BBI closer to deal on new capital injection

The key component left to finalise is a $600 million or so institutional placement to be matched by a placement to the new cornerstone investor, Canada's Brookfield Asset Management.

A group of large funds, predominantly from Australia, has been asked to participate in a placement at a defined price rather than an indicative range for a bookbuild.

Credit Suisse and Macquarie Capital have agreed in principle to serve as the underwriters, but the final documentation will not be completed until it is clear there is adequate market support for the recapitalisation plan.

The group of hedge funds backed by RBS, which had proposed an alternative plan, is believed to be not taking part.

As part of the $1.5 billion or so deal to erase all of BBI's corporate-level debt, Brookfield will take a 50 per cent stake in BBI's most prized asset, the Dalrymple Bay coal port in Queensland, and will buy the debt-laden PD Ports asset in Britain.

BBI, now advised by Gresham, had tried unsuccessfully to sell all or part of both of those assets before it decided the Brookfield recapitalisation plan was the best option.

Interestingly, on Friday evening, Moody's placed Dalrymple Bay's Baa2 credit rating on review for a possible downgrade that would see it lose its investment-grade status.

However, the downgrade is not expected to happen if the recapitalisation plan succeeds.

FLOATS SINK

The slew of Australian companies lining up for floats, led by Myer, Kathmandu and Ascendia Retail (better known for its main chain Rebel Sport), will be hoping they fare better than the latest offerings in Hong Kong. On Friday, Glorious Property Holdings' $US1.28 billion ($1.48 billion) effort was the fifth float in a row to see its share price fall on its first day of trading.

The success or otherwise of the Myer float  scheduled to list on November 2  will be very carefully watched by several private equity groups looking to follow the lead of TPG and Blum Capital and offload some assets of their own.

Myer has always warned the float might be pulled at the last minute, depending on market conditions.

That still appears unlikely, but it is notable that by the end of last week, global markets were beginning to get jittery again.

In the September quarter, the ASX 200 index rose 19.9 per cent in the local currency and 29.4 per cent in US dollar terms, meaning it outperformed every other big market in the developed world.

But as the Merrill Lynch equity strategist Tim Rocks has noted, the downside to that rise is that valuations look more compelling in other markets, such as the US.

And unlike other developed countries, Australia is likely to embark on a series of interest rate rises in the near term.

Rocks examined which stocks were most affected by rate rises in the first 12 months of the last two periods of tightening. In the context of the Myer float, it is notable that David Jones and Billabong International were at the top of the list.

CASH TO SPARE

OZ Minerals, which is sitting on $1 billion or so of cash after selling the bulk of its assets to China Minmetals, has made a tiny dent in that balance by contributing to recent raisings by Minotaur Exploration and Toro Energy to avoid dilution.

It would be understandable for the company to remain cautious about splashing out on a big acquisition in light of the chequered history of predecessor Zinifex's purchase of Allegiance Mining and the Zinifex-Oxiana merger.

However, its Prominent Hill copper-gold mine in South Australia is proving a money-spinner and its balance sheet will look lazier and lazier over time. RBS calculates that by the end of the 2010 financial year, OZ will be sitting on $1.7 billion cash, rising to $2 billion in 2011 even if it pays an annual dividend of 4c to 5c a share. The obvious options for OZ are acquisitions and/or a return to shareholders via dividends or a buyback.

BHP Billiton, which itself has plenty of cash, has so far found it very tough to locate top-tier assets in copper in particular due to the global scarcity of great deposits.

Even second-tier copper assets comparable to its Prominent Hill mine will be very hard for OZ to find, especially if it faces competition from Chinese state-owned companies.

In a recent presentation, OZ's new boss, Terry Burgess, hinted a buy that would bring $US100 million of earnings before interest, tax, depreciation and amortisation would be a good fit with his company, versus the $US500 million minimum needed by a company like BHP.

PanAust would meet OZ's requirements, but it has a new Chinese cornerstone shareholder and would also be attractive to Minmetals.

In the end, OZ may be forced to buy a project soon after discovery and put its cash balance towards building it from scratch. Oxiana had built the Sepon mine in Laos after buying the project from Rio Tinto and the Prominent Hill mine after it was discovered by Minotaur.

An alternative would be for a company such as Barrick Gold to make a bid for OZ. Chinese suitors would be excluded due to defence concerns over Prominent's location within the Woomera Prohibited Area.

FORTESCUE SLIDE

Fortescue Metals bonds have started a slow, downward slide since it became clear it would not be able to sign a $US6 billion financing deal by September 30.

They have slid from a peak of 105 to 101, although they remain slightly above the face value, while the shares fell to a closing price of $3.63 on Friday, from $4.24 on September 22.

There are few expectations of Fortescue soon signing a financing deal with a syndicate led by China Investment Corp, which puts in jeopardy the company's plans to expand output to 95 million tonnes by 2012.

Fortescue's chief executive, Andrew Forrest, has been noticeably quiet of late and its chief financial officer, Michael Minorosa, recently left the company to take the top job at a much smaller outfit. The market will therefore be very interested in any commentary provided alongside the release of Fortescue's quarterly results later this month.

jfreed@smh.com.au