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FMG slumps after canning bond issue

FMG slumps after canning bond issue

UPDATE 1.15pm: Shares in Fortescue Metals Group hit a fresh six-year low today after the iron ore miner axed plans for a $US2.5 billion bond issue to refinance its extensive debt pile.

The shock decision, which has wiped more than 5 per cent off Fortescue’s share price, came after WestBusiness last week revealed that the iron ore miner was facing an investor backlash in New York to its refinancing plans because of the terms it was demanding.

Despite a high appetite for yield products among US investors, the terms that Fortescue was demanding were deemed unreasonable at a time of plummeting iron ore prices.

It has sent shock waves through Fortescue’s shareholder base at a time when there already are concerns about the miner’s future viability given the weak iron ore price.

Yesterday Fortescue changed tack on its refinancing, replacing plans for a $US2.5 billion senior secured debt issue announced a fortnight ago to a senior secured note offering worth the same amount. The switch from term debt to the junk bond market was seen as further evidence that Fortescue was struggling to secure debt on its desired terms.

Announcing today that it had also canned the note offering, Fortescue said the decision had been taken because its “disciplined cost objectives were not met”.

“While Fortescue received investment grade ratings on the secured offering and significant investor interest in the proposed refinancing, volatility in the US credit markets resulted in terms and conditions that did not meet the company’s objectives,” Fortescue said in a statement.

It is understood the market was demanding a higher interest rate on the bonds than FMG was willing to pay.

“Accordingly, Fortescue has chosen not to pursue the refinancing at this time,” the company said.

Fortescue's plan was to use the $US2.5 billion raised to repay its 2017 and 2018 bonds.

Chief executive Nev Power said while the company had no debt maturing until April 2017, the objective of the refinancing was to extend Fortescue’s maturity profile and minimise interest costs.

“Debt capital markets were not favourable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage,” he said.

The company said it continued to maintain significant flexibility in its debt maturity profile, had no financial maintenance covenants and did not have any debt maturing until April 2017.

FMG said about 60 per cent of its debt remained available for early repayment or refinancing prior to maturity at its option.

“Fortescue’s cash on hand and positive operating cashflows will continue to provide a strong basis for voluntary repayment or refinancing of debt well in advance of maturities,” the company said in a statement.

Fortescue’s margins have been squeezed in recent months by the plunging price of iron ore and the company’s significant debt burden.

Its response has been to slash operating costs wherever it can and seek to refinance its debt on more favourable terms.

The key Tianjin iron ore spot price in China fell again yesterday to $US57.60 a tonne.

Fortescue shares slumped to a fresh six-year low of $1.795 this morning before recovering some lost ground to close at $1.865, still 10.5 cents, or 5.33 per cent lower for the day.