Yesterday and today, two ASX-listed companies together raised a total of US$3.3 billion dollars.
Fortescue Metals Group Limited (ASX: FMG) raised US$2.3 billion; Scentre Group Ltd (ASX: SCG) raised US$1 billion.
(You can read Ryan Newman's full coverage of the Fortescue bond issue here)
Fortescue is paying 9.75% interest per annum; Scentre Group is paying between 2.375% and 3.2%.
Are Fortescue shareholders getting robbed? What's the deal here?
Well, after its failed bond issue a month ago, Fortescue has clearly caved in to the urgent need to repay its debt and was forced to issue such high-yielding bonds to attract investors.
Scentre Group on the other hand has a fantastic reputation among investors both domestically and overseas, which translates into substantially lower rates.
While technically still a new company yet to complete its first year fully independent; Scentre Group benefits significantly from the warm and fuzzy feeling it established as the former Westfield Retail Trust.
However with the extremely negative sentiment surrounding the iron ore sector, Fortescue picked one of the worst times possible to attempt to refinance its debt; trapped between a rock and a hard place, it had no choice but to pay up.
Several ASX-listed companies are in a similar situation to Fortescue and their bonds are actually trading below fair value as investors increasingly believe iron ore miners and mining services companies like Ausdrill Limited (ASX: ASL) could fail to pay back their debt.
Which leads me to today's lesson:
- Always evaluate debt
Investors should actually take an in depth look at debt rather than seeing the 'Company XXX issues bonds' announcement and saying "oh okay…cool."
What is the debt being used for? When is it due? How much interest is the company paying? Might there be risks that lead to a company being unable to pay it back? How likely are they to occur?
With 20-20 hindsight, obviously Fortescue's debt today looks like a bad idea, but it probably seemed a good one at the time. 9.75% interest going forward looks like a real nightmare to my eyes.
On the other hand a number of companies are taking the opportunity to issue low-interest bonds in the US to secure a long-term source of funding at very low cost.
Used correctly, this finance can achieve great things – growing 5% or even 10% per year for a cost of ~2-3% interest is a real win for investors.
Used incorrectly, and you get a Fortescue Metals Group. Learn how to differentiate good debt from bad, and better protect your wealth during the tough times.
