MercoPress. South Atlantic News Agency

Metals war: Billiton after 55 billion loan to bid for Rio Tinto

Mining giant BHP Billiton is talking to an important group of banks for a record 55 billion US dollars loan to back its hostile bid for rival Rio Tinto, it was revealed on Tuesday by banking sources.

"We are talking to a number of relationship banks" a banker close to the deal told Reuters. . The company and mandated lead arrangers Barclays, BNP Paribas, Citigroup, Goldman Sachs, HSBC, Santander and UBS have approached around ten relationship banks to sub-underwrite the loan, sources said. Sub-underwriting banks are being asked to commit 2.5 billion US dollars each, with a view to holding around 1.75 billion after wider syndication, they added. The large size of the sub-underwriting commitments is the first major test of European banks' appetite in 2008 and will redefine market capacity. The large commitments are offset by pricing of 50-60 basis points on the loan -- double the 22.5-32.5 bps paid by target Rio Tinto on the recent 40 billion loan that backed its acquisition of Canadian rival Alcan. Meantime in Adelaide, Australia, at the annual general meeting BHP Billiton said it was pressing on with 150 billion US dollar bid to merge with Rio Tinto, describing the operation as a compelling step despite the rival company's resistance and customers' concerns. BHP Billiton executives gave no indication that the company would consider boosting the value of its offer for Rio Tinto, which this week signaled it would strongly defend itself from the current bid. Billiton has proposed in an all-share deal to buy London-based Rio Tinto, in what would create a vast resources company. Some 40 billion US dollars of BHP Billiton's record 55 billion loan will refinance Rio Tinto's loan and the remainder will be new money to part finance a 30 billion share buyback, according to the company. "The pricing rationale reflects the size of the deal -- given its size we need to make things a little more appealing to potential lenders. There is an element of new money to raise and it also reflects current market conditions" the banker said. However sizeable 2.5 billion US dollar commitments could be difficult for banks facing capital constraints due to the credit crunch and increased funding costs, and may also bump up against smaller banks' legal lending limits of 10% of their capital base, sources said. Banks will however, be keen to lend to the world's third-largest company in an environment of soaring commodity prices, and the loan will not be drawn until late 2008 or beyond when the acquisition is complete. Around 30% of the loan has a one-year maturity and the remainder carries three and five-year tenors. BHP Billiton executives argue a merger would speed the development of natural resources. They have toured Asia recently trying to sell the idea of the deal to major customers, and on Wednesday told shareholders, it made strategic sense and would add value to the shares of both companies. "The combination presents an opportunity to create the world's premier diversified natural resource company, and in our view no other combination is as logical or compelling," chairman Don Argus said. Chief executive officer Marius Kloppers added: "The bottom line is that these two companies are worth more put together than they are worth apart." But Chinese steelmakers and other major customers are objecting to the takeover bid, citing fears it would give the combined company inordinate control over iron ore pricing and supply. "A merger between these two companies is a commercial matter over which we have no opinion," Foreign Ministry spokesman Qin Gang said Tuesday in Beijing when asked about the issue at a routine briefing. "However, we hope that international iron ore prices will reflect the laws of market supply and demand," Qin said. "The price should be long-term, stable and beneficial to all, both the exporting and importing countries." As the world's biggest steel producing and consuming nation, China depends heavily on iron ore imports, and complains it has too little say over pricing in the international market.