Vale Sees its Loan Spreads Gap Out

Yesterday, I applauded - on both sides - Merrill Lynch's departure from the team raising money to fund Vale's $90 billion takeover bid for Xstrata. This morning, I got my daily email from Latin Finance (highly recommended, sign up here, although I do wish they would publish it online) which has more details on the syndicated loan that Vale is trying to raise.

According to Latin Finance, the loan is pegged at $40 billion or more, and will consist of tranches ranging from 18 months to seven years. The benchmark will be the five-year loan.

Now Vale is no stranger to enormous syndicated loans, and when it bought Inco at the end of 2006 it paid 62.5bp over Libor on the five-year tranche. But things have changed since then. Now, the talk for the Xstrata acquisition finance is closer to 150bp over Libor - a startling indication of how much things have changed over the past year and a bit. (And remember, even at 150bp over, the pricing was still too tight for Merrill Lynch.) Latin Finance thinks that Vale will pay up:

Identifying a price that will clear the market and expedite the rest of the acquisition is of utmost importance, which suggests Vale may look to err on the generous side.

But I'd also note that in nominal terms, 150bp over Libor when this deal gets done might well be a lower rate of interest than 62.5bp over Libor at the end of 2006. Yes, this is floating-rate credit, which means the Inco loan is now costing Vale much less than it could ever have expected. But that might well just give Vale that much more room to pay a bit more this time around.

And I'd also note that Vale is still funding a huge part of the total acquisition price in the loan market, rather than bypassing the banks and going straight to the bond market instead. Banks might be feeling a bit of a capital crunch right now, but they're still going to try their hardest to be there for their biggest and most valuable clients.

Update: the Latin Finance Daily Brief is online after all: it's here.