Fortescue Metals Group of Australia, the world’s fourth-largest iron ore exporter, has pulled a $2.5 billion debt sale amid a 48 percent plunge in the price of iron ore that prompted investors to demand better terms than Fortescue was willing to offer.
“Debt capital markets were not favorable at this time,” Fortescue’s chief executive, Nev Power, said in a statement.
In trading here on Wednesday, shares of Fortescue closed down 5.3 percent to a six-year low.
Fortescue had this week sought to borrow $2.5 billion through the loan market in the United States. But loan investors also demanded better terms than Fortescue was offering, leading the Perth-based company and its bankers at Credit Suisse to turn to the bond market with its higher financing costs.
Fortescue was planning to use the proceeds of the $2.5 billion debt sale to repay $1 billion of notes maturing in 2017 with a coupon of 6 percent, $400 million of notes due in 2018 with a coupon of 6.875 percent, and $700 million of notes due 2019 with a coupon of 8.25 percent.
The iron ore miner also wanted to sell $300 million of debt for working capital purposes.
“Rather than lowering the interest cost, we understand the funding cost for the proposed $2.5 billion secured note was likely to be 8.5 percent to 9 percent; hence why the offering was pulled,” said Citigroup analysts in a research note.
Citigroup said Fortescue has $1.6 billion in cash and no debt maturing until 2017.
The price of iron ore has fallen 48 percent in the past year, to about $61 a ton, according to Metal Bulletin data. But Fortescue says its mining costs are less than half the current price of iron ore. Margins may have collapsed after the end of the commodities boom but Fortescue is still profitable, the company has said.
Bankers say Fortescue’s strategy is to refinance its debt and extend its maturity, especially given the gloom surrounding the commodity market. Fortescue wanted to push the maturity of its notes through its aborted refinancing deal beyond 2021.
On top of the notes that Fortescue attempted to refinance, the company also has $1 billion of unsecured notes due in 2022 and a $4.9 billion senior secured credit facility that matures in 2019, according to Citigroup.
“Given the aborted refinancing, Fortescue may look to additional customer prepayments, currently $1.2 billion, to be delivered over the next few years, as a means to boost cash flow and repay maturing debt,” the Citigroup analysts said.
Source: NW Times