(The following was released by the rating agency)
SYDNEY, October 02 (Fitch) Fitch Ratings has assigned Australian-based FMG Resources (August 2006) Pty Ltd's proposed USD4.5bn guaranteed secured term loan due 2017 an expected rating of 'BBB-(EXP)'. The final rating is contingent upon receipt by Fitch of final documentation conforming to information already received.
The loan will be 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 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".
Fitch does not believe that secured debt of this size will impair Fortescue's senior unsecured creditors. This is because the USD4.5bn facility (assuming that it is fully drawn) is less than 2x prospective EBITDA of USD2.5bn-USD3bn (using Fitch's mid-cycle commodity price assumption and volumes produced). Fitch's criteria focus on the quantum of secured debt relative to EBITDA, rather than a percentage of total debt, to see if recovery prospects for unsecured creditors are impaired. Fitch's assessment is further reinforced by its expectations of leverage reverting to around 3x by FY15, consistent with the 'BB+' IDR.
The facility's security package does not include mechanisms which introduce payment priorities or other forms of structural preference versus other creditors. Importantly, the unsecured bonds share the same issuer and guarantee structure as the secured creditors.
The proceeds of the new financing will be used to repay and refinance existing debt associated with the company's expansion activities.
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, which means Fortescue will have to take on additional debt to fund its capacity expansion. 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
- 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.
Keywords: MARKETS RATINGS FORTESCUE