Fortescue’s Pulled Bond Is Canary in Mine-Driven Aussie Economy

Fortescue Metals Group Ltd.’s scrapped bid to borrow $2.5 billion stands as a warning of more distress in an Australian economy hamstrung by its dependence on selling raw materials to China.

The company that billionaire Andrew Forrest built into the world’s fourth-biggest exporter of iron ore pulled plans to refinance some of its debt amid a rout in commodity prices. The extra yield investors demand to hold Fortescue’s existing 2022 notes instead of U.S. Treasuries jumped above 10 percentage points to the most since the securities were issued in 2012. The Perth-based company’s shares were little changed Thursday after closing at a six-year low the previous day.

Fortescue’s market value peaked at A$35.8 billion ($28 billion) in 2008 from A$2 million in 2001, and dropped to A$5.8 billion on Wednesday. Its success spurred dozens of smaller companies, driving a record mining-investment boom. The world’s 12th-largest economy is now seeking new drivers of growth.

“Fortescue shelving their $2.5 billion deal is obviously an indicator that conditions weren’t ready to absorb that deal at the right price,” said Michel Lowy, chief executive officer and co-founder of SC Lowy, an independent loan and bonds specialist firm based in Hong Kong. “There is a band of maturities that are coming up. Mining is certainly an industry that has been suffering but more from the equities side.”

Chinese Demand

He said there are 10 to 12 Australian mining-related, high-yield bonds that have repriced on refinancing concerns. The industry’s fortunes are linked to that of Chinese property developers as construction has driven demand for commodities, including iron ore used to make steel, he added.

The seven-year senior secured bonds that Fortescue was looking to place were being marketed to yield 8 percent to 8.25 percent, while some lenders were looking for an all-in yield of 9 percent, according to people familiar with the matter who asked not to be identified.

“It’s obviously tough times out there,” said Glyn Lawcock, head of resources research at UBS Group AG in Sydney. While Fortescue’s next debt maturity isn’t until April 2017, the deal’s postponement “doesn’t leave a great taste in investors’ mouths,” Lawcock said.

Volatile Markets

The yield on Fortescue’s existing unsecured 2022 notes was 10.16 percentage points above Treasuries on Tuesday, Trace pricing indicated. The spread slipped back to 10.05 percentage points at 10:09 a.m. in New York on Wednesday as the bonds were quoted at 75.8 cents on the dollar to yield 12.08 percent, Trace data show.

The company’s existing $4.9 billion term loan maturing in 2019 fell to about 90.25 cents on the dollar from 91 on Monday and 96 on March 5, when the miner announced refinancing plans, according to people familiar with the trades who asked not to be identified because they aren’t authorized to speak publicly.

Fortescue’s shares fell 5.3 percent to A$1.865 in Sydney on Wednesday, the lowest close since January 2009, after the producer said the sale had been postponed, citing volatile U.S. credit markets and a failure to achieve the terms it wanted.

“Debt capital markets were not favorable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage,” Chief Executive Officer Nev Power said in a statement on Wednesday.

The delay came as the price of iron ore, Australia’s biggest export commodity, plunged by the most in more than a week. Ore with 62 percent content at the Chinese port of Qingdao fell 2.6 percent to $55.48 a ton on Wednesday, according to Metal Bulletin Ltd. That’s the lowest since at least May 2008, when Metal Bulletin started compiling weekly prices.

Slowing Economy

It’s also below the reduced price forecast published Wednesday by the Australian government, which lowered its 2015 price estimate to $60 a ton from a $63 projection in December.

The reduction in global commodity prices is putting pressure on the Australian government revenues, hampering its ability to address a slowing economy that’s pushed unemployment to near the highest level in more than a decade. Goldman Sachs Group Inc. has said there is a one-in-three chance that the country will fall into recession over the next year.

With confidence languishing, the central bank has said that it may need to cut its benchmark rate further from an already record low of 2.25 percent, and swaps markets are pricing in a further 0.45 percentage point of reductions over the next year, according to a Credit Suisse Group AG index.

“Commodity prices have declined over the past year, in some cases sharply,” RBA Governor Glenn Stevens said in the statement accompanying this month’s monetary policy decision. “The economy is likely to be operating with a degree of spare capacity for some time yet.”

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