Fortescue rides iron ore and market sentiment in US dollar blockbuster
Fortescue Metals Group visited the US dollar high-yield market on 19 March, taking advantage of strong business and market conditions to secure a refinancing transaction. The issuer says its deal demonstrates the ongoing strength of the US dollar credit market amid continuing global rates volatility.
The US$1.5 billion 10-year transaction priced with a coupon of 4.375 per cent via Citi, Credit Suisse, J.P. Morgan and Morgan Stanley, having launched with indicative volume of A$750 million. The issuer came to market to repay senior-unsecured notes due in 2022 and for general corporate funding purposes.
The notes have longer tenor and a lower coupon than any of Fortescue’s deals since 2015 (see table).
Fortescue Metals Group public syndicated deals since 2015
| Pricing date | Volume (US$m) | Tenor (years) | Coupon (per cent) |
|---|---|---|---|
| 19 Mar 21 | 1,500 | 10 | 4.375 |
| 6 Sep 19 | 600 | 8 | 4.50 |
| 2 Mar 18 | 500 | 5 | 5.125 |
| 10 May 17 | 750 750 |
5 7 |
4.75 5.125 |
| 23 Apr 15 | 2,300 | 7NC3 | 9.75 |
Source: Australian Securities Exchange 30 March 2021
Penny Stonier, group funding manager at Fortescue in Perth, tells KangaNews the issuer was confident going into the transaction given business performance in calendar year 2020 and the prevailing US dollar market conditions.
Fortescue was able to maintain its operations even during the height of the COVID-19 crisis in the first half of 2020, enabling it fully to capitalise on surging demand for iron ore as countries around the world – principally China – ramped up spending on infrastructure development.
Stonier says Fortescue had record performance in financial year 2020 and the first half of financial year 2021, maintaining the issuer’s strong credit profile among US debt capital markets investors.
“With indices performing at historic lows, and despite volatility, markets presented an opportunity to refinance the maturing 2022 notes,” Stonier adds. “The investor response confirmed that Fortescue is seen as a stable investment and allowed the company to upsize and take advantage of longer-dated debt at a historically low coupon.”
Debt strategy
Fortescue’s operational currency is US dollars and it has a longstanding preference for the US dollar market, supported by the depth of the US dollar high-yield market.
Despite being rated below investment grade, Stonier tells KangaNews that since 2006 Fortescue has been able consistently to access large volume at “investment-grade terms and conditions, which maintain flexibility to support ongoing operations with the capacity to fund future growth”.
The company regularly monitors the Australian dollar debt capital market and expects it to continue growing in the coming years, Stonier adds. But it cannot yet justify issuance away from US dollars given the market’s depth and liquidity.
Fortescue could consider environmental, social and governance (ESG)-linked funding, having announced in March that it is targeting carbon neutrality by 2030. Stonier tells KangaNews: “We are actively engaged with our existing banking group as well as potential new participants to develop various avenues for ESG-linked financing. In line with our commitment to carbon neutrality by 2030, we will align the funding strategy with the pathway to delivering on our objectives.”
Fortescue’s next trip to the public market is likely to be in advance of a US$750 million 2024 maturity. Stonier says the borrower is committed to maintaining investment-grade credit metrics including debt-EBITDA of 1-2 times and gross gearing of 30-40 per cent through the cycle.
In the meantime, Fortescue expects China’s steel industry to continue stoking strong demand for iron ore at least through the first half of 2021 and that the company will continue to generate strong margins and cashflow.
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