Fortescue Metals Group Limited (ASX: FMG) has shockingly decided to pull its US$2.5 billion secured bond issue which it announced just yesterday, stating that its "disciplined cost objectives were not met".
Initially, the miner's intention had been to raise debt in an attractive term loan but it was unable to do so, likely due to the strong headwinds facing the mining industry. Instead, it turned to the junk bond market where it hoped to raise US$2.5 billion, whereby the proceeds would go towards extending the company's debt maturity profile. As it stands, the miner has a net debt of US$7.47 billion, much of which is payable between 2017 and 2019.
Source: Fortescue Metals Group
Unfortunately, that initiative has also failed with Fortescue's CEO Nev Power saying that: "Debt capital markets were not favourable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage."
Given the enormous risks facing the iron ore industry right now, US investors were likely looking for a higher rate of return – particularly with most analysts forecasting further falls for the commodity over the course of the year. A report in the Australian Financial Review suggests investors had been hoping for a rate of around nine per cent while the company's bankers had hoped to issue the debt "in the high seven per cent area".
Unsurprisingly, the shares opened substantially lower as a result of the decision as investors become increasingly concerned about the miner's future. The stock fell 5.8% to a new six-year low of $1.855 while Macquarie also cut their price target on the stock by 19% to $2.10 per share.
Here's what this means for Fortescue Metals Group
Although it cited "volatility in the US credit markets" as the reason for its terms not being met, the announcement is a bad look for Fortescue Metals Group. As quoted by the Fairfax press this morning, NAB credit analysts said it would "certainly not [be] a good look following the reported similar failure to attract sufficiently attractive terms for a proposed syndicated loan."
The fact is, Fortescue Metals Group remains an extremely risky bet for investors – particularly now that the iron ore price is trading below US$57 a tonne, according to the Metal Bulletin (notably, UBS estimates that Fortescue's breakeven price is at US$57).
Rather than taking an unnecessarily high level of risk on the miners, there are plenty of other great companies trading at compelling prices right now, including this gem our top analyst has recently uncovered.
