Fortescue is turning to the bond market again to refinance the senior unsecured bonds forming part of its tender offer.
Fortescue has announced that it will launch a US$2.5bn senior secured bond to finance the repurchase of its full existing 2017 and 2018 senior unsecured bonds and up to US$700m of its 2019 senior unsecured bonds.
It was originally expected Fortescue would use bank debt to raise the funding, however the iron ore producer is turning to the US high yield bond market instead to undertake the refinancing. While the company has not yet officially announced the terms of the new bond offering, the new bond issue is expected to be a seven year deal, with a coupon at around the 8% level. It will have equal ranking security with the existing bank loan.
According to Bloomberg sources, the iron ore producer will also extend its US$4.9 billion bank loan to December 2021 and may pay a minimum interest rate of 5.5%, up from the current 3.75% and at the higher end of the range it had been expected to pay. Fortescue has also agreed to extend the deadline for agreeing the bank debt extension from March 13 to March 17.
Overall, Fortescue will end up paying a higher interest cost on the new debt facilities than its existing debt, in exchange for an extension of its debt maturity profile. This would be disappointing for the company given it has been able to consistently improve its interest cost in recent years. The higher interest cost reflects the market’s requirement for a greater risk premium in iron ore than previous.
The iron ore price has continued its downward trend in 2015, falling by 17.3% since the beginning of the year to US$58.90/tonne. This has been driven by continued increases in production from the ‘big 3’ – Rio Tinto, Vale and BHP and a levelling out iron ore demand from China. According to the World Bank, a global glut in the steelmaking commodity may persist for the next two years. The resultant oversupply in iron ore has created uncertainty as to where future iron ore price levels may land.
The new debt structure will give the company ‘breathing space’ to manage the challenging conditions expected in the near term for iron ore. With iron ore prices falling below US$60/tonne, Fortescue is in for challenging conditions over the next few years. It’s cash breakeven price is currently estimated to be between US$53-$55/tonne subject to future currency and oil price levels, so at current iron ore prices it is operating at thin positive cash margins. It remains to some degree at the mercy of the supply and demand forces which drive the iron ore price.
Assuming the full cap of the 2019 bonds is tendered for, Fortescue will have the following bonds outstanding as part of its revised debt structure:
- US$800m of senior unsecured bonds maturing in 2019
- US$2.5bn of senior secured bonds maturing in 2022
- US$1.0bn of senior unsecured bonds maturing in 2022
Once the new bond is priced and its full terms are known, we’ll publish our view on relative value of the various issues.
FIIG expects to assess whether the new secured 2022 issue can be approved as a DirectBond as soon as practicable.
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