BHP Billiton talks to lenders on record $55 bln loan

LONDON (Reuters) - Dual-listed mining giant BHP Billiton (BHP.AX)(BLT.L) is talking to sub-underwriting banks on a record $55 billion loan backing its hostile bid for rival Rio Tinto (RIO.AX)(RIO.L), banking sources said.

"We are talking to a number of relationship banks," a banker close to the deal told Reuters Loan Pricing Corp on Monday.

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 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.

Some $40 billion 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.

The company's one-year credit default swap (CDS) is trading at 78.7 bps, and its five-year CDS is at 104.25 bps, according to Markit Group.

Sizeable $2.5 billion 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 percent 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.

The lending decision may also be eased by favorable capital treatment under the new Basel II accord, bankers close to the deal said. BHP Billiton is targeting a high single-A rating after the acquisition, which will require banks to allocate less capital against the loan.

Around 30 percent of the loan has a one-year maturity, sources said. The remainder carries three and five-year tenors, they added.

(Reporting by Tessa Walsh, additional reporting by Zaida Espana; editing by Rory Channing)