1 Month After Scrapping Deal Fortescue Returns To High Yield Bond Market For $1.5B

Fortescue Metals Group is back in market today with a $1.5 billion offering of seven-year (non-call three) secured notes via sole bookrunner J.P. Morgan, according to sources. An investor call is scheduled for 11:00 a.m. EDT, with pricing later today, and proceeds will be used to address the company’s existing notes maturing in 2017 and 2018, according to sources.

The deal is a return to market after the company decided to defer a $2.5 billion offering of secured notes one month ago, which itself was pitched after a $2.5 billion, seven-year term loan offering was dropped.

Investors are being guided towards BB+/Ba1/BBB- rating, according to sources. Note, the first call in three years is at a rare and investor-friendly par plus 100% coupon. Last month's deal included a first call at par plus 50% of the coupon, sources indicated. In addition, if $1 billion of common equity proceeds is raised in the first two years and proceeds are used for debt repayment, then the notes can be redeemed at par plus 50%, then 25%, and par.

Recall the $2.5 billion, seven-year (non-call three) offering was whispered in a high 7% context early in the marketing process, price talk was released at 8-8.25%, and over the course of market deterioration – with other new issues from other commodity credits trading many points below offering prices – investor demands widened towards 9%, according to sources. Credit Suisse and J.P. Morgan acted as joint physical bookrunners on that deal.

Existing Fortescue bonds rallied this morning on the deal announcement, with the bonds being taken out popping around three points and the longer-dated series also trading higher. The 6.875% notes due 2018 targeted in the refinancing gained 3.5 points, to trade at 103, while the 6% notes due 2017 were also bid up to a 103 context.

The longer-dated 6.875% notes due April 2022 not targeted traded as much as two points higher initially this morning, at 74, before settling back a latest trade at 72, trade data show. Note those bonds traded at 85 prior to the previous deal launch last month.

However, amid speculation that the deal will clear wide of where the original deal was guided in March, Fortescue’s covenant-lite term loan due 2019 cooled to an 86/86.5 market this morning, down about three quarters of a point from yesterday, sources said. The paper is currently priced at L+275, with a 1% LIBOR floor, but note the spread is tied to a leverage-based grid ranging from L+275-350.

Benchmark Iron Ore 62% Fe is up 4% today, at $52.9 per dry metric tonne, according to The Steel Index, a division of Platts. Pricing is up roughly 6% week over week and higher by approximately 13% from the record low of $46.7 at the outset of the month.

Fortescue is rated BB/Ba2/BB+. S&P downgraded the company and its debt by one notch this morning, citing expectations that Fortescue's financial risk profile will weaken significantly in the next two years due to low iron ore prices. Moody's last week downgraded its corporate family rating to Ba2 from Ba1 and its secured and senior existing debt to Ba3 from Ba2 and Ba1 from Baa3, respectively. The company’s shares trade on the Australian Securities Exchange, under the ticker FMG.

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