Fortescue has launched a tender offer for up to US$750m of its 2019 8.25% and 2022 6.875% senior unsecured bonds
Last week, Fortescue announced its intention to purchase up to US$750m in aggregate of the 2019 and 2022 unsecured bonds. This represents about 40% of the total unsecured bonds remaining on issue.
Bondholders are able to tender their bonds by nominating a price within the stated range, between: US$880 to US$930 for the 2019 bonds and US$750 to US$800, per US$1,000 of principal for the 2022 unsecured bonds. The company has approximately US$2.7bn of cash on hand which it plans to use to settle the repurchase of the bonds.
The tender process is relatively complicated and a summary is outlined below*:
- The tender process has been described by Fortescue as a ‘modified Dutch auction’ process. This means, if a bondholder elects to participate in the tender, they can either specify a minimum bid price which they would be willing to accept in exchange for each US$1,000 of principal (within the ranges outlined above) or not specify a bid price upon which they will be deemed to have specified the ‘Base Price’ as their bid price
- The ‘Base Price’ is effectively the lower end of the price range specified above. For the 2019 bonds, the ‘Base Price’ is equal to US$880 per US$1,000 of principal, and for the 2022 bonds the ‘Base Price’ is US$750 per US$1,000 of principal
- Fortescue has advised that if a tendering bidder wishes to maximise the chance that Fortescue will purchase their bonds they should not specify a bid price. By not specifying a bid price in their tender offer, bondholders are effectively bidding the lower end of the price range (US$880/US$750) as part of the tender offer. Please note that this figure includes an addition US$30 early participation payment to bondholders who submit their tender forms by the 24 November early participating deadline
- Success in having a tender accepted depends on how the bid price specified compares to other bid prices specified by other tendering bondholders. For example, if a bondholder nominates the top end of the offer range and all other bondholders nominate a lower amount, it is unlikely that bondholder’s tender will be accepted
- On the Early Participation Date (November 24), Fortescue will determine the ‘bid premium’ which is the additional amount bid by tendering bondholders over the minimum ‘Base Price’. Fortescue will then use all of the bid premiums across both series of bonds to calculate a ‘clearing premium’ for a particular bond series. The 'Total Consideration' payable will be based on a formula consisting of a base price (being the low end of the tender price range above) plus the clearing premium which will be determined based on the bid prices submitted by tendering bondholders
- The tender offer is scheduled to expire on 9 December however the tender deadline for being eligible for the US$30 early participation payment is 24 November.
- If the amount of tendered bonds exceeds the US$750m tender cap, then tendering bondholders are likely to be subject to a pro-rated scaleback of their tendered amount. However, Fortescue also reserves the right to increase the US$750m tender cap
*Please note that we will provide further communication via email on the steps to participating in the bond tender process and associated timelines.
Example of tender outcome
In relation to the 2019 bonds, if the clearing premium is calculated to be US$20 per US$1,000 of principal, then only 2019 bond tender bids which were less than or equal to the Base Price (US$880) plus the $20 clearing premium (ie: US$900) will be accepted. Please note that this figure includes a US$30 Early Participation Amount (per US$1,000 of principal) for bondholders who submit their tender forms early.
Options for bondholders
- Participate in the tender process. We will provide further details to bondholders around the steps to participating in and completing the tender process forms shortly. Participating bondholders are strongly encouraged to submit their tender before the early participation deadline – we will let you know the date we need to be notified. As detailed above, bondholders may either nominate a bid price (but take the risk that their bid is not accepted), or alternatively not nominate a bid price thereby effectively accepting the minimum base price on offer but maximising their chances of having their bid accepted
- Alternatively, instead of participating in the tender, Fortescue bondholders could sell their bonds. The 2019 and 2022 bonds have appreciated in value since the announcement of the buyback last week and are currently trading around the lower end of the tender price ranges outlined above. By opting to sell now instead of participating in the tender, Fortescue bondholders are more likely to liquidate their position earlier and in a simpler manner than going through the tender process
- Hold onto the bonds in the expectation of further price increases.
With the BHP bonds looking like good value at present, now may be a good opportunity to switch out of Fortescue and into one of the BHP lines available. BHP has a stronger credit rating than Fortescue and is diversified across commodities while Fortescue is purely an iron ore producer. As such BHP is better placed to withstand continued weakness in commodities. This would be a good trade for bondholders in Fortescue, particularly if they want to avoid having to go through a relatively complicated tender process.
Please contact your FIIG representative for further information on the Fortescue bonds.