Fortescue Metals (FMG) shares hit a new all time low yesterday after the embattled iron ore miner abandoned a $US2.5 billion refinancing.
Earlier the company had been forced to switch its fund raising from a loan to a bond issue – but it seems prospective customers baulked at that and demanded interest rates on the bonds that were far too high.
The shares fell 7% at one stage yesterday (all the news broke before trading started at 10 am yesterday) in reaction to the abandonment of its fund raising and news of a nasty 3.3% slide in global spot iron ore prices.
The shares ended the day on a new closing low of $1.865, down 5.3%.
FMG vs BHP vs RIO 1Y – Fortescue under more pressure
Fortescue said in a statement the US-dollar bond offering received “significant investor interest” but that its “disciplined cost objectives were not met”. (i.e. the interest rates demanded by buyers were to high.)
Fortescue complained of “volatility in the US credit markets”, which is understandable given the proximity to the Fed’s two-day meeting and an expected clearing of the way for the first rate rise since late 2008.
The Financial Times commented, "Remove the jargon and it’s clear what happened: investors are demanding high yields to compensate for this risky bet. Its outstanding bonds already show investors are jittery: the price of its 2019 bonds has tumbled to less than $90, from $95.875 earlier this month.”
Fortescue yesterday maintained it has “significant flexibility" given that no debts mature until April 2017.
Fortescue CEO Neville Power said in a statement:
"The objective of the refinancing was to extend Fortescue’s maturity profile and minimise interest costs. Debt capital markets were not favourable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage."
Fairfax Media reported that some of the proposed buyers of the bonds had demanded interest rates of 9% – that’s an extortionate level and Fortescue’s decision to end the offering is easy to understand.
But it all depends on the future path of iron ore prices.
A big fall in the value of the Aussie dollar (like below 70 USc) in the next few months, will help Fortescue, as would a rise in the global spot price towards $US70 a tonne.
But if there’s no change, then it will be a watch and wait, especially with hedge funds and other vultures shorting the shares (a reported 11% of Fortescue’s shares have been borrowed to short by speculators).
Fortescue has around $US9 billion of debt, but none matures until 2017. It has $US1.6 billion of cash (at December 31), so there is breathing room.
But weaker iron ore prices and volatile conditions in the US debt markets will raise more pressure on the company in the meantime.
