Oct 18 - Fitch Ratings has assigned Australia-based FMG Resources (August 2006) Pty Ltd's USD5bn guaranteed secured term loan due 2017 a final 'BBB-' rating.
The loan is unconditionally joint and severally guaranteed by Fortescue Metals Group Limited (Fortescue, 'BB+'/Negative) and its subsidiaries currently representing more than 95% of the group's consolidated total assets and net income. The credit agreement contains certain clauses usual for this type of loan.
The loan size has been increased to USD5bn from USD4.5bn since the expected rating was assigned on 2 October 2012. The increase in the issue size has not affected the final rating, which is in line with the expected rating.
The proceeds will be used to repay and refinance existing debt, including the buy-back of Leucadia National Corporation notes for USD715m, existing bank debt, and for general corporate purposes.
The secured loan has significantly enhanced Fortescue's liquidity. As at 30 September 2012, cash totalled USD2.4bn and the senior secured loan, after the application of funds and disbursements, will increase cash balance by USD1.7bn.
The rating on the secured credit facility is notched up a level from Fortescue's 'BB+' Issuer Default Rating to reflect the additional provision of quality collateral, including mining tenements. This uplift for a 'BB+' rated company is consistent with Fitch's criteria "Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers".
Fortescue's rating reflects its position as a high-margin producer, which is supported by its low production costs relative to peers and proximity to its customers in Asia. Importantly, the rating reflects Fitch's expectation that upon completion of the capacity expansion by 30 June 2014, within the revised budget, Fortescue's credit profile will improve rapidly and its metrics will be consistent with its 'BB+' rating. Fortescue's rating is also supported by its strategic importance to downstream Chinese steel producers.
The Negative Outlook reflects the current downturn in iron ore prices, and hence lower operating cash flow. Thus, the pace of de-leveraging post capex completion will be slower than Fitch had expected earlier this year.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Liquidity strains especially if iron ore prices remain below USD90 a tonne and capex is not deferred
- Funds from operations (FFO)-adjusted gross leverage remaining above 2.75x upon completion of the capex
Positive: The current Outlook is Negative. The Outlook may be revised to Stable once there is greater clarity that leverage will revert to below 2.75x after the financial year ending June 2014. Rating factors include the impact of a previously announced capex delay, the effectiveness of planned cost reductions and possible sale of non-core assets or minority interest.