Tuesday, 18 September 2018

IFR Top 250 2007: CVRD's sweet deals

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Companhia Vale do Rio Doce is a coveted client but also a demanding one. The world’s biggest iron-ore miner has a reputation for dealing aggressively with its lenders, but has set some impressive records as a result. Christopher Langner reports.

Fabio Barbosa, chief financial officer of Brazilian iron-ore miner Companhia Vale do Rio Doce, plays down his firm's reputation as an aggressive user of the debt markets – although he acknowledges the reputation is not entirely unwarranted. Instead of asking lenders what they can offer, CVRD typically submits its terms and waits to see who will bite.

But in spite of its assertiveness, CVRD never fails to attract a long line of suitors to its deals. Proof of that was the gargantuan loan it sought last year when it bought Canadian nickel miner Inco. The US$18bn bridge-facility enjoyed US$34bn in commitments. Some 28 names joined the list, led by nine senior lead arrangers – BNP Paribas, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Bradesco, Calyon, Citi, HSBC, JPMorgan and Scotiabank.

The market showed the same appetite for CVRD's debt when the company took out its bridge loan. Within three months CVRD had already refinanced 84% of the US$13.2bn drawn down from the facility, and had broken a few records on the way.

CVRD's US$3.75bn deal in November 2006, for example, was the largest ever emerging markets global corporate bond. Demand reached US$13bn, despite aggressive pricing, with 530 funds buying it. The 30-year tranche priced at 98.478 to yield 6.997%. The short 10-year tranche priced at 99.267 to yield 6.346%.

Less than one month later, CVRD did it again, this time in the local markets. It issued a two-tranche R$5.5bn debenture, the largest transaction of its type in Brazilian history. The four-year tranche priced at 101.75% of local benchmark CDI, and the seven-year priced at 100.25% of CDI, for record low yields.

Finally, in December, CVRD took a US$6bn export loan arranged by ABN AMRO, Credit Suisse, Santander and UBS. The five-year US$5bn tranche pays 62.5bp over Libor. The longer, seven-year US$1bn tranche pays 75bp over Libor. The deal was upsized by US$1bn from CVRD's original plan. A few months later, the company paid the remainder of the bridge loan with cash.

The latest record-breaking deal was a US$650m syndicated revolving credit line. The three-year US$300m tranche priced at 17.5bp over Libor, the first time a Brazilian corporate had got a revolver for less than 20bp over Libor. The second, five-year US$350m tranche priced at 25bp over Libor. Fees also came in low, at 0.75bp. The syndicate comprised 19 banks, led by BNP Paribas.

According to Barbosa, such success is the result of a decade of liability management. As he recalls, it was not long ago that CVRD was still rated as junk. Moody's, the first rating agency to give CVRD an investment grade rating, did so in July 2005. Fitch, the last to do so, raised it to BBB– only in June last year.

According to Barbosa, CVRD only started to have a real gauge of its own unsecured risk in 2003, when it placed a ten-year US$300m which priced inside the sovereign. Before that, most of CVRD's debt was collateralised. The following year, CVRD priced an 8.25% 30-year bond – the first and only by a Brazilian corporate – at 98.904, to yield 8.35%.

Recently, after CVRD boosted its gross debt from US$6.1bn to US$31.1bn through the acquisition of Inco, some analysts fretted about CVRD's newly-acquired rating. Notwithstanding, it soon became clear that the deal could improve the company's cash position.

Indeed, since CVRD bought Inco, the price of nickel in the London Metal Exchange has risen from around £34,000 per metric tonne to £44,500 as at June 6.

"Inco's expected cash generation for the next two years pays the full debt CVRD incurred to buy it," says Pedro Galdi, a mining sector analyst with ABN AMRO in Brazil. Galdi projects that CVRD will end 2007 with an adjusted Ebitda of R$30.07bn (US$15.34bn). In a recent meeting with analysts, Barbosa said that he expected the company's gross debt to Ebitda ratio to fall from the current 1.9 to 0.9 within two years.

With so much cash, the question is whether CVRD will tap debt markets in the near future. Barbosa says the company does not plan net debt issuance this year, but may pursue liability management operations.

The miner still has US$5.8bn in long-term debt with coupons over 7.1% which it may choose to refinance, although Barbosa would not detail his plans. The general idea, according to Barbosa, is to clean up the curve and remain only with two benchmarks, a 10-year and a 30-year. One thing is for sure, whatever does emerge will be on CVRD's terms.

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