Yesterday’s big refunding deal from Fortescue Metals Group (FMG) failed to move investors, but when complete in a couple of weeks time, it will go a long way to easing an emerging concern about the company’s debt burden over the next five to eight years.
Fortescue shares ended up 0.3% at $2.295 after it told the ASX it had put together a $US2.5 billion refinancing package to ease any pressure on its balance sheet from falling iron ore prices
In addition to the deal, Fortescue says it will extend the maturity on its existing $US4.9 billion senior credit facility.
As a result, the majority of the miner’s debt will mature beyond the middle of 2021.
Fortescue had previously faced a 2017 deadline for the repayment of $US1 billion of senior unsecured notes and a further $US400 million in 2018, with the rest occurring around 2020.
Even though the company has been repaying debt ahead of schedule ($US500 million in the December half year alone), some analysts have started looking at the iron ore price and expectations it will remain around these levels for longer than expected, and wondered about the company’s ability to meet these debt repayments.
FMG 1Y – Fortescue pushes back debt deadlines
Fortescue’s net debt rose over the past six months from $US7.2 billion on June 30 to be $US7.47 billion as at December 31.
Fortescue had $US1.6 billion in cash on hand at December 31, has cut or finished its huge investment plan and continues to cut costs (as shareholders in Macmahon Holdings found last month to their cost).
Chief executive Nev Power said the deal would strengthen the company’s balance sheet.
"The refinancing will extend Fortescue’s debt maturity profile while maintaining flexibility and minimising interest cost.
“This initiative complements the great work done in reducing costs and improving productivity and efficiency across all of Fortescue’s operations,” he said.
Fortescue reported a fall in interim profit to $US331 million, from $US1.714 billion a year earlier.
Revenue in the period fell 17% to $US4.858 billion as the global iron ore price fell more than 50%.
At the time, Mr Power said despite the falling iron ore price, the company was still making money and delivering consistent, sustained cost reductions through productivity and efficiency improvements.
The pricing of the Fortescue issue will tell us a lot about how the big ratings groups and investors think about iron ore long term.
With yields in Europe low (and about to rise in the US), a mixed euro/US dollar raising would seem ideal, perhaps with a slab of Chinese yuan as well.
If this works and is well priced, it wouldn’t surprise to see Rio Tinto and BHP Billiton follow Fortescue.
