Fortescue Holds Talks With Lenders on Potential Debt Waivers

Fortescue Metals Group Ltd. (FSUGY), Australia’s third-biggest iron ore producer, said it’s in talks with lenders for potential changes to debt terms after price declines, triggering a record drop in its U.S. securities.

The company is seeking “potential waivers in the event that covenants are put under pressure by extended volatility in the iron ore market,” Perth-based Fortescue said yesterday in a statement. It said it remains fully compliant with its financial covenants and has full access to all its funding facilities.

Fortescue, which has A$8.7 billion ($9.2 billion) of debt, held a call last week to reassure bankers in Asia about its finances as it seeks to syndicate a $1.5 billion facility, according to a person familiar with the matter. Iron ore has fallen 31 percent this year, prompting the company this month to cut its annual spending forecast by 26 percent to $4.6 billion.

“The company lacks flexibility to operate in a way it would like to because it’s being constrained by the fall in the iron ore price, ” said David Lennox, a resources analyst at Fat Prophets in Sydney, said by phone. This “has impacted the balance sheet and the debt ratio,” he said.

Fotescue’s American depositary receipts fell 12 percent overnight to $6.45, after their Sydney-traded shares yesterday fell the most since Dec. 22, 2008, cutting the company’s market value to A$9.3 billion and slicing about A$500 million off Chairman Andrew Forrest’s wealth.

Debt Compliant

The company is “compliant” with the terms of its debt, Chief Executive Officer Neville Power said yesterday in Hong Kong. The company extended the syndication deadline until the end of the month, according to a person with knowledge of the situation this week.

The extra yield investors demand to hold Fortescue’s $2.04 billion of 7 percent bonds due in November 2015, instead of Treasuries, surged 56 basis points yesterday to 756 basis points, BNP Paribas SA prices showed.

“If Fortescue has breached its covenants, then it would be up to the lenders and the company to negotiate going forward,” Fat Prophet’s Lennox said yesterday by phone. “But generally it would require some type of injection of capital or some form of restructure or repayment.”

Moody’s said Sept. 4 that Fortescue, rated Ba3, remained under review for a debt-rating cut as a result of the drop in iron ore prices. A rebound in iron ore to about $115 to $125 a ton will “substantially reduce concerns around liquidity and covenant pressure,” it said.

The company may face a $1.7 billion expansion funding shortfall on lower cash-flow estimates, Citigroup Inc. said in a Sept. 5 report.

To contact the reporter on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net

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