Teck bonds trading like junk
Miner paying again for investment in coal as demand ebbs in China
VANCOUVER — Teck Resources Ltd. survived one near-death experience six years ago, ultimately pulling its US$10 billion of debt out of the speculative-grade market. Now investors are selling the miner’s bonds as if it’s headed back to junk.
The cost of hedging against losses on the debt of Canada’s largest diversified mining company have soared to its highest level since the financial crisis as global commodities prices have plunged to a 13-year low. Teck’s investment-grade bonds are already trading like junk after its outlook was cut to “negative” in June.
Teck’s undoing has been its bet on steelmaking coal. The Vancouver-based company added about US$9.8 billion of debt through the acquisition of Fording Canadian Coal Trust in the second half of 2008, just as the global economy was tanking. Cut to junk after the transaction, Teck remade its balance sheet and debt maturities and regained its investment-grade rating in 2010.
Now, Teck is paying again for its investment in coal as China heads for its slowest pace of annual growth in a quartercentury, raising the spectre of another cut to junk.
“With the slowdown in China, more and more people are becoming bearish to the commodity space, and Teck Resources plays right into that,” Zachary Chavis, vice-president of portfolio management at Austin, Texas-based Sage Advisory Services Ltd., which oversees about US$11 billion, said July 27 by phone.
Five-year credit-default swaps for Teck, the world’s largest exporter of seaborne coal used to make steel after BHP-Mitsubishi Alliance, widened in the past week by 111 basis points to 638 basis points, touching the most since May 2009. It was the biggest increase among 23 members of Canada’s benchmark Standard & Poor’s TSX Index that have such contracts, data compiled by Bloomberg show.
The yield on Teck’s US$750 million of 3.75 per cent bonds due in February 2023 has risen to 7.7 per cent, similar to the 7.4 per cent among companies with a B junk rating, at least four levels below Teck’s current rating, according to Bloomberg and Bank of America Merrill Lynch.
Moody’s Investors Service, which along with Standard & Poor’s cut its outlook on Teck in late June to “negative” from “stable,” says the implied credit rating on the company’s of Baa3-rated debt — C$10.87 billion, according to data compiled by Bloomberg — is Caa1, six levels below investment grade.
Steelmaking coal accounts for about 90 per cent of Teck’s coal sales, the firm said, the remainder being thermal coal destined for power plants. Last year, Teck relied on coal from its mines in Alberta and British Columbia for 39 per cent of revenue and 13 per cent of gross profit, according to data compiled by Bloomberg.
Teck is under pressure now because prices for its most important commodities — copper and zinc, along with metallurgical coal — have declined amid the slowdown in China, which consumes more than 40 per cent of the world’s coal, copper and steel production, according to Barclays Plc analysts. China is Canada’s largest trade partner after the U.S.
Teck is being further squeezed by spending on its 20 per cent share of construction costs at Suncor Energy Inc.’s C$13.5 billion Fort Hills oilsands project in Alberta.
“We have ample liquidity and we continue to deliver on our operational targets,” Teck spokesman Chris Stannell said in an email. “We believe that over the long term, the diversity of our business, the quality of our long-life assets, and the cost efficiency of our operations are all characteristics of an investmentgrade-rated company.”
The firm has moved to strengthen its financial position by cutting production costs and boosting the size of its credit facilities — chief executive Don Lindsay said it had C$6.5 billion of liquidity in cash and credit lines at the end of the second quarter. Still, it may be too little too late to prevent a cut to junk.
“Our investment-grade credit ratings continue to be a priority for us,” Teck chief financial officer Ron Millos said July 23 on a conference call. “However, if commodity price moves further against us, there is a limit to what makes sense to defend it.”
To Sage Advisory’s Chavis, that battle looks more and more like it’s already lost.
“The assumption has shifted to that they will probably end up as high-yield,” Chavis said. “It’s bringing out a lot of sellers who are trying to get in front of being forced sellers when it does get downgraded.”