JPMorgan Chase & Co. (JPM:US) is leading a rebound in bank lending to mining and energy companies, which are taking out the most loans since 2011 to refinance debt as commodity prices slump and acquisitions slow.
Raw-material industries boosted borrowing by 17 percent last year to $684.7 billion, after a 22 percent drop in 2012, data compiled by Bloomberg show. The top lenders were U.S. banks JPMorgan at $57.1 billion, Wells Fargo & Co. (WFC:US) at $47.1 billion and Bank of America Corp. (BAC:US) at $37.8 billion. The figures reflect transactions involving more than one bank and include credit lines, project or term loans and trade finance.
While increased scrutiny from regulators is prompting JPMorgan and other banks to exit physical commodity businesses such as warehouses and power plants, lending rose as companies including Rio Tinto (RIO) Group and Royal Dutch Shell (RDSA) Plc refinanced to take advantage of low borrowing costs. Tumbling metal prices also eroded revenue at mines and smelters last year during the first commodity slump since the recession of 2008, while the value of mergers and acquisitions slid 31 percent, data show.
“It was generally not a good year for commodities in 2013, and that required companies to raise external financing,” said Larry Landry, vice chairman of investment banking for JPMorgan in New York. “There will be less opportunistic-driven refinancing in 2014, but hopefully that will be offset by a meaningful pickup in mergers and acquisitions.”
RBC Capital Markets ranked fourth in lending to the commodity and energy industries last year, and Citigroup Inc. (C:US) was fifth. Nine out of the world’s top 10 banks boosted lending to natural-resource companies, with a 31 percent increase by BNP Paribas SA. (BNP) JPMorgan led for a fourth straight year.
Rio Tinto, the world’s second-biggest mining company, said in November it obtained a $7.5 billion revolving credit facility to refinance a $6 billion facility expiring in 2015. Anglo American Plc, the largest platinum producer, got a $5 billion loan in March to replace debt due next year. Shell, Europe’s largest oil company, secured a $7.48 billion revolving credit facility last month, data compiled by Bloomberg show.
Credit lines are often used by companies to backstop short-term borrowing and are supplied at low cost by lenders seeking to win more lucrative business.
“Natural-resource loan volumes were significantly up in 2013,” said Mark Pegrum, head of loan capital markets for non-domestic corporates in Europe, Middle East and Africa loan syndications at BNP Paribas in London. “It was a combination of some of the large mining companies taking advantage of the favorable market conditions to refinance their existing facilities, on top of incremental increases in transactions from the commodity trader players.”
Banks cut borrowing costs for the most credit-worthy companies in Europe to the lowest since 2007, according to data compiled by Bloomberg. Even with rates little changed in the U.S., some companies refinanced earlier on concern costs will rise as bank regulation tightens, said Tim Keller, a managing director in the loan syndications group at Bank of America in Charlotte, North Carolina.
The average interest banks charge for loans to commodity companies has fallen to 283 basis points more than benchmarks, from 325 basis points in 2012, according to data compiled by Bloomberg. Rio Tinto pays an interest margin of 30 basis points to 35 basis points more than the benchmark lending rates on its $7.5 billion credit line. Shell pays 12.5 basis points above benchmarks on its $7.5 billion credit line. A basis point is 0.01 percentage point.
While interest margins on loan facilities in Europe shrank to the lowest in six years in 2013, lenders said costs may rise as new regulations force banks to hold more capital.
JPMorgan’s Chief Executive Officer Jamie Dimon said at an investor conference in New York in December that banks will have to charge more for lending to get a “fair return” as regulators require the industry to set aside more funds to cushion against losses.
U.S. regulators including the Federal Reserve also are stepping up scrutiny of banks that own physical commodity businesses to determine if they pose increased risks to markets or financial assets. JPMorgan said in July it may shed its commodity businesses. Bank of America said this month it will exit power and natural-gas markets in Europe. Morgan Stanley agreed in December to sell a unit that stores and transports oil products to OAO Rosneft, Russia’s largest oil producer.
The 10 biggest Wall Street banks probably generated $4.7 billion in revenue from commodities last year, according to data in November from Coalition, a London-based analytics company. JPMorgan ranked No. 2, after Goldman Sachs Group Inc. (GS:US)
Demand for loans also may slow as natural-resource companies cut back on investment. Rio de Janeiro-based Vale SA (VALE5), the biggest iron-ore producer, last month said it will cut investment this year to the lowest since 2010. London-based Rio Tinto, which last year cut more than $2 billion in costs and divested $3.3 billion of assets, plans to cut its spending in half by 2015.
