Freeport-McMoRan bonds battered by news of $9bn deals

Wed Dec 5, 2012 1:03pm EST

NEW YORK, Dec 5 (IFR) - Bonds issued by Freeport-McMoRan Copper & Gold Inc were battered on Wednesday after the company said it would buy Plains Exploration & Production Co and the portion of McMoRan Exploration Co it does not already own for $9 billion in cash and stock.

Yield spreads on the company's 3.55% notes due March, 2022 widened 29 basis points to 199 basis points over comparable 10-year Treasuries, according to Tradeweb.

The bonds, issued in February, 2012, were the most actively traded outside of new issues.

At the same time, the cost of protecting the company's debt against potential default rose sharply. Five-year credit default swaps were last trading 15 basis points, or 11%, wider at 152. That means it costs $152,000 a year to protect $10 million of debt for five years.

Freeport is expecting to retain its investment-grade rating after the deal, Chief Executive Richard Adkerson said on a conference call.

"We're in a situation where we have attractive financing markets and we've been looking for ways to take advantage of those financing markets for shareholders," he said.

Moody's Investors Service currently rates the credit at Baa3, the final level of investment grade in its scale, so even a one-notch downgrade would push Freeport into junk territory.

Standard & Poor's and Fitch Ratings rate it at BBB, which is two notches above junk.

The company has effectively used cash flow over the years to delever and expects to maintain this model going forward, with the acquisition expected to generate significant positive cash flow, management said.

The financing of the deal is set to include $5.5 billion in senior unsecured notes and $4 billion in term loans, with JP Morgan leading the financing.

Existing debt maturities include $3 billion of Freeport senior unsecured notes, $6.6 billion in senior unsecured notes at Plains Exploration and $300 million in senior unsecured notes at McMoRan.

The company estimated that total debt would be $20 billion following the acquisition, with debt to EBITDA in 2013 predicted at 1.7x.

Of note, Plains Exploration tapped the high-yield market in late October with a large $3bn two-part offering led by JP Morgan, Barclays, BMO, Citigroup and Wells Fargo joint books.

Proceeds of that offering went to purchase BP's and Shell's interests in certain deepwater Gulf of Mexico oil and gas properties for $6.1bn, in a deal announced on September 10.

Plains Exploration management said on the call that the acquisition eliminates the need to liquidate natural gas assets that would have been necessary as part of the Gulf of Mexico acquisition.

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