Market Report: Rio looks grand on boost to debt position

The miner Rio Tinto traded higher in line with the wider sector yesterday amid growing confidence in the company's long-term debt position.

The stock lagged behind its peers earlier this week after BHP Billiton decided to pull its merger proposal, citing, among other factors, the pro-spective levels of debt at the combined group. The move sparked concern about Rio and its ability to meet debt repayments, the first of which, for $8.9bn, is due in October next year with another $10bn due in 2010.

Rumours of a possible rights issue soon emerged with some wondering how the company would meet its obligations. A supportive note from UBS (which, incidentally, advised BHP in its bid to merge with Rio) helped stop the rumour mill and put some of those concerns to bed last night, aiding Rio on its way to 1,650p, up 5.3 per cent or 83p.

Forecasting $35.5bn in net debt at the end of 2008, the broker said that although the amount of debt was "uncomfortable, it should ultimately be manageable", adding: "Rio has an undrawn debt facility [of] $6.8bn which it can draw-down: under our base case, we estimate Rio can meet debt repayments through cash flows and using this facility."

"Under a 'stress test' case scenario (iron ore price down 50 per cent, volumes down 20 per cent) we estimate that Rio will need to refinance some of its debt, but this is limited to around $2.4bn by 2010 assuming it cuts capital expenditure and dividend per share guidance."

Other miners were also strong as investors bought in on hopes that recent government action in the United States, Europe and China will help shore up the global economy. Xstrata was the strongest, advancing to 959p, up 12.2 per cent or 104.5p and claiming first place on the Footsie. Kazakhmys, at second place, was up 11.6 per cent or 28p at 269p and Vedanta Resources, at fourth place, climbed to 612.5p, up 10.8 per cent or 59.5p.

Elsewhere, oil and gas issues, inc-luding Tullow Oil at 518.5p, up 10.2 per cent or 48p, and BP at 530.25p, up 3.4 per cent or 17.5p, rose as the oil price gathered pace ahead of a meeting of the Opec cartel in Cairo this weekend.

Overall, the strength in commodities kept the London market on a firm footing and the FTSE 100 closed up 73.41 points at 4,226.1p. The FTSE 250 also rose, gaining 205.6 points to 6,036.64p.

News from the Nationwide Building Society that the pace at which house prices were falling had "moderated significantly" in November aided the banking sector. Mortgage lenders HBOS, up 2.8 per cent or 2.5p at 93p, Lloyds TSB, up 2.5 per cent or 4p at 164p, and Royal Bank of Scotland, up 3.8 per cent or 2p at 55p, all traded higher.

The Nationwide report also powered housing and retail stocks, which rose despite disappointing earnings reports from Kingfisher, down 2.4 per cent or 2.9p at 116.6p, and DSG International, down 10.7 per cent or 1.5p at 12.5p. Short sellers were forced out of the likes of Game, up 15.9 per cent or 22.25p at 162.25p, Carphone Warehouse, up 10.3 per cent or 10.75p at 115.5p, and HMV, up 7.1 per cent or 8p at 121.5p.

In the housing sector, similar factors drove Barratt Developments up 11.1 per cent, or 5p, to 50p.

Taylor Wimpey gained a spectacular 73.0 per cent, or 4.22p, to 10p after rumours suggested that the company was close to striking a refinancing package – expected to take the form of a debt-for-equity swap – with its lenders. Some rumours anticipated an announcement as early as today.

Although the market was initially wary of a debt-for-equity deal, KBC Peel Hunt analyst Robin Hardy said that, given the current share price, it was "probably the best option for existing shareholders".

"If half the debt was swapped out, there would [be] significant dilution but most likely to a level higher than the current share price," he added.

On the downside, Bluebay Asset Management was down 30 per cent, or 30p, at 70p after announcing the closure of its flagship long-short emerging market fund.

The move prompted concern about the financial health of the business, with Cazenove saying that the "dis-appointment of [the] flagship fund suggests other assumptions need reviewing".

Among smaller companies, Moss Bros slumped to 17p, down 37.0 per cent or 10p, after Warbeck, Sir Philip Green's investment vehicle, said it had no intention of making an offer for the business. Speculation that Sir Philip might take the company private surfaced earlier this month when Warbeck acquired a 28 per cent stake in Moss from Baugur, the troubled Icelandic retail investor.