While crude oil and natural gas were among the few commodities to rally last year, San Ramon, California-based Chevron Corp. (CVX:US) plans to cut spending on energy projects by 5.2 percent to $39.8 billion because of higher labor costs, increased drilling expenses and currency fluctuations.
As borrowing costs declined in 2013, so did most commodity prices. The Standard & Poor’s GSCI gauge of 24 raw materials slid 2.2 percent, the first drop in five years. The slump included double-digit declines for nickel and aluminum on signs that supplies were rising faster than demand. Gold and silver posted the biggest losses since 1981 as rallying equity markets and slow inflation eroded demand for the precious metals as a hedge.
While 16 raw materials in the GSCI fell in 2013, the slide for the index was limited because energy accounts for about 70 percent of the gauge’s weighting. Crude rose 7.2 percent and U.S. natural gas advanced 26 percent. This year, West Texas Intermediate fell 4.7 percent and natural gas rose 5.6 percent.
The Bloomberg World Mining Index of 140 companies plunged 26 percent last year, while the MSCI All-Country World Index of equities jumped 20 percent. The Bloomberg Treasury Bond Index lost 3.4 percent.
Citigroup said last year that the “super cycle” of commodities gains has ended because supply caught up with demand. As prices more than doubled in the past decade, major mining companies spent $348 billion to boost production from 2005 to a record in 2012, according to Glencore Xstrata Plc (GLEN), the largest publicly listed commodity supplier. Five of 10 industrial and precious metals will be oversupplied this year, Barclays Plc estimates.
Even as commodity companies cut back on expansion, they still need to raise money to complete existing projects, according to JPMorgan’s Landry.
Loans to commodity firms in the Americas jumped 24 percent to $413.9 billion while those in Europe, Middle East and Africa advanced 15 percent to $173.5 billion, according to data compiled by Bloomberg. There was a 2.3 percent drop in the Central Asia and Pacific Rim region to $93.9 billion.
“There was a supply-driven boom which led to higher commodity volumes,” said Ashu Khullar, the co-head of loan structuring and syndication for Europe, Middle East and Africa at Citigroup in London. “The banks were coming back to health last year after a very difficult 2012. The Europeans are back, the Japanese are there, the U.S. banks are active. For the top clients, there is plenty of competition.”
Commodities traders have been increasing the size of their credit lines in the past five years as they grow their business, BNP Paribas’ Pegrum said.
Glencore, which generated revenue of $214 billion in 2012 trading, producing and handling commodities including coal, oil and corn, had last year’s biggest loan. The Baar, Switzerland-based company got $17.3 billion of revolving credit backed by 80 banks in June.
Traders including Trafigura Beheer BV have snapped up assets including oil terminals, ports, mines and refineries to counter shrinking margins in the trading business. Vitol Group started trading grains this year, and Glencore set up a desk in September to trade liquefied natural gas.
Vitol, the world’s largest independent oil trader, raised $7 billion in October to replace $6 billion of loans due in 2015, according to data compiled by Bloomberg. Trafigura, the third-largest independent oil trader, raised $4.3 billion in February.
Commodities and energy companies announced 4,305 mergers and acquisitions valued at $425.4 billion last year, the lowest since 2009, as they reigned in spending and curbed expansion plans, data compiled by Bloomberg show. A year earlier, there were 4,572 deals valued at $612.6 billion.
Loans may increase as much as 15 percent this year if companies start buying and selling more assets, which have declined in value during the commodity slump, Citigroup estimates. Goldcorp Inc. (GG:US), the world’s second-largest gold miner, this month bid to buy Osisko Mining Corp. for C$2.6 billion ($2.38 billion).
Last year’s second-biggest loan was the $14.2 billion raised by Moscow-based Rosneft to finance the second part of its acquisition of oil producer TNK-BP. Freeport-McMoRan Copper & Gold Inc. (FCX:US), the largest publicly traded copper producer, raised $7 billion of loans in February to back its purchase of Plains Exploration & Production Co. and McMoRan Exploration Co.
“There are all the ingredients for the robust market that we had in 2013,” said Frank Pizzo, head of loan syndications at Wells Fargo in San Francisco. “It appears that the M&A activity is increasing. It appears that rates are going to stay historically low, and we still have a healthy corporate market.”
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