Rio Tinto is back in the bond trading business. Having bought back $1.5 billion dollar of bonds in April, the global mining giant has announced it will offer to repurchase up to USD$3 billion of bonds with maturities in between 2018 and 2022. Rio says the offer is the result of having a “strong liquidity position”, which is perhaps another way for Rio to say it is currently holds excessive amounts of cash and/or cash equivalents. What this implies is Rio will not be issuing new debt with lower coupons to replace the debt. It also implies Rio’s treasury department sees these bonds as offering a higher return than the return offered by it cash holdings.
However, unlike an investor which buys bonds as an investment, as a bond issuer Rio is already effectively “short”. It will be probably repurchasing these bonds at prices higher than the prices at which they were sold. According to prices on the Berlin Borse, all these bonds, with one exception, are trading at more than face value. There will some losses, which was also the case with the bonds Rio repurchased in April.
The offer comprises two components; the “Any and All” offer for two series of May 2018 bonds and a “Maximum tender” offer for various bonds with maturities in 2020, 2021 and 2022. The Any and All component will be repurchased at (2018) Treasurys + 50bps while the Maximum Tender bonds will be repurchased at a spread of between 65bps and 140bps to the relevant Treasury security yield. The face value of two series of bonds in the Any and All component amount to about USD$2.85 billion and any funds left over will be available to buy bonds in the Maximum Tender component.
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