The recent action:
Freeport Looks Like Junk as $46 Billion of Miner Bonds Plummet
- Cost cuts don't change `market situation': Moody's Analyst
- Jefferies strategist says `sell/short' Freeport bonds
The commodities rout is casting doubt on the investment-grade status of billions of dollars of bonds issued by miners on the cusp of junk.
Case in point: Freeport-McMoran Inc. Yields on the $14.7 billion of bonds issued by the world’s biggest publicly traded copper producer have surged to levels that are more than what investors typically demand to lend to high-yield companies. Teck Resources Ltd. and Barrick Gold Corp. are in a similar bind. They’re among five metals miners with $46 billion of bonds that are yielding an average of 7.6 percent, more than the 5.73 percent for companies rated in the highest speculative-grade tier.
Credit investors are signaling skepticism that cost cuts and production changes will be enough to offset commodity prices that last week fell to the lowest since 1999. Freeport, which has posted $7.2 billion of losses the past three quarters, said last week it will reduce spending as prices for almost everything it produces tumble.
“It’s a very good step forward, but it doesn’t change the market situation,” Carol Cowan, an analyst at Moody’s Investors Service said Aug. 27 by phone. “The whole commodity metals market’s prices have collapsed -- across the industry that is going to really compress earnings and we think it’s going to be an ugly third quarter.”
Weak economic growth in China has eroded demand for commodities and battered the outlook for miners, whose debt has performed the worst among high-grade issuers this year, according to data compiled by Bloomberg.
This has taken a toll on Freeport’s bonds and also the debt issued by other investment-grade miners such as Teck Resources, Barrick Gold and Vale Overseas Ltd. All four borrowers have one-year default probabilities that are typical of junk-rated borrowers, Bloomberg data show....MUCH MORE