The perceived risk of owning BHP Billiton Ltd. bonds rose on concern the world's largest mining company may try to take over aluminum producers Alcoa Inc. or Alcan Inc.
Credit-default swaps based on $10 million of BHP's bonds rose to $14,000 from $11,500 overnight, according to JPMorgan Chase & Co., on concern BHP may need to borrow to finance any bids. An increase suggests deteriorating credit quality.
BHP won't comment on rumor or speculation, spokeswoman Samantha Evans said today. Buying Alcoa or Alcan, the world's second and third-largest aluminum producers, would add to the 9 percent of earnings BHP gets from aluminum, helping it to diversify from copper, iron ore and natural gas.
"If BHP makes a cash offer it would result in some weakening in its credit quality," Michael Bush, head of fixed interest credit research at National Australia Bank Ltd., said today in Melbourne. "Spreads widened because the rumors have grown a few more legs."
Shares of BHP rose 24 cents, or 0.7 percent, to A$34.92 on the Australian Stock Exchange at the 4:10 p.m. close in Sydney.
A five-year rally in metal prices has fueled $98 billion of takeover bids in the industry this year. Shares of New-York based Alcoa yesterday rose to a six-year high after the Times of London said Melbourne-based BHP is reviving plans for a $40 billion takeover. Merrill Lynch & Co. has been hired to advise BHP on a possible bid for Montreal-based Alcan, Reuters said yesterday.
Fight Off
Alcoa has bid $27.7 billion for Alcan to create the world's largest aluminum producer, an offer that was rejected. Alcan is studying options, which may include working with BHP, to fight off the bid, an Alcan executive said last week.
BHP posted a record first-half profit and net operating cash flow rose to $7 billion from $4.3 billion. Alcoa is worth $36.4 billion and Alcan has a market value of C$32.9 billion ($30.7 billion).
"With the amount of cash flow BHP has, funding any bids isn't going to be a problem," said Paul Xiradis, who manages about $8.3 billion at Ausbil Dexia Ltd., in Sydney. "But I'm not convinced they would bid. There are other opportunities that would offer them better assets."
BHP would likely have to sell Alcoa or Alcan's manufacturing assets after paying a premium for them, which would act as a deterrent to a takeover, Rob Clifford, an analyst at ABN Amro Holding NV in Melbourne, said yesterday. The price of aluminum has also lagged behind other metals, he said.
Copper, Nickel
Aluminum futures have risen 52 percent in the past two years in London, behind a more-than-doubling of copper and nickel prices.
BHP today said it bought back 500,000 shares in London yesterday as part of its share buyback. BHP normally hands over its buyback to a broker to handle independently in the weeks leading to its earnings as any company that buys back shares while in the possession of price-sensitive information may be in breach Australian exchange rules.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.
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