Fortescue has continued its impressive run of debt reduction, by announcing its intention to repay a further USD700m of its 2019 secured term loan
This debt repayment will create continued positive momentum for the company’s credit rating. Fortescue’s current corporate rating of BB/Ba2 is two notches away from investment grade and we consider it likely that Fortescue will achieve an investment grade credit rating if iron ore prices continue to remain supportive.
Fortescue’s remaining bonds are currently indicatively offered at the following yields to worst:
- Unsecured 2022 bond: 4.70% (yield to April 2017 call date @ USD103.438 call price)
- Secured 2022 bond: 4.00% (yield to March 2018 call date @ USD109.75 call price)
The bonds have rallied strongly over 2016 generating solid returns for bondholders. However with the prospect of early calls on both bonds in the next 12 to 24 months, we expect any further upside to slow down and now may be a good opportunity for holders to take profit.
The term loan repayment will be made at par on 16 September 2016 and will generate annual interest savings of USD26m per annum. With both 2022 bonds now trading at levels above par, Fortescue could be more inclined to continue to make further repayments on the 2019 term loan in the near term, because of the loan’s earlier maturity date as well as its ability to be repaid at par level versus the bonds whose call prices are at a premium to par value. However, we think the company will look to roll over its 9.75% secured bond at the first call opportunity given it would most likely be able to raise new debt and refinance this expensive bond at much cheaper levels.
Fortescue has now repaid USD3.6bn in debt since the beginning of FY16, bringing total debt outstanding down to USD5.6bn. A summary of Fortescue’s debt maturity profile is outlined below:
Source: Fortescue
A link to the announcement is available here.
Please contact your FIIG representative for further information on the Fortescue USD bonds. Available to wholesale investors at a minimum face value of USD10,000.