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Fortescue scraps $2.5 billion refinancing, shares drop

Sergio Dionisio | Bloomberg | Getty Images

Fortescue Metals Group, the world's fourth-largest iron ore miner, has pulled a $2.5 billion high-yield bond issue after a weak response from investors worried about tumbling iron ore prices.

Fortescue, which had net debt of $7.5 billion at Dec. 31, had been looking to push out any debt repayments by up to four years to 2021 and cut its interest rates, with iron ore prices stuck at six-year lows and analysts forecasting worse to come.

But it ended up canceling the seven-year senior secured bond offering in New York despite indicating to investors it would be prepared to pay a yield as high as 8.5 percent, market sources said.

"Debt capital markets were not favorable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage," Fortescue Chief Executive Officer Nev Power said in a statement.

Fortescue shares fell 7.6 percent to a more than six-year low of A$1.82 as investors worried that it may need to sell new shares to shore up its finances.

Analysts had seen the move to refinance as a prudent step as they feared it may not be able to generate enough cash to pay debt due from 2017 if current iron ore prices persisted.

"It's disappointing, because if they were successful, it would have meant there was basically no debt due this decade," said Macquarie analyst Hayden Bairstow.

"Their ability to weather any volatility in the iron ore price would have been much better, particularly in terms of what the market will do to equity values if the iron ore price falls like we think it will."

Read MoreWhy iron ore won't rebound any time soon

Fortescue's $1 billion 2017 and $1.5 billion 2019 bonds are expected to be marked down significantly when U.S. trading resumes, a trader said.

In a further reflection of investor uncertainty, its $4.9 billion U.S. loan traded at less than 90 percent of par value on Tuesday, down from more than 91 percent in the previous session, according to Thomson Reuters Secondary Market Intelligence.

Loan bid

Investment banks Credit Suisse and JP Morgan, lead managers for the issue, had first tried to arrange refinance for Fortescue in the U.S. loan market, but investors showed little interest despite the miner offering more than 400 basis points over the London interbank offered rate (Libor), the sources said.

Iron ore prices have fallen 50 percent over the past 12 months, hitting Fortescue's profits. The miner has sought to compensate for the price slide by stepping up exports and cutting costs, but its earnings still tumbled 80 percent to $331 million in the half-year to December 31.

Iron ore fetched $57.60 a tonne on Wednesday, the lowest since index pricing was introduced in 2009.

Fortescue said volatility in U.S. credit markets "resulted in terms and conditions that did not meet its objectives."

"Fortescue continues to maintain significant flexibility in its debt maturity profile, has no financial maintenance covenants and does not have any debt maturing until April 2017," the company added.