Default Call Forgiven as Biggest U.S. Miner Rides Iron-Ore Rally

  • Cliffs extends rebound as iron gets back over $60 a ton
  • Private debt exchange tantamount to default, according to S&P

With iron ore surging past the $60 threshold, some investors are more than happy to forgive the biggest U.S. producer for a debt arrangement that Standard & Poor’s is calling a default.

Cliffs Natural Resources Inc. shares rose for a fourth straight day on Wednesday, while its most traded bonds reached a six-month high. That’s as a benchmark of the steel-making ingredient extends a gain this year to 39 percent on signs that Chinese demand may be recovering. As iron ore tumbled last year, Cliffs shares plunged 78 percent while the bonds lost 57 percent.

The rebound is set to bolster Chief Executive Officer Lourenco Goncalves’s efforts to return the company to profitability by selling iron ore mined domestically to North American steelmakers and divesting assets acquired in a diversification surge during the commodities boom.

The Cleveland, Ohio-based company is also refinancing.

It exchanged $512 million of second-lien and senior unsecured notes for $219 million in new 8 percent senior secured notes due 2020, spurring S&P to lower its rating to selective default from CC.

“In our opinion, the company’s capital structure was unsustainable,” S&P analysts wrote in a statement Tuesday. “Therefore, we consider this transaction as a distressed exchange, which we view as tantamount to a default.”

Patricia Persico, a company spokeswoman, didn’t respond to requests for comment.

Legal Suit

Last month, Cliffs 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, according to the complaint filed in Manhattan federal court. Cliffs said in a March 15 response that it intends to defend itself against the claims that are without merit.

On Jan. 27, Cliffs reported a smaller-than-estimated quarterly loss after lower costs stemmed the effects of slumping sales. That day, the company offered certain 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. 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.

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.

Shares gained 8.6 percent to $4.32 at 10:56 a.m. in New York and are up 50 percent in the past four days. The company’s notes due 2018 advanced to 56.3 cents on the dollar, the highest since Oct. 15. The bonds traded above 100 cents in September 2014 before tumbling to as low as 15 cents in January when iron ore was below $45 a ton.

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