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Mining: Debt finance in a challenging market, Omer Molad, Director, Resources, NAB; Mark Bower, Director, Debt Markets Origination, NAB

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Mining: Debt finance in a challenging market, Omer Molad, Director, Resources, NAB; Mark Bower, Director, Debt Markets Origination, NAB. A presentation from Mines and Money Australia 2013, Oct 29 – …

Mining: Debt finance in a challenging market, Omer Molad, Director, Resources, NAB; Mark Bower, Director, Debt Markets Origination, NAB. A presentation from Mines and Money Australia 2013, Oct 29 – Nov 1, 2013, Melbourne Convention and Exhibition Centre

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  • 1. Debt Finance in a Challenging Environment Omer Molad, Director Natural Resources October 2013 Mark Bower, Director Debt Markets
  • 2. Current State of the Mining Sector Since 2012 the mining sector has seen lower commodity prices, weaker share prices and negative sentiment 2012 & 2013 YTD commodity prices and AUD/USD $168 $177 $1,421 $9,600 $2,470 Mining sector cont. to underperform the market in 2013 1.0233 2012 40% 5% 8% YTD Index Return YTD Indexed Return 10% 10% 0% -7% -5% -10% -19% -17% -15% -20% -14% -21% -18% 30% 20% 34% 0.9542 10% 22% 19% -10% $157 -10% -3% $133 -7% -5% $7,186 -25% $1,883 Gold Copper Aluminium 2012 2013 -14% -24% Today -20% -30% Met Coal 23% 0% $1,352 Iron Ore 30% AUD/USD -30% Source: Bloomberg Source: Bloomberg • Commodities have displayed significant volatility since 2012 and in 2013 trended downward • For Australian miners, the falling AUD gave some (minor) relief, but not enough to offset lower prices • Lower share prices and a more negative sentiment has made equity a less attractive form of capital Page 2
  • 3. Long Term Outlook for Commodities Long term prospects are still considered sound by most creditors and supported by supply and demand fundamentals Demand for major commodities has trended upwards 2009-2010 2010-2011 Resources project investments in Australia 2011-2012 Committed 70 Feasibility Stage Publicly Announced 70 A$bn A$bn 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Aluminium Copper Gold Coal Iron Ore 2013 2014 2015 2016 2017 Source: ABS, DFAT 2018+ Source: BREE • Commodity demand is strong across the board, including from China, Japan, Taiwan, India and South Korea • In particular strong demand from China is expected to endure, along with stable forecast GDP growth of around 7.5% p.a. • Project pipelines suggest a supply shortfall for some commodities (e.g. metallurgical coal), providing incentives for new developments and expansions Page 3
  • 4. So how has all this affected access to debt markets for mining companies? Page 4
  • 5. It hasn’t! Page 5
  • 6. Why? Page 6
  • 7. Because debt markets are largely driven by macro-economic forces. Let’s see why… Page 7
  • 8. Debt Markets Remain Open and Strong Notwithstanding sector conditions and specific project characteristics, debt markets are largely driven by macro-economic forces • Banks generally focus on the long term outlook for commodities and macro factors to set risk appetite levels • Project characteristics are important but banks and bond markets will be more aggressive if “conditions are right” Banks focused on growth • Projects need to be fully funded despite debt market conditions so accessing equity or having retained earnings is still very important • Stable global market conditions are providing a strong platform for issuers into loan and bond capital markets • Low or negative credit growth sees debt investors (especially banks) voice concerns about credit supply to meet budgets Investors chasing yield ECAs & multilaterals continue to encourage exports and project developments • Globally, banks have recapitalised and re-entered the Australian market to finance resources companies • Bond investors have been financing resources projects post completion providing very attractive long term finance options • Contractions in pricing across all markets is pushing investors further down the risk curve and into longer tenors to increase yield Page 8
