Ask any mining executive where they would place salvation on a map and it would be China.
Yet with Foreign Investment Review Board hurdles to climb over, shareholder scepticism and sometimes even political hostility, investment from Chinese firms is not always the perfect solution for a company wanting to raise capital or strengthen its balance sheet.
Similarly, companies are increasingly averse to bank debt and the dilutive consequences of passing around the cap in shareholder rights issues. The meeting of these factors, along with a growing number of retail investors seeking fixed-interest type products with a better yield than savings accounts, all set the scene for a wave of retail bond issues despite Australia’s historically shallow appetite for the corporate bond asset class.
As for relying on Chinese investment as a ready stream of cash, this is looking less and less dependable.
Fortescue Metals Group may have had its investment from China’s Hunan Valin approved by the FIRB, but Canberra’s attitude towards Chinese investments is still just as cloudy. So while the Treasurer Wayne Swan has given the go ahead for Fortescue to issue 260 million new shares to Valin, the same cannot yet be expected for Chinalco’s planned investment in Rio Tinto. Or, for that matter, Anshan Iron & Steel’s proposed investment in Gindalbe Metals.
After all, the other recipient of the big Chinese resource investments, OZ Minerals, had its deal making interrupted when FIRB and Swan ruled out any Chinese takeover of the Prominent Hill mining project. The sale of Prominent Hill, in the Woomera Prohibited Area — a 127,000 square kilometre zone the size of England where the defence department sometimes conducts weapons testing — was deemed to be a security risk, especially as OZ’s suitor, Minmetals, is a state-owned company.
Luckily for OZ however, it seems to have managed to negotiate an alternative arrangement from Minmetals, whereby it will bid for the company sans Prominent Hill, the Martabe gold project in Indonesia and a number of listed assets, including the company’s majority stake in Toro Energy, a uranium explorer. Luckily too, OZ has managed to convince its bankers to extend its loans as issues with FIRB and Minmetals get sorted out.
The experience of OZ illustrates the risk of Chinese foreign investment in firms that are in precarious situations, and in the current financial crisis that is a lot of them. It also illustrates the risks of relying on bank debt in current circumstances where Basel II capitalisation rules and a general counterparty distrust conspire to slash loan books, despite the unprecedented efforts of central banks around the world to reduce interest rates and pump money into the economy.
So between the rock of the banks and the hard place of China, where does that leave embattled companies?
Rights issues and private placements by institutional investors has always been one avenue, but these are dilutive, expensive, cumbersome and not always guaranteed to work. The failure of book-builds by companies such as Ten Network Holdings and the criticism that raisings such as Wesfarmers’ attracted over value destruction are cases in point.
Then that leaves companies with the option of the corporate bond market. Australia has historically had a very shallow bond market, but the experience of New Zealand, where DIY investors have propped up an increasing number of bond issues, bodes well for the sector in Australia. After AMP’s $300 million listed notes issue and Tabcorp’s $200 million corporate bonds offer, analysts expect other blue chip companies to follow suit. Research from UBS in fact suggests that $5 billion worth of bonds will be raised in Australia over the next few months.
As self-managed super fund investors look for equity alternatives and baby-boomers approach retirement, the stability and reliability of a fixed interest product that pays well over the yield of a cash savings account will no doubt be attractive. And while companies may have been adverse to adding debt to the balance sheet since the advent of the credit crunch, debt tied up with bonds isn’t the same as bank debt. Anecdotal evidence also suggests that the market is becoming more sophisticated in its analysis of corporate liabilities.
Mining companies such as Aquarius Platinum and BHP Billiton are already tapping overseas bond markets. As well as raising equity capital, Aquarius is funding the takeover of London-listed Ridge Mining with the issue of R650 million ($98.6 million) worth of bonds on the Johannesburg Stock Exchange, while BHP has raised a whopping $9 billion from European and US bond investors for the tantalisingly vague use of “general corporate purposes.”
Is debt the new equity and are bonds the new China? At the very least, you don’t need FIRB approval to raise debt — despite the fact that companies are often more beholden to their creditors than investors.