Fortescue (FMG) shares went for a big run up yesterday after iron ore prices spiked higher overnight Wednesday and the company revealed it had finally got a bond raising away, a month after aborting an earlier attempt.
The shares jumped more than 12% yesterday, after iron ore prices rose by around 5% (both the Metal Bulletin and Steel Index), taking the rally in the last week to more than 13%.
The shares ended up 9.7% on the day at $2.09.
Normally that would have been good enough to spark renewed interest in stocks like Fortescue, but news of the successful, but smaller fund raising in the US junk bond market, added to the positive news.
Not even a downgrading of the company’s credit standing by S&P overnight Wednesday could offset the positive feelings around the market for the embattled iron ore miner.
Fortescue Metals finally got a $US2.3 billion bond refinancing away overnight Wednesday – but not before it was forced to pay through the nose.
According to the reports, the bond will cost Fortescue a massive 10.25% a year. The seven year non-callable (meaning the buyers can’t ask for early repayment) bond was issued at a yield of 9.7% (itself pretty onerous), but was discounted (to get buyers interested) to produce a yield of 10.25%.
The successful issue raised less than the $US2.5 billion sought in March which ended up being pulled because Fortescue didn’t like the yields it would have to pay – reported around 8.5%.
Now it’s paying much more, a sign of the company’s desperation. This bond is repayable in 2022, which extends the company’s debt profile and lessens the debt burden for the next couple of years.
After earlier announcing it had launched an offering for $US1.5 billion of senior secured notes, Fortescue reported it had issued $US2.3 billion of seven-year notes “due to high demand”.
The offer is expected to settle later this week, so the company gets a big cash injection to help it ride out the current depression in the iron ore market. It will add to the net cash of $US800 million on its balance sheet (after deducting $US1 billion in prepayments for iron ore yet to be delivered).
But the cash won’t stay very long in Fortescue’s bank accounts. They money raised will be used repay its existing 2017 and 2018 debt in full and refinance $US450 million of debt scheduled to fall due in 2019.
That will also leave a further $US350 million to strengthen its balance sheet – taking the net cash position to just over $US1 billion (which will rise each quarter as those prepayments are amortised).
