Codelco taps hungry bond market as it adds to debt mountain

The world’s largest copper miner Codelco sold bonds worth a combined $2bn that will add to the state-owned company’s growing debt load, but were welcomed by a market hungry for high-grade bonds.
The Chilean copper miner initially proposed selling 10-year bonds at a yield of 150 basis points over Treasuries, before reducing the premium it offered to 130 basis points.
Similarly, it priced a 30-year bond at 155 basis points over Treasuries, having initially offered 180 basis points. That meant the new debt was priced in line with, or tighter than, Codelco’s existing curve. At the same time, the company offered to buy back bonds worth $639mn in total.
Codelco is adding to more than $140bn of investment-grade debt sold thus far in September, which will likely end up as the third-largest issuance month by volume on record, according to data compiled by Bloomberg. Tumbling yields on benchmarks have pushed investors into corporate debt.
“Investors are chasing positive yield, and not paying too much attention to fundamentals,” said Diego Torres, Santiago-based director of emerging markets at MCC Itau Chile.
“Codelco has the indirect support of the Chilean government, an A-rated country. It looks like that is all that matters at this point.”
Santiago-based Codelco has increased its borrowing over the past few months as copper prices remain near two-year lows.
The Chilean government has yet to announce any new funding for Codelco’s multibillion-dollar plans to upgrade aging mines and avoid a slump in production.
Total debt was $16.1bn at the end of the second quarter, the highest since at least 1999, according to data compiled by Bloomberg.
“Chile has a very strong sovereign credit profile, but it needs to put a lot more cash into Codelco,” said William C Slaughter, a Milwaukee-based senior portfolio manager at Northwest Passage Capital Advisors, which owns Codelco bonds but is underweight on the credit. “Until it does so, I think there’s a risk that the ratings gap between the company and the sovereign could grow.” Codelco is taking advantage of favorable conditions on the debt market with an operation that will allow it to finance projects and reduce its debt due between 2020 and 2023, the company said in an emailed statement. Codelco had orders from over 250 investors and the bond sales were oversubscribed four times, it said.
The yields were the lowest ever obtained by Codelco for 10- and 30-year bonds.
Moody’s Investors Service said the debt sale and accompanying buy back will “not have a material effect on Codelco’s leverage” and will allow the company to push back the maturities on 92% of total debt outstanding beyond 2023.
Codelco is expected to cut capital expenditures and get “some level of assistance” from the Chilean government to offset low copper prices, which have pushed the company’s debt levels higher, S&P Global Ratings said in a statement.
Credit agencies rate Codelco’s debt at Chile’s sovereign rating on the expectation that the company will receive government support. As a stand-alone company without the government’s backing, Codelco would be rated BB, two levels below investment grade, according to S&P. The agency said a downgrade is unlikely under current conditions.
At the end of 2018, the company’s ratio of net debt to earnings before items was more than four times higher than that of some of its biggest competitors.
With rating companies pressuring other sovereign and quasi-sovereign borrowers like Mexico’s Pemex and South Africa’s Eskom, it’s hard not to harbour some doubts about Codelco, Slaughter said in an e-mail.
Since Codelco last sold bonds in August, spreads on emerging markets metals and mining company debt have tightened an average of 17 basis points, according to Bloomberg Valuation. Codelco bonds on the other hand have widened an average of 1 basis point.
Codelco is the highest-rated metals and mining company in emerging markets and spreads of the lowest-rated debt have tightened the most in the past month.