Bold bonds plunge a big winner for BHP

BHP Billiton will be laughing all the way to the bank after placing $3 billion of bonds on the US market at interest rates below what the Australian Government is charged by foreign investors.

The BHP bond offering comprises $1 billion of one-year notes at 1.24 per cent, $750 million of five-year notes at 1.98 per cent and $1.25 billion of 10-year notes at 3.36 per cent.

In context, the AAA-rated Australian Government 10-year bond is yielding 4.04 per cent, while the Reserve Bank of Australia (RBA) cash rate of interest in Australia is still at 4.5 per cent.

In other words, lenders are crudely saying that BHP is more creditworthy than the Australian Government.

Does BHP need the money?

Not specifically, but it's a prudent move on behalf of the 'Big Australian' which has the funds would be used for general commercial purposes and the retirement of commercial paper.

In simple terms, BHP is just doing what any householder would do with their mortgage given the opportunity, refinancing existing debt at a cheaper interest rate. It's Economics 101, so congratulations BHP for securing cheap long-term funding.

But the real question here is who is on the other side of the trade? The volatility and uncertainty on global share markets is fuelling strong demand for fixed interest holdings to stabilize earnings within portfolios.

With the official US interest rate still hovering at 0.25 per cent there is a 3.11 per cent spread on the 10-year notes, however if I was investing in these notes I'd be a little concerned about being over-run by inflation during this period - and as we all know if you're worried about inflation then (fixed interest rate) bonds isn't a good place to be invested.

And let's take a look at the one year bonds that BHP sold, with an interest rate of 1.24 per cent per annum. If you bought BHP shares right now you'd earn a 2.7 per cent dividend yield, a full 1.5 per cent better than the return you would get from the corporate bonds.

On top of this you would be giving yourself exposure to Australia's top company that at current commodity prices earns just shy of $2 billion in profit per month and is trading on a forward P/E ratio of less than eight times.

Now feel free to stop me in the street in 12 months time and point out any flaws in my logic above, but I know what exposure I'd be taking to BHP at this point of the price cycle, and it wouldn't be buying BHP bonds.

BHP hasn't been the only Australian company taking advantage of US demand for corporate bonds. Newcrest Mining issued $750 million of 10-year bonds at 4.45 per cent and $250 million of 30-year bonds at a rate of 5.75 per cent, totalling $100 million of funding.

As you can see when comparing apples with apples that the interest rates on BHP 10-year notes were more than one per cent below what Newcrest achieved, but Newcrest, coming in below the RBA cash rate of interest, is still a solid achievement.

·If you would like to subscribe to Cameron Bartram's weekly market update, contact him at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _