Cliffs Natural Investors Sue for Being Shut Out of Debt Swap

  • Investors say Cliffs Natural has two classes of bondholders
  • Cliffs Natural has faced `severe challenges,' plaintiffs say

Cliffs Natural Resources Inc. was sued by investors claiming to have suffered losses because they were shut out of a private debt swap that was reserved for institutional buyers.

Two investors said in a proposed class-action or group suit that the company violated federal securities law when it executed the private debt exchange that only allowed a select group of institutional bondholders to exchange their unsecured corporate bonds for secured bonds, wrongfully denying retail bondholders an opportunity to participate. 
“As a result, class members were not only precluded from participating in the exchange offer, but were kept in the dark regarding defendant’s view of the exchange offer,” according to the complaint filed Monday in Manhattan federal court.

Cliffs Natural, the biggest U.S. iron-ore producer, on Jan. 27 reported a smaller-than-estimated quarterly loss after lower costs stemmed the effects of slumping sales. 

That day, Cliffs Natural offered certain bond investors the ability to swap six types of unsecured notes they held for as much as $710 million of better-ranked, so called 1.5-lien notes that paid 8 percent and matured in 2020, the company said in a Jan. 27 statement. Only qualified institutional buyers could participate in the exchange, according to the company statement. The company issued $218.5 million of the new 1.5-lien notes in February, according to a March 2 regulatory filing.

The new notes Cliffs issued rank above the unsecured debt the plaintiffs hold, and in their lawsuit, they say that decision created “two classes of holders of class notes with very unequal rights,” according to the complaint filed by investors Gary Waxman and Leonard Hammerschalg.

Patricia Persico, a spokeswoman for the company, didn’t immediately respond to phone and e-mail messages after regular business hours seeking comment on the lawsuit.

Cliffs’ debt exchange was similar to “other distressed debt swaps that offer structurally subordinate security holders the opportunity to move up the capital structure,” according to a Jan. 29 note by Bloomberg Intelligence analyst Richard Bourke.

Cliffs Natural rose more than 15 percent Monday after announcing it will restart a key mine. The company said it will restart production of iron ore pellets at its Northshore Mine in Minnesota by May 15.

The suit is Waxman v. Cliffs Natural Resources Inc., 16-cv-01899, U.S. District Court, Southern District of New York (Manhattan).

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