The cost of protecting debt sold by BHP Billiton Ltd. and Rio Tinto Group may decline from a four- month high as concern mining taxes may be changed in Australia is overstated, said National Australia Bank Ltd.

BHP’s five-year credit-default swap contracts have jumped 18.8 basis
points and swaps on Rio climbed 34.4 basis points, according to prices
from CMA DataVision in New York, since Jan. 22 when the Sydney Morning
Herald reported an Australian tax review proposed changes to mining
laws to boost revenue.

The Australian government has been given no “firm proposal” on changes
to mining taxes, Minister for Resources and Energy Martin Ferguson said
last month. Changing the taxes would take years to pass and the
proposal is unlikely to be successful in its current form, according to
Liberum Capital Ltd.

“Weakness in BHP and Rio credit spreads was first prompted by talks of
a change in resources tax, and has been exacerbated by general credit
market weakness,” said Jason Watts, head of credit trading at National
Australia Ltd. in Sydney. “Spreads should tighten again once the market
realizes that the prospect of any tax change is far from being
conclusive, meaning the current levels are a buying opportunity for
investors.”

BHP and Rio contracts cost 70.5 basis points and 115.5 basis points
respectively today, National Australia prices show. The cost of
protecting Rio debt rose to the highest since Oct. 6 yesterday, while
BHP credit-default swaps hit a four-month high on Jan. 26, according to
CMA.

Lending Curbs

Lending curbs at Chinese banks and concerns over Greece’s debt burden
have seen global credit markets weaken in the last month. The Markit
CDX North America Investment-Grade Index, which is linked to 125
companies, rose 11.1 basis points in January, its biggest monthly
increase since February 2009, CMA data show. The Markit iTraxx
Australia index rose 9.5 basis points since Jan. 22. A basis point is
0.01 percentage point.

BHP and Rio’s swaps also rose after the European Commission, the
European Union’s antitrust authority, said Jan. 25 the companies will
face an inquiry into whether their Australian iron-ore joint venture
curbs competition. BHP and Rio, amid pressure from steelmakers, in
October scrapped a plan to jointly market as much as 15 percent of the
venture’s ore.

“There’s a bit of uncertainty on how the EU is going to respond to the
proposed joint venture of iron ore assets in the Pilbara,” John
Manning, a credit analyst at Royal Bank of Scotland Group Plc, said by
phone from Sydney today. “That’s caused some speculation, which I don’t
subscribe to, that BHP may make another tilt at Rio if the joint
venture is rejected.”

Credit-default swaps pay the buyer face value in exchange for the
underlying securities or the cash equivalent should a country or
company fail to adhere to its debt agreements. An increase indicates
deterioration in the perception of credit quality; a decline, the
opposite.

Source: Bloomberg

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