Fortescue Seeks to Extend $4.9 Billion Debt as Ore Slumps

Fortescue Metals Group Ltd., the world’s fourth-biggest iron ore supplier, is seeking to extend the maturity on debt of $4.9 billion beyond 2021 as the plunge in raw material prices curbs profits.

The Perth-based producer will begin a new $2.5 billion secured debt issue and has made an offer to holders of unsecured notes due to mature between 2017 and 2019 to tender them for repurchase, subject to a cap on 2019 notes, it said today in a statement.

“It’s a good credit market environment and given the weakness in the iron ore market they are probably having to make some concessions,” Michael Bush, head of credit research at National Australia Bank Ltd., said by phone from Melbourne. “One of those concessions is moving toward secured debt, to really bring down the cost of funding.”

Fortescue, which has already lowered spending plans by half and reduced staff, closed unchanged at $2.29 in Sydney trading and has declined 16 percent this year.

The producer is targeting further savings after net income fell 81 percent in the six months ended Dec. 31 to $331 million, as the price of iron ore has tumbled 47 percent in the past year. A global glut in the steelmaking commodity may persist for the next two years, according to the World Bank, which forecasts that the steel-making ingredient will average $75 a metric ton this year.

Net Debt

“The refinancing will extend Fortescue’s debt maturity profile while maintaining flexibility and minimizing interest cost,” Chief Executive Officer Nev Power said in the statement. “This initiative complements the great work done in reducing costs and improving productivity and efficiency.”

Fortescue, which had net debt of $7.5 billion as of Dec. 31, said it will finalize its refinancing in the next few weeks.

The producer has issuer ratings of BB+ with a stable outlook at both Standard & Poor’s and Fitch Ratings, one step below investment grade, and it carries the equivalent Ba1 rating with a stable outlook at Moody’s Investors Service.

While S&P on Thursday affirmed the miner’s issuer rating, it placed Fortescue’s senior secured and senior unsecured debt ratings on CreditWatch with negative implications. It said in a statement that the planned refinancing “is likely to weaken the recovery prospects of both the existing senior secured and unsecured debt holders.”

Secured Debt

Fitch said that while the proportion of Fortescue debt that is secured will rise to 84 percent, this is unlikely to impair senior unsecured creditors. It expects to rate the new secured facility BBB-, one level above the miner’s issuer rating.

Fortescue’s 2019 notes yielded about 7.75 percentage points more than U.S. Treasuries on March 4, having fallen from as high as 10.64 percentage points on Dec. 16, according to Trace pricing.

The miner previously took about $5 billion in new loans in 2012 as iron ore prices hit a then three-year-low.

Iron ore with 62 percent content delivered to the Chinese port of Qingdao fell 0.5 percent on Wednesday to $61.94 a ton. It fell on Feb. 9 to $61.20 a tone, the lowest on record dating back to May 2009.

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