Inmet Bondholders Raise Question of Covenant Breach in Takeover

Investors and analysts are questioning whether First Quantum Minerals Ltd. created a breach in terms of $2 billion bonds of Inmet Mining Corp. when it acquired the Toronto-based miner.

The bonds carried restricted-payments covenants, which limit the amount of cash an issuer may use for distributions to shareholders such as stock repurchases or dividends.

In the C$5 billion ($4.8 billion) acquisition in April, Vancouver-based First Quantum employed a bridge loan to buy Inmet, using the target’s assets to support the financing, then paid off the short-term debt with cash, creating a “strong argument” that First Quantum breached the payments provision, according to a report by the researcher Covenant Review today.

“It certainly raises concerns, and we’re currently examining this,” said Kevin McSweeney, portfolio manager at CI Investments Inc., which oversees about $74 billion of assets. “We know that they couldn’t have paid out Inmet shareholders directly. We have questions and doubts about how the company structured these transactions to get around the restricted-payments limits and whether compliance with this covenant was maintained.”

Sharon Loung, a spokeswoman for First Quantum, referred questions to executives in London, who weren’t available outside of business hours.

‘Indirectly Funded’

“It appears that the money that went to Inmet shareholders was indirectly funded by Inmet assets,” Anthony P. Canale, head of high-yield research at New York-based Covenant Review, said in a telephone interview. “The restricted payments covenant of these indentures is designed specifically to protect the bondholders from having assets of Inmet being used to finance a buyout of equity,” he said. “It appears that Inmet’s shareholders were the beneficiaries of a buyout financed with Inmet assets.”

Inmet’s $1.5 billion of 8.75 percent bonds due in June 2020, which were quoted as high as 111.5 cents on the dollar in January, have fallen to 102.4 cents to yield 8.29 percent, according to Bloomberg prices. Its $500 million of 7.5 percent debt maturing in June 2021 is down 12.6 cents from a March high to 96.3 cents to yield 8.14 percent.

First Quantum’s hostile purchase of Inmet gave it the Cobre Panama copper project, which will catapult it to the world’s fifth-largest copper producer.

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