Iron Ore Surge Means Fortescue Bond Buybacks No Longer So Cheap

  • Steelmaking material recorded its biggest-ever one-day gain
  • Prices for the Australian miner's bonds have rebounded

As iron ore prices surge, it’s getting more expensive for Fortescue Metals Group Ltd. to buy back its bonds, a strategy that helped the miner slash its debt pile in 2015.

QuickTake Iron Ore Wars

The producer of the steelmaking material has been busy cutting costs, and with its notes so beaten up, it’s used the spare cash generated to repurchase debt at a discount to face value. Although the revival in iron ore is good news for revenue, the company’s bonds have also rebounded, making debt retirement less appealing for the moment.

“The recent opportunity they’ve been taking advantage of -- in buying back their bonds at a steep discount -- has largely been and gone for now,” said Michael Bush, a credit analyst at National Australia Bank Ltd. in Melbourne.

Confidence in the miner has surged this week as the price of iron ore in China rose by 19 percent in just one day to $63.74, its biggest-ever gain. The firm also announced an accord with the world’s biggest producer Vale SA that could cut costs, pave the way for joint ventures and see the Brazilian company take a stake in Perth-based Fortescue. Any sort of fresh equity injection would be positive for Fortescue from a credit perspective, according to NAB’s Bush.

Fortescue is currently rated two levels below investment grade by both Moody’s Investors Service and Standard & Poor’s.

Bond Rally

The price of Fortescue’s $2.16 billion of March 2022 bonds on Monday rose 6.25 U.S. cents to 105.25 cents in the dollar, according to Trace prices. That’s the first time Fortescue’s largest outstanding bond has been above par since November, having dropped as low as 83 in January. The yield on the 9.75 percent coupon notes fell to an eight-month low of 8.61 percent from as much as 14 percent just seven weeks ago.

The company has already retired $140 million of the securities it initially sold on that line, and has bought back more than half of its other two issues. It has $478.18 million of April 2022 debt outstanding and $576.74 million of November 2019 notes, according to data compiled by Bloomberg. Both of those lines continue to be priced at less than face value, although they have rallied as well.

Shrinking Debt

In the second half of last year, Fortescue repaid $1.1 billion of debt, trimming its net borrowing pile to $6.1 billion as of Dec. 31, according to filings released last month. Those early repayments generated annualized interest savings of about $88 million.

Chief Financial Officer Stephen Pearce said last month that the world’s fourth-biggest iron ore producer intended to keep cutting its debt burden and that it has more than $1 billion of firepower on its balance sheet.

“Fortescue has consistently communicated its commitment to further debt reduction and will continue to take advantage of market conditions to repurchase and retire outstanding securities as opportunities present,” Fortescue said in an e-mailed response to questions on Tuesday. “We will advise the market as and when there are any material developments in this regard.”