BHP Billiton bid for Rio - one step forward but problems remain

BHP Billiton's bid for rival miner, Rio Tinto, has passed a major hurdle - with approval by Australia's competition authority.

But the world's biggest mining company still has problems ahead in sealing the deal.

Not only does it require permission from the European Commission. The current inter-bank "meltdown" will doubtless also increase the price it has to pay for loans already secured from a raft of gobal banks - potentially the biggest tranche of bank finance ever issued in Europe.

BHP Billiton's $55bn loan on hold after green light

Reuters

1st October 2008

LONDON - Bankers working on a jumbo $55-billion loan backing miner BHP Billiton's hostile bid for peer Rio Tinto welcomed regulatory clearance of the acquisition on Wednesday, but will have to hold the huge financing on balance sheet over a difficult year-end.

Australia's competition watchdog gave regulatory approval for BHP Billiton's proposed $114-billion bid for Rio Tinto on Wednesday, which bankers view as a positive development in the long M&A process.

Further syndication of the $55-billion loan will remain on hold before the European Commission's first in-depth review of the transaction on January 15, banking sources told Reuters LPC, but pricing on the loan is likely to be increased if it is drawn due to deteriorating loan market conditions, sources said.

"We are still awaiting EU clearance, today's green light is one of the many steps BHP Billiton needs to get the deal approved, so there is no immediate effect on the syndication," a banker close to the deal said.

"Loan pricing is moving materially, risk is being fundamentally repriced," a head of loan syndicate said.

News of BHP Billiton's regulatory approval comes on the same day that rival miner Xstrata dropped plans for a $10-billion takeover bid for Lonmin.

"The current lack of clarity and certainty regarding the future availability of credit introduces significant risks into the financing package available to Xstrata," Xstrata's CE, Mick Davies. said in a statement.

Hostile loan and bond market conditions, the soaring cost of bank funding in the interbank market and the increasing scarcity of capital however continue to challenge BHP Billiton's $55-billion loan, which is the biggest ever loan to be underwritten in Europe.

Nine sub-underwriters were signed in to the deal in April by mandated lead arrangers and bookrunners Barclays Capital, BNP Paribas, Citibank, Goldman Sachs, HSBC, Santander and UBS.

Sub-underwriters were asked to commit $2,5-billion each for a fee of 60 basis points, with a view to holding around $1,75-billion each after wider syndication. Bankers close to the deal say that more sub-underwriters have joined the deal since April.

The banks will have to hold BHP's loan on their balance sheets over a difficult end of the year as banks try to reduce their balance sheet commitments to avoid increasing capital ratios as a percentage of risk-weighted assets.

The loan will still be available to BHP, but will remain undrawn over year-end which will attract a more beneficial capital weighting given the company's investment-grade rating and will not incur funding costs, a banker close to the deal said.

"Financing is committed even though it's undrawn, but it's a lesser commitment for banks than drawn debt. With EU clearance looming, there's still some contingency about the deal proceeding, but the capital weighting will be favourable," a third banker close to the deal said.

PRICE HIKE

BHP Billiton is likely to have to revisit pricing on the facility which was set at 50-60 basis points (bps) last November in light of deteriorating loan market conditions before the loan is drawn.

Loan pricing is soaring, boosted by the high cost of dollar funding and the availability of the currency in the fragile interbank market, which will substantially increase BHP Billiton's cost of funding.