Fortescue's debt weathers downgrade despite iron ore doubts

[SYDNEY] Lenders on Tuesday shrugged off the latest downgrade of Fortescue Metals Group, backing the Australian miner's ability to repay its debt amid a strong rebound in iron prices.

Moody's on Monday cut its rating on the world's no 4 iron ore producer by one notch to Ba2 with a negative outlook, some two levels below investment-grade, pointing to a "fundamental downward shift" in the mining sector.

The downgrade highlighted the credit agency's doubts of a sustained rise in iron ore prices, and took Fortescue's rating to two levels below investment-grade, in line with Standard & Poor's, which cut nearly a year ago.

Bids on Fortescue's outstanding US$2.3 billion high-yield bonds due March 2022 barely changed. The bonds are currently bid at 102.12 per cent of par value, having traded as low as 81 percent on Jan 15 before a steep rally in iron ore prices. "Moody's move was already priced in and makes little fundamental difference because no new ground has been broken,"said a Sydney bond investor.

For the miner's US$4.9 billion US loan, average bids were at 85.21 per cent of par value as of Monday's close, unchanged from Friday's bids of 85.25 per cent of par value, Thomson Reuters loan data showed.

The loan has climbed nearly 20 points since Jan 21 on the recent surge in iron ore, one of this year's best performing commodities. The bond is yielding around 9.204 per cent according to the data. "It makes sense to pay off debt when their biggest bond pays a hefty 9.75 per cent coupon when they sitting on a pile of cash," said a bond banker.

In the first half of 2016, Fortescue reduced net debt by US$1.1 billion to US$6.1 billion.

Fortescue Chief Financial Officer Stephen Pearce told Reuters last month the company could easily continue to pay down debt to meet its 40 per cent debt-to-equity target.

Fortescue said in a statement on Monday that the latest downgrade had no impact on its debt capital structure.

Iron ore's 30 per cent price gain this year has defied most forecasts for weakening prices in 2016 due to low-cost supply from Australia and Brazil and weaker Chinese steel demand.

Citi analysts this month forecast prices of between US$45 and US$65 a tonne over the next six months, falling as low as US$35 under a worst case scenario. Iron ore was last at US$55.50 a tonne.

REUTERS