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