencore

By Laura Benitez

LONDON, Oct (HKSE: 3366-OL.HK - news) 2 (IFR) - Global resources company BHP Billiton (NYSE: BBL - news) will attempt to sell a debut hybrid bond next week, leaving no time for the dust to settle on a torrid week for the corporate bond market that is still reeling from Glencore (Xetra: A1JAGV - news) 's struggles.

The Anglo-Australian mining, metals and petroleum company is planning a US$4bn-$5bn multi-currency hybrid to shore up its balance sheet and to fund potential M&A deals.

The transaction, if it prices, will come against a backdrop of negative news from Volkswagen (Other OTC: VLKAF - news) and Glencore that have sent the bond market into a downward spiral and increased corporates' funding costs.

BHP's investor meetings began on Monday, just as the commodity sector was roiled after Investec (LSE: INVP.L - news) analysts' warned that "nearly all the equity value of both Glencore and Anglo American (LSE: AAL.L - news) could evaporate" if commodity prices stayed at current levels.

Glencore's 1.25bn April (LSE: 0N69.L - news) 2018 bonds dropped over 12 points to a cash price bid of under 78.00 on Tuesday morning.

The news did not help an already vulnerable hybrid market.

Yields in the sector have risen to 3.92%, from year-to-date lows of 2.67% in March, according to the Bank of America Merrill Lynch global corporate hybrid index.

This poor performance has driven a wedge between corporates' senior and subordinated debt. Bankers and investors say the difference between the two is now around 350bp, compared to around 200bp/250bp in the first half of the year.

"The differential is hard to wrap my head around - it's shot up to 350bp, but that is based solely on market nerves, and doesn't factor in any default probability or rating changes," one DCM (KSE: 024090.KS - news) official said.

"But if my portfolio had been hit, I'd want paying more for risk too. If you want to issue in this market right now, it's tough luck."

RANGE OF OPTIONS

However, bankers and investors say the upcoming deal from BHP should be looked at in isolation.

"There's no real concern around the company. It (Other OTC: ITGL - news) 's the best in its class and has the ability to navigate downward spirals," an investor who attended the London roadshow on Tuesday said.

"It's a decent credit with a good diversified portfolio of commodities, which makes it probably the only candidate in the mining sector which could generate demand for subordinated issuance."

But BHP's debt prices have been hit over the last week. Its 0.750% October 2022s have widened 18bp to 126bp over mid-swaps, while its 3.250% September 2027s widened 20bp to 113bp over mid-swaps, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

The company is targeting the US dollar, euro and sterling currencies across five tranches. However, it has given itself some leeway and said it would postpone any issuance if the costs were too high.

"It's a great name but the question is, can we convince investors to buy the deal at a sensible price?" a lead manager asked.

"If the price isn't right, then it will return to the market or [raise money] in stages when conditions improve. The company would like the hybrid but it's not in desperate need, and it won't accept any price."

The company is rated A1 (stable) by Moody's and A+ (negative) by S&P, while the upcoming hybrid is expected to be rated A3 by Moody's.

Barclays (LSE: BARC.L - news) will be global coordinator on the upcoming deal, while Barclays and Goldman Sachs (NYSE: GS-PB - news) will be structuring advisors and joint bookrunners, and BAML and BNP Paribas (Xetra: 887771 - news) joint bookrunners. (Reporting By Laura Benitez; editing by Helene Durand and Matthew Davies)