Fortescue raises $2.3bn to refinance debt

Australian iron ore producer Fortescue Metals Group has sold $2.3bn in junk bonds, less than a month scrapping a similar fund raising and debt refinancing effort amid a slump in commodity prices.

To secure the support of investors, the company, founded by entrepreneur Andrew "Twiggy" Forrest, agreed to pay higher yields than it offered in its proposed March bond issue.

It said the money raised would go towards refinancing its $7.5bn net debt.

"We've seen strong demand from the market which will result in repayment of our 2017 and 2018 debt in full, refinancing of $450m of our 2019 debt and an additional $350m to further strengthen our balance sheet," said Nev Power, Fortescue chief executive, on Thursday.

The bond offer was initially launched at $1.5bn, but there was enough demand to increased it to $2.3bn, the company said.

Shares in Fortescue surged by more than 10 per cent to A$2.11 on the Australian Stock Exchange following the deal.

Fortescue has been racing against time to refinance its debt following its decision to pull a $2.5bn bond issue in March when investors pushed funding costs out to 8.5-9 per cent.

The interest rate on the $2.3bn in bonds sold on Thursday was set at 9.75 per cent but discounts offered on the bonds pushed the yield out to 10.25 per cent, according to market analysts.

"This buys Fortescue some time but it still has the same amount of debt," said Mathew Hodge, analyst at Morningstar.

"The problem for Fortescue is its destiny is not in its own hands. Its future depends on a recovery in iron ore prices and how much production Rio Tinto, BHP Billiton and Vale push into the market," he added.

Clarke Wilkins, analyst at Citi, estimates Fortescue would need an iron ore price of $80 a tonne to refinance almost $6bn debt due in 2019. Citi is forecasting an average price of $40 a tonne over the next three years.

The price of iron ore jumped by almost 6 per cent to $54 on Wednesday following news BHP Billiton would slow its planned expansion in iron ore production, but remains near 10-year lows.

"This bonds sale gives Fortescue a window to pursue other funding options, which include selling a stake in mining assets or infrastructure," Mr Wilkins said. 

Investor sentiment towards iron ore producers has slumped following a halving in the price of the commodity over the past 12 months. Fortescue managed to get its junk bond issue away in spite of S&P cutting its credit rating by one notch on Wednesday to BB, which is below investment grade.

On Thursday following the bond issue S&P also lowered its ratings on Fortescue's senior secured debt to "BB+" from "BBB-", noting the company's secured debt will increase to $7.2bn from $4.9bn under its proposed debt refinancing.

Fortescue, the world's fourth-largest producer of iron ore, has accused its Australian rivals Rio Tinto and BHP of destroying shareholder value by ramping up production at a time of falling prices.

Rio and BHP remain profitable at current prices thanks to lower production costs, while Fortescue is struggling to break even.

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