BHP strikes a rich funding seam

There is a striking contrast between the renewed turmoil in European bond markets overnight, as it became apparent that the European Union hasn't been able to reach any agreements on responding to the Greeks revolt against austerity or shoring up the eurozone banks, and announcements from two major Australian resource groups today.

Against the backdrop of European investors pouring money into German bonds in a scramble for safety, the announcements that BHP Billiton has raised €2 billion ($A2.6 billion) and the Origin Energy-led Australia Pacific LNG $US8.5 billion in project funding for its Queensland coal seam gas project is striking.

BHP priced a two tranche euro bond issue overnight, raising €1.25 billion ($A1.6 billion) at 2.125 per cent with an issue that matures in 2018, and €750 million ($A1 billion) at 3 per cent maturing in 2024.

Origin said APLNG had signed definitive project finance agreements with the Export-Import Bank of the US and a syndicate of domestic and international commercial banks. The agreements run for 16 and 17 years respectively. China's Export-Import Bank has signed a commitment letter for its share of the facilities.

BHP raised some eyebrows earlier this year when it raised about $1 billion of three-year money in the US at 1.125 per cent and $750 million of five-year funding at 1.875 per cent, generating the obvious comparisons with the significantly higher cost at which the Australian government borrows money.

The exchange rate obviously helps explain why a corporate, no matter how highly rated, can borrow more cheaply than a AAA-rated sovereign, but given that BHP operates in US dollars – and its revenue streams are in real US dollars – there isn't an exchange rate risk to hedge when borrowing in the US. The euro bond issues overnight are more expensive but longer-dated and presumably BHP has a physical or financial hedge against the currency risk.

Given how volatile and nervy the European bond markets are, and how undercapitalised much of the eurozone banking system is, it is telling that BHP was able to raise relatively long-term funds at such rates even as tensions were again rising because of the fears of a Greek exit from the eurozone.

The scale and diversity of its cash flows and the conservative nature of its balance sheet presumably makes it more appealing to risk-averse investors than European government bonds, other than, of course, German bunds. In recent days investors have been virtually paying the Bundesbank to protect their funds.

The APLNG project funding is, perhaps, even more telling, given that it is a $16 billion greenfields project that won't generate cash for several years.

There has been concern that the sheer number of LNG projects and other resource projects in the pipeline and their scale – the four Queensland LNG projects are all $16 billion-plus projects and some off Western Australia are twice that cost – would create a funding shortage in an environment where banks are risk-averse and managing their balance sheets to not only reduce risk but to prepare for the new and tougher capital and liquidity requirements.

It is noteworthy that within the APLNG banking syndicate there are several European banks, including Spain's BBVA, the UK's Lloyds and France's Societe Generale, as well as a number of Asian banks and the four big domestic banks. While each of the APLNG partners (Origin, ConocoPhillips and Sinopec) will guarantee their share of the funding, those guarantees will fall away once the LNG facility is built.

The fact that APLNG has been able to raise long-term funding in the midst of the market upheavals is a vote of confidence, not just in its project, but in the sector and the long-term prospects for LNG and the growth in demand for gas within the region.

The continuing willingness of the institutions to lend and the impact of the monetary policies being pursued by both the Federal Reserve in the US and the European Central Bank on the cost of borrowings is providing an historic opportunity for the higher quality resource companies and projects, with their primarily US dollar-denominated revenue bases, to lock in cheap funding while they are still considered better risks than many sovereign issuers.

Whether that same opportunity is open to lesser companies and projects may well yet be a testing question for some of the smaller miners with projects under development or consideration.