- There is a recent trend towards Australian resource companies seeking project finance from international high yield debt markets.
- The low interest rates on bonds issued by the US Treasury and renewed confidence by investors is making the US a particularly attractive market for Australian mining companies looking to raise debt.
The stock of bonds on issue from corporate issuers in Australia has continuously expanded from the mid-1990s in line with the funding requirements of the corporate sector. In particular, the last six months has seen a significant increase in the entry of Australian resource companies into the international high yield debt markets for project funding.
The recent debut of Western Australian miner Atlantic Ltd (Atlantic) into the US bond market is indicative of the trend towards resource companies increasing corporate debt through the issuance of bonds. In February, Atlantic raised US$335 million in 7-year bonds to fund its Windimurra Vanadium project, which was acquired earlier in September 2010. Approximately US$75 million is required to complete the project, which is expected to be achieved by September 2011.
The Atlantic bonds were priced at 11.5%, for maturity in 2018, and were marketed specifically to the European, American and Asian markets. Significantly, 85% of the take up was from the North American market. The uninspiring interest rates offered by the US Treasury along with renewed confidence in the high yield market, has lead to a move by US investors into corporate bonds in search of higher returns. In 2009, the issue of high yield bonds in the US market soared to record levels (US$146 billion), which was exceeded the following year (US$259 billion). Based on comparative statistics from 2010, this record looks set to be surpassed again during 2011.
Increased demand in the US market has been further enlivened by US$114 billion worth of loan refinancing, as participants substitute activity in lending for the debt markets. The US high yield bond market is particularly attractive to the Australian resource industry as it provides a natural hedge for commodities (priced in US dollars) and US dollar capex and opex cashflow requirements.
Historically, the reduction of interest rates by the US Government, in response to stagnation in the US economy, has substantially lessened miners’ financing costs as investors turn to the corporate sector. Provided that investors perceive that a resource company can effectively service its payment obligations under any bonds it issues, there is a growing pool of investors within the US high yield bond market willing to provide funding. This is clearly evidenced by the overwhelming reaction by investors to recent bond issues by the large Australian miners Rio Tinto and Woodside Petroleum.
The buoyancy of the US debt market coincides with renewed enthusiasm of investors and the desire for exposure to the Australian resource sector. High commodity prices and domestic interest rates have further fuelled interest in the industry. However, investors are still wary of the risks that are associated with funding resource ventures, such as project delivery, capital expenditure and cost overruns. Value, risk and quality management of a project are still fundamental attributes that potential bond investors are unwilling to compromise on.
Miners are further attracted to the issue of bonds for funding purposes by the flexibility that may be incorporated in their issue and their short execution period. Atlantic’s Windimurra Vanadium project completed financing within six months, which included due diligence, assignment of credit ratings and marketing.
The debut by Atlantic follows the highly successful raising by Fortescue Metals Group Ltd (FMG) in 2006, and subsequent return to the debt markets in December 2011 to expand its Pilbara iron ore operations. The two offerings raised $2 billion and $1.51 billion respectively. Amendments to FMG’s recent bond issue are reflective of activity in the debt market. FMG initially issued $800 million worth of bonds, before substantially increasing the offer in response to overwhelming demand.
This latest raising has noticeably caught the attention of Australian resource executives, and alerted miners to the opportunities that currently exist in the international debt markets. Akin to Atlantic’s debt issue, the majority of the take up of FMG’s offering came from the US market. The success of FMG’s offering originates from their established reputation and the significant representation by US shareholders in its corporate constituency. In previous years, insufficiency in the issue of resource bonds has created difficulties for investors seeking to access the flourishing commodities and Chinese markets.
For the month of May, total issuances were over US$68 billion including Rio Tinto’s issue of medium and long term bonds to the value of US$2 billion.
The return by Australian miners to the international debt markets has been a gradual process, stemming from BHP Billiton’s $45 billion financing to fund its hostile takeover of Canadian fertiliser giant Potash Corporation in 2009. The attempted acquisition by BHP signalled emerging confidence in the international debt markets following the financial crisis. Since 2009, the sourcing of finance within international debt markets has become increasingly attractive to mid-tier, junior, emerging and unrated resource firms.
In March this year, mining equipment company Boart Longyear raised US$300 million in 10 year bonds which was followed earlier this month by Woodside Petroleum’s US$700 million issue of 10-year notes through Woodside Finance Ltd, its wholly owned financing arm. Mid-tier miner Aston Resources is currently contemplating a bond issue in the US to fund its $380 million capital expenditure at its Maules Creek site.
The renewed allure of the high yield bond market extends beyond the resource industry, and is generally strong across the corporate sector. The 2009–10 financial year saw debt capital markets in Australia raise $57.33 billion, with corporates contributing $1.29 billion to this figure. This figure has increased from $917 million in 2008–09.
Bankers and the government are also indicating confidence in the debt capital markets to satisfy their funding requirements. Assistant Governor of the Reserve Bank of Australia, Guy Debelle has predicted continued strong bond issuance by Australian corporations over the next few years, particularly by resource companies.