Market conditions "not favourable" for Fortescue

Philip Bayley
The refinancing and capital restructuring plans of Fortescue Metals have failed to eventuate, leaving Australia's third-biggest iron ore producer without a funding plan, while the iron ore price heads further downwards..

After announcing a multi-billion dollar debt refinancing in early March, then switching from a syndicated bank loan financing to a seven year bond issue in the US at the start of this week, Fortescue Metals Group announced yesterday that the bond issue won't be going ahead either. Market conditions "were not favourable at this time", the company explained.

At best, this means that Fortescue couldn't get the pricing that it wanted on the bonds. At worst, it means that there was insufficient investor interest in buying bonds issued by Fortescue, even though they would be secured and Fortescue was offering a yield of eight per cent to 8.25 per cent per annum, according to Bloomberg (quoting a source that wished to remain anonymous).

The reality of the situation is probably somewhere in the middle.

With the plummeting price of iron ore, Fortescue's share price has been hit hard, harder than those of BHP Billiton or Rio Tinto. Over the last twelve months Fortescues, shares have fallen more than 60 per cent to A$1.97 at the close on Tuesday, from a peak of A$5.45.

Without going as far as trying to raise equity at deeply discounted levels, Fortescue chose to bolster its balance sheet by extending its debt maturity profile. On March 5, Fortescue advised the ASX that it was inviting bond holders to tender for buy back US$1.0 billion of April 2017 bonds, US$400 million of February 2018 bonds, and up to US$700 million of the US$1.5 billion of the November 2019 bonds.

At the same time, it also sought a waiver of all restrictive covenants and undertakings relating to the bonds, from bond holders. This would of course, encourage many to sell.

The invitation to tender was conditional on Fortescue being able to successfully arrange syndicated loans or new bond issues sufficient to fund the buyback, on terms and conditions satisfactory to Fortescue.

Initially, Fortescue sought a US$2.5 billion secured syndicated loan to fund the buyback. The fact that Fortescue was offering security to finance the buyback of unsecured bonds concerned Standard & Poor's.

An increasing proportion of secured debt relative to unsecured debt caused S&P to place the 'BBB' and 'BB' ratings assigned to Fortescue's secured and unsecured debt respectively, on review for downgrade.

Late on Monday, Fortescue advised the ASX that it was launching a US$2.5 billion secured bond issue in the US s144A market, to fund the bond buyback. The implication of this announcement was that the syndicated loan raising had failed.

The Australian Financial Review reported as much on Wednesday, stating that potential lenders had demanded interest rates higher than Fortescue was prepared to pay. The International Financing Review reported that bankers were demanding yields close to eight per cent per annum.

Yesterday, it became clear that potential secured bond holders had made, at the least, the same demands.

In another advice to the ASX, Fortescue said it would not be pursuing the bond issue and the offer to tender the existing bonds had been withdrawn. Fortescue said: "the objective of the refinancing was to extend Fortescue's (debt) maturity profile and minimise interest costs.

"The company's disciplined cost objectives were not met."

Fortescue said it expected to be able to voluntarily repay or refinance debt well in advance of maturities.

Fortescue's share price fell more than five per cent to A$1.86 on the opening of the market yesterday, and continued to fall through the morning.