Bloomberg News

BHP, Rio Bond Risk Soars to 2-Year High on Slowdown Concerns

October 04, 2011

(Updates with shares in eighth paragraph.)

Oct. 4 (Bloomberg) -- The cost of insuring the bonds of BHP Billiton Ltd., the world’s biggest miner, and Rio Tinto Group surged to a more than two-year high amid investor concern a slowdown in China will damp demand for commodities.

Credit-default swaps on BHP surged 50 basis points since the Sept. 30 market close to 190 basis points at 4:42 p.m. in Sydney, according to Australia & New Zealand Banking Group Ltd. That’s the highest since April 2009, according to data provider CMA. Contracts on Rio Tinto soared 100 basis points to 290 in the same period, the highest level since June 2009, according to ANZ Bank and CMA. It was a public holiday in parts of Australia yesterday.

Goldman Sachs Group Inc. cut its 2012 growth forecast for China today to 8.6 percent from 9.2 percent amid domestic lending curbs and as Europe’s sovereign debt crisis roils markets worldwide. Commodity prices have been dropping on slowdown concerns, with copper plunging 32 percent in London trading since a February high.

“There is a growing realization that we are entering a global slowdown and Asia is very vulnerable,” said Finbar Cooke, the Sydney-based head of credit derivatives at ANZ Bank. “If China property development grinds to a halt, that has big implications for resources demand, and therefore affects BHP and Rio.”

Kelly Quirke, a spokeswoman for BHP, wasn’t available for comment when contacted by phone in Melbourne. Karen Halbert, a Melbourne-based spokeswoman for Rio Tinto, declined to comment.

Credit Outlook

Property developers in China face an “increasingly severe” credit outlook, which may force them to cut prices, Standard & Poor’s said in a Sept. 27 report.

Fifty-nine percent of respondents in a Bloomberg poll last month said China’s gross domestic product, which rose 9.5 percent last quarter, will gain less than 5 percent annually by 2016. Policymakers in Europe and the U.S. are battling to keep their economies expanding as they enact fiscal austerity measures to rein in deficits.

BHP shares have dropped 25 percent this year to A$33.86 in Sydney, while Rio’s have fallen 31 percent to A$59.

Mining shares may drop further if the global outlook worsens, Glyn Lawcock, head of resources research at UBS Securities Australia, said by phone from Sydney.

“What the market is worried about is that we do get that cessation of activity,’’ he said. “If you talk to the companies, they say at this stage their order books remain full and they’re keeping on shipping. But if you press them, they have limited visibility."

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--Editors: Edward Johnson, Brendan Murray

To contact the reporters on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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