Fortescue has accepted offers to repay US$750m of principal across the 8.25% 2019 and 6.875% 2022 unsecured bonds via the ‘modified Dutch auction’ tender process. With further debt reductions anticipated we continue to believe the 2019 bonds offer good relative value and represent a buying opportunity
Fortescue has announced that it has completed the US$750m tender of its senior unsecured bonds. In aggregate the tendered amounts exceeded US$750m and so Fortescue will not accept any further offers in this round. Fortescue will have around US$2bn of cash available following the tender and we anticipate the company will make further debt reduction.
The media release did not specify the ‘bid premium’ over the base tender price up to which Fortescue repaid bonds. However, the following high level details were provided in the ASX announcement
:
- 8.25% 2019 bonds: US$311m of bond principal outstanding was repurchased for a total consideration US$280m, or a weighted average price of $90 (inclusive of the $3 early participation payment). Following the tender, US$578m of 2019 unsecured bond principal remains outstanding
- 6.875% 2022 bonds: US$439m of bond principal outstanding was repurchased for a total consideration of US$338m, or a weighted average price of $77 (inclusive of the $3 early participation payment). Following the tender, US$478m of 2022 unsecured bond principal remains outstanding
Interestingly, Fortescue repaid more of the 2022 bonds than the 2019 bonds, meaning a greater proportion of the 2022 tendering bondholders offered their bonds at the lower end of the tender range versus 2019 bondholders.
Fortescue has to option to settle repurchases as early as the end of this month and FIIG will advise when this occurs as well as the proportion of bonds (if any) that bondholders who elected this tender option will be repaid. Notably, there was more than US$750m worth of tender offers.
Fortescue has bought back US$1.1bn of bond principal over FY16 to date including the current tender which has generated pre-tax gains of US$192m and annualised interest savings of US$88m per annum. The company has previously stated an intention to buy back a further US$750m of debt so there is a good chance of further bond buybacks.
Following the buyback announcement, Fortescue’s 2019 and 2022 bonds are trading around the lower end of the tender range (~US$88 and ~US$75 respectively). We anticipate further debt reduction by Fortescue given the large remaining cash balance (US$2bn) and the fact that its bonds continue to trade at a material discount to par value.
With the 2019 bonds trading at the ‘mid-to-high’ US$80s we continue to see a buying opportunity in the 2019 bonds, given the potential for further debt reduction as well as the fact that only ~US$600m of these bonds remain outstanding. The bond price will likely exhibit volatility noting iron ore prices are currently at 10 year lows of around US$44 per dry metric tonne (/dmt), however given Fortescue’s anticipated breakeven price of between US$37-39/dmt the miner continues to remain cashflow positive. Over the past 3 years, Fortescue has made significant progress in terms of cost reduction. The figure below compares Fortescue’s relative cost competitiveness three years ago versus today – it is now the third cheapest producer of iron ore globally and made more significant progress on cost improvement than its peers.
Source: Fortescue presentation
View the ASX announcement
Please contact your FIIG representative for further information on the Fortescue bonds.