March 19, 2015 / 9:04 PM / 3 years ago

RPT-Iron ore gloom chills Fortescue bond sale

(Repeats item first issued on Thursday with no changes to text)

By Mariana Santibanez and Sonali Paul

NEW YORK/MELBOURNE, March 20 (Reuters) - A treacherous snowstorm snarled flights the day Fortescue Metals Group’s CFO touched down in New York on a mission to tap the loan market for $2.5 billion to help the world’s no.4 iron ore miner ride out collapsing iron ore prices.

Fortescue was looking to take advantage of cheap money to pay off notes due two to four years from now and seek an extension on a further $4.9 billion loan so it would have nothing due till next decade.

The timing was terrible - as Stephen Pearce battled through the frigid Manhattan weather, another squall was brewing in the iron ore market that would blow his efforts off course and force Fortescue to scrap its attempted refinancing.

Over the next two weeks, as Pearce and his advisers at Credit Suisse and JPMorgan tried to raise $2.5 billion in first the loan and then the bond markets, iron ore prices slumped from $62 to a six-year low below $58 a tonne, half the price they were at a year ago.

Fortescue also misjudged the appetite of investors who had just forked out $10 billion to Valeant Pharmaceuticals in the second-biggest junk bond sale on record. They had also just snared a 10 percent yield on a $1 billion issue by top U.S. coal miner Peabody Energy.

The pulled deal underscores a collapse in investor confidence for the once unassailable iron ore sector, which powered through the global financial crisis on the back of China’s seemingly insatiable appetite for the steel-making ingredient.

“You just don’t do $2.5 billion in a dangerous sector, especially after the Valeant trade,” said a debt investor who declined to be named.

“We are more negative on iron ore than in energy and any other commodity sector and the big guys are increasing production and there is a mismatch on supply. China GDP and the sector is a mess,” the debt investor said.

The “big guys” are Brazil’s Vale and Anglo Australian giants Rio Tinto and BHP Billiton , who are flooding the market just as China’s growth has slowed, depressing prices and making a bond sale tough at the yields Fortescue was willing to pay.


Fortescue could have learned from Australian miner Whitehaven Coal’s experience. Whitehaven considered tapping the U.S. market late last year to refinance A$1.2 billion ($921 million), but said it was too tricky with U.S. coal miners on their knees, and instead turned to Australian banks this year.

“The execution process was not done particularly well, starting with an unattractive loan transaction and then attempting to shift to the bond market,” said Steven Oh, global head of credit and fixed income at PineBridge Investments.

Fortescue would have been better off tapping the European market, where there is a lack of higher-yield supply, he said.

Ratings agencies are more sanguine than debt investors, saying Fortescue has options to shore up its funding, including selling down stakes in its mines, port and rail.

“The key will be the ability to generate free cash flow and that will be driven by the iron ore price,” said Matthew Moore, senior analyst at Moody’s.

A share sale would be the last resort as it would dilute the one-third stake held in the company by its billionaire founder, Andrew “Twiggy” Forrest, and be expensive after a 62 percent slide in its share price over the past year.

“Whenever you launch a transaction of this nature, you have a lot of personal skin in the game,” a weary sounding Pearce told Reuters from New York late on Tuesday evening, after being holed up in a Manhattan hotel for nearly two weeks.

“You don’t actually know how the U.S. market is travelling until you are actually live doing a deal. At the end of the day we weren’t happy with the cost of capital.” ($1 = 1.3026 Australian dollars) (Additional reporting by Jonathan Schwazburg and Lisa Lee in New York and Sharon Klyne and James Regan in Sydney; Editing by Lincoln Feast and Alex Richardson)

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