Fortescue Says It’s Making Progress in Talks With Lenders

Fortescue Says It’s Making Progress in Debt Talks With Lenders
Fortescue, which has A$8.7 billion ($9.2 billion) of debt and market value of A$9.3 billion, 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. Photographer: Carla Gottgens/Bloomberg

Fortescue Metals Group Ltd., Australia’s third-biggest iron ore producer, said it’s made progress in talks with lenders to restructure bank loans after commodity prices declined.

“Discussions with its banks have progressed significantly,” Perth-based Fortescue said today in a statement that requested a trading halt before it updates the market on the talks by Sept. 18. Yesterday, its U.S.-traded securities fell by a record.

Fortescue, which has $9.1 billion of debt and a market value of A$9.3 billion ($9.8 billion), 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.

“Our cash-flow analysis shows they’re operating just above break even on a per ton basis so we do have concerns on their sustainability,” Adrian Prendergast, an analyst at E.L. & C. Baillieu Stockbroking Ltd., said by phone today from Melbourne. “So long as they can maintain their access to the undrawn debt facilities then they’ll be fine in the medium term.”

Forrest’s Wealth

Fortescue’s American depositary receipts fell 12 percent overnight to $6.45, after its Sydney-traded shares yesterday fell the most since Dec. 22, 2008, slicing A$488 million off Chairman Andrew Forrest’s wealth.

His net worth dropped to $3.4 billion yesterday as of 5:30 p.m. New York time, according to data compiled and calculated through the Bloomberg Billionaire Index. His wealth has slid $1.1 billion, or 25.3 percent, this year.

More than 97 percent of Forrest’s wealth is linked to shares of Fortescue. He bought $137 million worth of shares in June and another $38.6 million in August. BlackRock Inc., the world’s biggest money manager, invested almost $97 million on July 6 to raise its stake in Fortescue to 2.1 percent, according to data compiled by Bloomberg.

Debt Compliant

Fortescue reiterated today the company remains fully compliant with its financial covenants and has full access to all its funding facilities.

The company may be trying to sell a 15 percent equity stake to its biggest customer, Baosteel Group Corp., the Australian Financial Review reported in its Street Talk column today, without citing anyone. Meng Haibiao, a media official at Baosteel, denied the reported plan.

Forrest is in talks with billionaire Kerry Stokes’ WesTrac division for a sale and leaseback agreement of rolling stock and heavy machinery to raise cash for Fortescue, the Sydney Morning Herald reported today. Forrest was looking to sell his equipment for A$4 billion, according to the newspaper, which cited unidentified people. Any sale would require approval from the company’s lenders, the report said.

Fortescue spokeswoman Yvonne Ball and spokesman Nathan Vass couldn’t be reached for comment when called on their office and mobile phones. Calls made to Forrest’s office weren’t answered.

Fortescue lender Bank of America Corp. extended the syndication deadline until the end of the month, a person familiar with the matter said this week. Bank of America Merrill Lynch agreed to underwrite the debt facility, according to a stock exchange filing from Fortescue last month.

About 20 lenders have been approached to join the loan and a range of international banks, including Chinese and Japanese, are processing credit approvals, other people said Aug. 30.

“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. This “has impacted the balance sheet and the debt ratio,” he said yesterday.

The extra yield investors demand to hold Fortescue’s $2.04 billion of 7 percent bonds due in November 2015, instead of Treasuries, surged 57 basis points yesterday to 757 basis points, BNP Paribas SA prices showed.

Ratings Review

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.

“We are uncertain how close Fortescue currently is to breaching covenants,” National Australia Bank Ltd. said in a report today. “Clearly though, the covenant issue will be a major overhang over the credit profile until it is cleared - either through a waiver or a clearing through one or more of a major recovery in the iron ore price, an equity raising or asset sales.”

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