  • 9. Bank Market Conditions Support Lending Despite subdued commodity and equity prices, debt is available at a cheaper price as banks look to grow and funding costs fall Healthy liquidity due to unfulfilled lender appetite Pricing benefiting from lending environment • Low credit growth and funding diversification to capital markets means less supply of credit • The Australian Loan Market is becoming more dependent and linked to global wholesale funding markets • There is a general lack of deals in the market other than refinances that are driving pricing and terms down • Cost of funds for the four majors and foreign banks active in Australia is now tied to major offshore capital markets • Banks remain focused on growing asset books despite the limited deal supply but appetite not at “any cost” yet • Funding costs have tightened steadily over past 18 months with only a blip following the “tapering” comments • Willingness to lend to broader sectors is evident although the resources market is clearly a subset of the broader market • Cost benefits are being passed through to loan pricing but event risk deterioration will also Australian historical loan volume Indicative secondary spreads – selected issuers 140 250 A$bn Volume 250 # Deals # of deals bps 120 200 BN P FRN 02 /18 WSTP FRN 01/18 NAB FRN 02/17 150 60 HSBC 11/17 CBA FRN 01/18 NAB FRN 05/18 200 100 80 GS 11/17 JPM 11/ 17 ANZ FRN 04/ 18 100 150 40 100 50 20 0 50 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 0 2007 2008 2009 2010 2011 2012 Q3 2013 Source: Thomson Reuters Page 9 Jul 13 Aug 13 Sep 13 Oct 13 Source: NAB
  • 10. Project Finance Loans are Important to the Australian Market The project finance market trends similarly to the broader bank market Historical project finance loans volume Market conditions are positive for borrowers 50 60 50 Utilities • Margins for project finance transactions have trended down 20 Infrastructure • Resources projects remain attractive to banks 30 Resources • Appetite remains strong for project finance transactions generally, with limited deal supply a continuing theme 40 US$bn • Higher yields are available to lenders compared to the corporate loan market, thus attracting volume # Deals 40 30 20 10 10 0 0 • Structure and terms & conditions are a key focus in the market 2008 2009 2010 2011 2012 YTD Source: Thomson Reuters Historical Australian loans volume 120.0 Historical project finance tenor US$bn Corporate PF 100.0 80.0 60.0 40.0 20.0 0.0 2007 2008 2009 2010 2011 2012 YTD 2013 ~ 13.0yr ~ 12.0yr ~ 11.0yr ~ 10.0yr ~ 9.0yr ~ 8.0yr ~ 7.0yr ~ 6.0yr ~ 5.0yr ~ 4.0yr ~ 3.0yr ~ 2.0yr ~ 1.0yr < 0.5 yr Tenor 0 Source: Thomson Reuters Page 10 Volume (A$bn) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Source: Thomson Reuters
  • 11. Export Credit Agencies are Supporting Projects ECAs & multi-laterals continue to encourage exports and project developments ECAs support large and risky transactions Notable market updates • ECA transaction proceeds at six year highs • Since 2010 total ECA exposures in Australia have increased from US$16 billion to US$28 billion (CAGR of 32.7%) • “National Interest” support is high for natural resources transactions with governments securing import supply • Recent activity includes the US$20bn Ichthys project – Over US$11bn direct and indirect funding from ECAs – Largest direct funding provided by JBIC (Japan) US$5bn – K-EXIM (Korea) and EFIC (Australia) also provided US$400m • Can be tied to supply of equipment or engineering into sites, securing export from economies into Australia • Governments are incentivised to stimulate national economies and employment • The top four ECA exposures in Australia come from NEXI (Japan), Sinosure (China), JBIC (Japan), and K-EXIM (Korea) • Motivation is to secure economic development for economies Global ECA volume trending up and expected to continue 90 80 US$bn New Medium/Long-term ECA Volume 70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 2012 Source: EXIM (US), Data for OECD ECAs Page 11
  • 12. US Leveraged Markets have Unprecedented Liquidity at a Cost Provides covenant light debt funding in large volumes for sub-investment grade mining companies US institutional and HY bond monthly volumes The fine print... 160.0 Issuance ($ Bils.) HY Bonds • Provides alternative when traditional bank debt not available Inst. Loans 140.0 • Market volume has increased although refinances continue to drive the market 120.0 100.0 • With yields at record lows, issuers are coming back to market to refinance at lower rates 80.0 60.0 40.0 • Lenders moving further down the risk curve looking for higher returns 20.0 0.0 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Source: Thomson Reuters Historical yields by rating - BB, B and CCC rated corporates 20.0% BB B Average BB Average CCC • 2013 has seen a series of Australian borrowers go to the US TLB Market with mixed success US leveraged loan market by sector H1 2013 B CCC Average Basic Materials (Mining) 3.81% 15.0% Basic Materials (Mini ng) TMI 10.0% Consumer Industrial s 5.0% E&U Finance 0.0% Jan-10 Apr-11 Jul-12 Oct-13 Source: BofA Merrill Lynch Page 12 Service Source: Citi Group
