Does Rio Tinto have a case to make for damages — over the impact of the rigging of the Libor interest rate (London Interbank Offered Rate) by Barclays and other banks — on the $US40 billion debt burden taken on to finance the takeover of Alcan in 2007?
Rio Tinto, the world’s third largest mining company spent about $US40 billion buying Alcan ($A44 billion at the time). It almost sent the company broke and has seen billions of dollars in assets sold off and an asset write-down of $US9 billion in the 2011 financial year. The funding for Alcan was based on the Libor rate and was in place until the end of 2010 when it was finally repaid or refinanced.
Other companies, such as banks, the likes of BHP and big US and European industrial and financial groups had debt and financial derivatives whose interest costs were based on Libor. Rio Tinto comes to mind because Barclays’ former CEO at the time of the rorting is now a director of Rio Tinto. John Varley joined the Rio board after he stepped down from the CEO’s role at Barclays early in 2011.
So the question is how much has the Libor rigging by Barclays and other banks cost Rio extra interest payments on that $US40 billion of debt? And, what was the role of Varley at Barclays during his time running the bank when the rorting was happening? Barclays wasn’t involved in the $US40 billion financing deal, but its rigged bids in Libor in 2007-2009, would have (when added to the dodgy bids from other banks) forced Rio and other bank customers to pay more in Libor-linked finance costs.
Media and regulator reports have named at least three other banks involved in the arranging of the Rio debt package as being involved in Libor rigging. These were Royal Bank of Scotland or RBS (where some traders have already been sacked and which was bailed out by the UK government). The giant Deutsche Bank of Germany was another involved in putting together the funding deal for Rio, and has also been implicated in the Libor rorting, as has the giant Swiss bank, UBS (which almost collapsed in the GFC).
At least 20 banks have been implicated in the rorting of Libor (and its variants based on the US dollar, euro, yen and other currencies.) The scandal has seen CEO of Barclays Bob Diamond quit, along with the bank’s chief operating officer. Barclay’s chairman, Marcus Agius, is remaining on the board to oversee the search for a new CEO and he will then follow up on his decision early last week to resign over the scandal.
According to the settlement between Barclays and regulators in the US and UK, the Libor rigging scandal goes back to at least 2005. Diamond had only been head of the bank since early 2011. He succeeded Varley, who is now the lead independent director on the Rio Tinto board, a position of considerable responsibility. Varley was CEO of Barclays from 2004 to 2010, and in that time he was also the boss of Diamond.
This is what the Financial Times wrote at the weekend
“Yet there were tell-tale signs of reputational trouble ahead, and not just from the constant public controversy over Mr Diamond’s pay or the probe into Libor rigging, stretching back to 2005. The bank’s traders have also been under investigation for allegedly manipulating Californian electricity prices. A Canadian court last year accused Barclays of making fraudulent misrepresentations in its dealings there. Its financing of tax avoidance schemes was deemed highly abusive by UK authorities. And the retail bank’s culture has been put in question by the cynical mis-selling of payment protection insurance. The credibility of Barclays’ aspiration to good corporate citizenship, to which the annual report gives high prominence, is in tatters.”
And the Economist wrote in its current issue: “Investigations into the fixing of Libor and other rates are also under way in America, Canada and the EU. Between them, these probes cover many of the biggest names in finance: the likes of Citigroup, JPMorgan Chase, UBS, Deutsche Bank and HSBC. Employees, from New York to Tokyo, are implicated.“Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that Libor and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. ‘This is the banking industry’s tobacco moment,’ says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. ‘It’s that big,’ he says.”
Given this background, the question has to be asked, did the actions of Barclays (and the performance of the Barclays’ management and board, including Varley and Diamond) and the other banks result in Rio Tinto paying more interest than it should have on its $US40 billion debt?
In 2007 Rio said in a press release that: of its “$US40 billion term loan and revolving credit facilities (the “facilities”). This is the largest ever loan facility raised by a UK corporate and the fourth largest worldwide. The money was provided by The Royal Bank of Scotland, Deutsche Bank, Credit Suisse and Société Générale.”
Documents prepared by Rio for a shareholders meeting in 2007 to approve the Alcan deal revealed on page 130 that the $US40 billion Facility Agreement “comprises two term facilities and two revolving facilities (including one swing-line facility) up to a total amount of US$40 billion. Facilities A and D are term facilities for a term of 364 days and five years and one day respectively, Facility B is a three-year revolving facility and Facility C is a five-year revolving facility including a swing-line facility.
“The funds made available under the Facility Agreement will be used to finance or refinance, directly or indirectly the consideration or other amounts payable in respect of the Acquisition and the financial indebtedness of the Alcan Group. The proceeds of the three year Facility B and five year Facility C are also made available for the general corporate purposes of the Enlarged Group.
“Interest rate and fees Advances under the term and revolving facilities will bear interest at rates per annum equal to the margin (which is dependent on the long-term credit rating of the debt of Rio Tinto as determined by Moody’s and S&P) plus LIBOR plus any mandatory cost.”
Alcan itself had $US5.5 billion of debt. The same documents said on this debt “Interest rates fluctuate principally with the lender’s prime commercial rate, the commercial bank bill rate, or are tied to Libor/Euribor/Sibor rates.”
And the 2008 Rio Tinto annual report revealed that: “The group interest charge was $US765 million higher than in 2007, mainly reflecting a full year of increased net debt following the acquisition of Alcan. The debt under the Alcan acquisition facilities continues to incur an interest rate of 30 to 40 basis points over $US Libor.”
Did any of the higher interest cost (the $US765 million) result from Rio paying more for its Libor linked finance in 2008, 2009 and 2010? Was the US Libor rate too high (or too low)? That is the questions tens of thousands of companies and investors are now asking themselves, their auditors, group treasurers and others to find out. It may be all too hard and problematic to do anything for Rio, but shareholders need to be told whether Varley has been questioned as to what he knew of the rigging, and the investigation by regulators, which was well under way before he left the bank.
And in 2010 BHP Billiton had a brush with the Libor rorting when it arranged a huge $US45 billion loan with an interest rate that involved a margin over Libor. It was to finance the $US45 billion takeover of Potash Corporation, which was later abandoned.
Barclays was one of the banks that was involved in the syndicate, along with Spain’s Santander, BNP Paribas, JPMorgan and RBS (again). Twenty five global banks with which BHP previously had relationships were involved in the deal. Each bank, including the Commonwealth, ANZ, NAB and Westpac, has agreed to $US1.8 billion of the potential funding.
The Financial Times reported in August of 2010 that the loan was structured: — Facility A — $US25 billion term loan — 364days at 70bps over Libor, but can be extended by a further 12 months at BHPB’s election. Any asset disposals must be used to reduce this facility, although no asset sales are mandated. — Facility B/Revolving Facility B — $US15 billion three-year facility — 110bps over Libor. Revolving Facility C — $US5 billion revolving facility — duration four years — 130bps over Libor.
This is such a non-story. Nothing but speculation without foundation. If banks were systematically underestimating LIBOR to indicate their financial stability the Rio would have paid less rather than more. If there is a story there, it relates to whether the people who loaned the money to Rio (i.e. the banks and their shareholders) got shortchanged. Or, on the other side, whether the investors who loaned money to the banks (i.e. the Euro retirement funds) got a lower interest rate on bonds with LIBOR reference rates.