What: On Thursday morning Fortescue Metals Group Limited (ASX: FMG) announced that it was opening a tender to existing senior debt holders to exchange outstanding debt in 2017, 2018 and 2019 for cash, up to a maximum of US$700m.
In addition, Fortescue announced that it is planning on extending the maturity of its largest loan, a US$4.9 billion senior secured credit facility due in 2019.
So What: Fortescue is one of the most heavily indebted iron ore mining companies in Australia, and likely the world. This increases the risk for investors when the iron ore price falls, as the company's ability to pay down the debt and cover interest payments comes into question.
At December 31 2014, the company had US$8.8 billion in outstanding debt, with the first US$1 billion due in 2017, another US$400 million in 2018, and $6.4 billion due in 2019.
The refinancing process aims to reduce the outstanding debt in the 2017, 2018 and 2019 calendar years by buying back up to US$700 million in exchange for cash. The US$700 million is expected to be funded from a new loan due beyond 2020.
The debt offered for redemption has a dollar weighted interest rate of 7.3%, which if refinanced at 6% could save the company over US$9 million in interest each year.
What Now: If the tender process is successful, Fortescue will be 'off the hook' to a degree and I imagine the market will react positively. Extending the debt profile will give the company more time to pay down its debt and allow it to more readily withstand lower iron ore prices over the medium term.
Fortescue remains an extremely high-risk proposition but offers a better balance of risk vs reward than junior peers such as Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Northern Star Resources Ltd (ASX: NST) that all produce at a higher cost and are in dire financial positions at the current low iron ore price.