  • 13. Domestic Capital Markets Will Grow in Importance The A$MTN market has not been a natural market for miners but it is a proven source of funding for publicly rated companies Traditionally A$MTN market not “mining friendly” A$MTN market characteristics • A$MTN historically considered unsuitable: 2011 2012 2013 YTD Longest 10.0 years 10.0 years 10.0 years Average 5.0 years 5.4 years 5.8 years Largest $900M $1,000M $500M Average $235m $245m $220m – Cheaper funding is available offshore – Longer tenors not available Corporate Tenor – Smaller volumes compared to offshore markets • How ever big names have come to the market after long absences including the likes of BP and BHP Corporate Deal Size • Pricing is currently globally comparable 2013 YTD trend towards longer tenor and ‘BBB’ band Case study: BHP Billiton $1,000m A$MTN (2012) • 53% of issuance this year is 7yrs+ vs. 13% in 2011 Credit Rating: A+/A1 • 35% of borrow ers are ‘BBB’ band rated vs. 13% in 2011 Format: Senior Unsecured Fixed Rate Tenor: 5 years Amount: A$1,000m Margins: S/Q coupon matched ASW + 90bps Key Highlights: • • • • Issuance from the resources sector makes up ~12% of total corporate issuance in 2012, with no other mining issuance since 2005 $12,580m $6,745m 2010 2011 $7,475m $6,775m $3,615m 2009 2012 2013 Page 13 Strong order book in excess of $2B Globally competitive pricing Diverse investor participation with ~20% Asia Returning to A$MTN market with first transaction since 2001
  • 14. Alternative Capital Streaming is an alternative to equity capital but needs to be structured carefully so as not to adversely affect bankability State of the market Merits of streaming transactions • Raising equity capital has become less attractive to miners (12 IPOs for 1HY13, 69% fall y-o-y) (EY) • Streaming can provide an alternative to ordinary equity • $5.9bn proceeds raised from convertible bonds in 1H13 (210% y-o-y increase) (EY) • 88% (by volume) of convertible bonds were issued by juniors in 1HY13 (EY) • Unlike in the global market, streaming is not yet used as a common source of funding in Australia Deal Date • Cashflows from commodity streams that are contracted will be “unavailable” to service debt and thus affect bankability Global streaming proceeds have been increasing steadily Silver Wheaton Corp Payment To Vale S.A. Upfront (US$m) % of Production 1.8 25% Au 28-Feb-13 Payment From • Streaming is still not overly prevalent in Australia but several interesting transactions have been closed recently • Mining companies should understand the implications for existing and future senior debt capital Streaming/royalty transactions Mine Location • Streaming can be negotiated privately and structured at the asset level, rather than on the register 1.5 US$bn $1,954.0 70% Au Franco-Nevada Corp Inmet/K. Panama $1,000.0 Royal Gold Inc Thompson Creek Metals $782.0 52.25% Au Sandstorm Gold Ltd Mutiny Gold $9.0 ~15% Au 23-Sep-13 Royalty Stream Invest. Northwest Resources $2.0 15% GRR 2-Mar-12 Franco-Nevada Corp Navigator Resources $4.8 1.2 ~68.8% Au, Ag 6-Dec-12 Australia 20-Aug-12 8-Aug-12 Other 1% NSR (add.) 0.9 0.6 0.3 0 2009 Source: Annual Reports Page 14 2010 2011 2012 Source: PwC
  • 15. Summary Despite volatile conditions in the sector, debt markets remain available to mining companies with robust projects Commodity markets remain volatile and equity prices have been affected Costs in the mining industry remain high and a high AUD continues to have an adverse impact Debt markets are largely driven by macro-economics - growth and relative value are available Bank and bond markets remain open and ready to invest Debt is available for the right mining projects Alternative capital is increasingly available Streaming transactions are becoming more prevalent Unless there is another macro-economic shock (eg GFC, US default) bank markets will remain strong in the foreseeable future Page 15