Forrest’s Fortescue Gets New $4.5 Billion Loan; Shares Surge

Fortescue Gets New $4.5 Billion Facility to Refinance Loans
Fortescue, which had $9.1 billion of debt before today’s statement and a market value of A$9.3 billion ($9.7 billion), held a call earlier this month to reassure bankers in Asia about its finances, according to a person familiar with the matter. Photographer: Carla Gottgens/Bloomberg

Billionaire Andrew Forrest’s Fortescue Metals Group Ltd. got $4.5 billion of new loans, fueling its biggest share jump in three years and easing concern the company may need to sell assets or stock to pay debt.

The five-year facility, underwritten by Credit Suisse Group AG and JPMorgan Chase & Co., extends the earliest repayment date of the company’s debt to 2015, Perth-based Fortescue said today in a statement. Australia’s third-biggest iron ore producer began talks with banks to seek changes to loan terms as iron-ore prices fell this month to near a three-year low.

The deal eases pressure on Fortescue to sell more assets or undertake a share sale that would have diluted Forrest’s stake and shores up finances strained as China’s slowdown pushed iron ore prices down by almost a quarter this year. The company cut jobs and its full-year spending forecast by 26 percent to $4.6 billion this month to bolster margins and horde cash.

“It will probably remove the need for them to raise capital anytime soon,” Chris Weston, an institutional dealer at IG Markets, said from Melbourne. “They’ve now got the flexibility to sell non-core assets as and when they need it ”

Fortescue rose 17 percent to A$3.50 at the close of trading in Sydney, the most since June 11, 2009, as trading resumed after a halt on Sept. 13. That gave the company a market value of A$10.9 billion ($11.4 billion).

Forrest’s net worth had dropped to $3.4 billion on Sept. 13, according to data compiled and calculated through the Bloomberg Billionaires Index. More than 97 percent of his wealth is linked to shares of Fortescue. He bought $137 million worth of shares in June and another $38.6 million in August.

Ore Prices

The company has also been boosted by a rebound in iron ore prices, which have gained 18 percent this month. Ore for immediate delivery at the Tianjin port in China rose 3.4 percent yesterday to $105.1 a metric ton, the highest since Aug. 21. They’ve gained on speculation steel mills will speed imports because of government spending on infrastructure projects estimated by Nomura Holdings Inc at about 1 trillion-yuan ($158 billion).

Fortescue, which had $9.1 billion of debt before today’s statement, said Sept. 13 that it was in compliance with all its banking covenants. The covenant issue would overhang the company until cleared by a waiver, recovery in the iron ore price, an equity raising or asset sales, National Australia Bank Ltd. said in a Sept. 14 report.

Restrictions Removed

“This package effectively removes all of the restrictions and all of the time pressure out of our balance sheet to allow us the time and flexibility to finish our expansion and to ride out any volatility in iron ore prices,” Chief Executive Officer Neville Power said in an interview on Bloomberg Television’s “Asia Edge” with Rishaad Salamat.

There’s no need “whatsoever” for an equity raising, Power said separately on a conference call. The company, which signed an agreement this month to raise $300 million selling a power plant to TransAlta Corp., isn’t in any rush to sell assets now, he said.

“We have a large number of those projects in the future that we could introduce partners to,” Power said on the call. “Underlying all of that is that we’ll only consider those options if we get the true long-term value of those assets.”

Time for Forrest

The new loan, which removes earnings-linked covenants, hasn’t been finally priced, Chief Financial Officer Stephen Pearce said on the call. The company expects “no material change” in the costs of funds, he said, citing the company’s unsecured bonds that traded at around 7 percent.

Forrest “has bought himself more time, but he still has the problem of a lot of underlying debt,” Glyn Lawcock, Sydney-based head of resources research for UBS AG, said by phone. “There are still a lot of unanswered questions, such as the interest rate and additional liquidity that may be needed.”

Moody’s Investors Service said Sept. 4 that Fortescue, rated at its third-highest junk grade of Ba3, remained under review for a 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.

Australia Forecast

The new loan “will be sufficient to cover their working capital requirement and obviously to repay those debts that were associated with the covenants,” David Lennox, a resources analyst at Fat Prophets in Sydney, said today by phone. It gives “them a needed cash injection and removes some of the risks that they had in those projects,” he said.

Australia, the world’s biggest iron ore exporter, today cut its price forecast for this year by 7.4 percent on concern that a slowing economy in China, the largest buyer, will curb demand growth. Prices will average $126 a ton in 2012, compared with a June estimate of $136 per ton, the Bureau of Resources and Energy Economics said in a report today. The steel-making raw material may average $101 a ton in 2013, from $131 estimated in June, the Canberra-based bureau said.