Doubt continues to rise over the future of Fortescue Metals Group Limited (ASX: FMG) after it was forced to abandon its US$2.5 billion bond issue yesterday. While the stock fell to a new six-year low of $1.795, it finished the day 5.3% lower at $1.865.
So What: Fortescue's attempt to raise US$2.5 billion in the junk bond market came after it initially failed to raise the debt in an attractive term loan. With a large portion of its US$8.8 billion in debt due between 2017 and 2019 (as can be seen in the chart below), Fortescue had intended to use the proceeds to repay existing bonds and extend its debt maturity profile. However, it was forced to pull the issue citing "volatility in the US credit markets".
Source: Fortescue Metals Group
Although Fortescue suggested it had "lots of choices in front of us in terms of capital markets" (as quoted by the Fairfax press), it is clear that investors aren't so sure. While Fortescue's efforts to reduce costs and improve productivity have been noble, it is still under pressure in this low price environment where prices have fallen by nearly 60% since January 2014.
UBS has estimated Fortescue's breakeven price to be US$57 a tonne and the commodity was trading at US$55.48 a tonne overnight, according to the Metal Bulletin. As such, it's likely that Fortescue's investors were after higher returns to cater for the high level of risk and Fortescue was unwilling to oblige.
Now What: Given the headwinds facing the industry, Fortescue Metals Group remains a high-risk investment prospect. While some analysts are still confident the miner is generating sufficient cash to repay the debts due in 2017 (and continue paying a small dividend), it will certainly be a rough ride for the miner, and for its shareholders.
