What happened?
This morning Fortescue Metals Group Limited (ASX: FMG) received great news from the S&P Global Ratings Agency (S&P) as it has upgraded Fortescue's corporate credit rating.
So what?
S&P's corporate credit rating of listed companies is used by financing companies to determine if, and at what terms, they will lend money to the company in question. The company rating may also determine how any bonds issued by the company are rated.
A triple-A rating (AAA) is the highest possible, while the lowest is known as 'junk' status, where S&P really don't think you're highly likely to repay debts.
S&P upgraded the following:
- Fortescue's issuer credit rating to BB+ from BB;
- Senior secured rating to BBB- from BB+;
- Senior unsecured rating to BB- from B+; and
- Confirmed the stable outlook on all ratings.
Chief Executive Officer Nev Power said: "Our productivity and efficiency initiatives have achieved sustained cost reductions, and significant free cash flow has continued to be applied to debt repayment. We are again pleased that S&P have acknowledged the strength of Fortescue's balance sheet through the continued execution of our debt repayment strategy. This has led to improved credit metrics which is now reflected in S&P's upgrade of the issuer credit rating to BB+, and the senior secured rating to investment grade BBB-".
Where to from here?
Unfortunately for shareholders this change makes little difference to the debt Fortescue has already issued, but could make it easier for Fortescue to borrow money in the future.
Fortescue's share price has gone through the roof as the iron ore price surged from US$40 to US$80 over the last 12 months, although it's settled back a little lower now. The company's management team wisely paid down another US$1 billion in debt last week to take the outstanding debt down to just US$1.98 billion due in 2019, and around US$2.5 billion due in 2022.
Does this mean more dividends?
I expect we will continue to see the company prioritising paying down debt as it would be a safer investment with lower debt. This may restrain dividend payments in the short term but should result in a stronger company coming out the other side.
Sadly however, I think the upside from here could be limited seeing as the share price has more than doubled to over $6 this year. In fact there could be better options to buy now.
