Fortescue has announced that it is proposing to raise a new US$2.5bn senior secured debt issuance. The purpose of this issuance will be to refinance the all of the 2017 and 2018 bonds, and up to US$700m of the 2019 bonds, leaving a minimum US$800m of the 2019s remaining. The tender is subject to the successful completion of the new issue, but given the ample liquidity in funding markets at the moment, we expect Fortescue will successfully be able to raise the new secured financing at a relatively low funding cost.
FMG is proposing the following consideration on each of the bonds (plus accrued and unpaid interest):
For bondholders who validly tender their bonds prior to the Early Participation Date which is 5pm NYC time 17 March 2015:
- 2017s @ US$103.25
- 2018s @ US$103.75
- 2019s @ $100
For bondholders who validly tender their bonds after the Early Participation Date:
- 2017s @ US$100.25
- 2018s @ US$100.75
- 2019s @ $97
Commentary
For FIIG bondholders in the 2019s, the choice will be between the below options.
- To validly tender the bonds early and receive par value.
- To hold onto the bonds, and continu to earn coupon income (and potentially further price uplift) and look to take profit in the market at some later date.
Given the 2019s are callable at approximately $104 in November of this year, and that this news should increase FMG’s bond prices across the curve, it is questionable whether $100 is fair compensation for 2019 bondholders even if it was at a premium to market value before the announcement. It will be interesting to see whether any 2019 bondholders accept being taken out at par. We believe that FMG may need to up its offer on the 2019s to entice enough investors, however we expect holders of the 2017/18’s will accept the offer given the early participation prices are roughly at call price levels.
We note that new secured debt will be much cheaper than the existing bonds given the low funding cost environment. The existing 2019 senior secured facility costs FMG LIBOR + 2.75%, with a LIBOR floor of 1%, meaning they only pay 3.75% on the 2019 bank debt, which is less than half of the interest on the 8.25% 2019 senior unsecured bonds.
Fortescue also plans to extend the maturity of the US$4.9m senior secured credit facility beyond mid 2021, which alleviates the 2019 refinancing pressure.
Commentary on individual FMG lines
- 2017s and 2018s – the tender offer is at call price and represents good value
- 2019s:
- The tender offer is at par but below the November call price of $104
- Overall the news is positive and would place the 2019s at the front of the queue in terms of repayment
- We believe the 2019s remain a buy up to $104 levels
- 2022s:
- Overall news is neutral to positive but this will depend on the term of the new secured issue
- Positives: debt maturity profile extended, cost of funds (and production cost) reduced, which will reduce the probability of default and give the company headroom to manage the downturn in iron ore
- Negatives: 2022s will be more subordinated following the new secured issue, which would reduce their recovery level in a default scenario. Also, the term of the new secured issue will be important – if the new secured debt goes out beyond 2022, then this will be positive for the 2022s
- Overall with the continued high yield on offer, we believe the 2022s remain good value and a buying opportunity. We note there may be some volatility in the bond price overnight as offshore markets react to the news, which could either increase or decrease the bond price depending on the market reaction
Overall, we believe this is good news for the company and bondholders, and should reinforce the quality of this credit in what has been an extremely challenging market environment for iron ore.
Pricing accurate as at 5 March 2015 for current pricing or for more information contact your FIIG representative.
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