Fortescue Metals Group

Fortescue Metals a headache for Merrill

PUBLISHED : Tuesday, 18 September, 2012, 12:00am
UPDATED : Tuesday, 18 September, 2012, 3:42am

The unexpected suspension of trading in the shares of Fortescue Metals last week is causing headaches for Bank of America Merrill Lynch (BAML), specialist publication Instanter reports.

The lender is trying to syndicate a US$1.5 billion loan for the embattled Western Australian iron ore group.

Banks are concerned Fortescue may renegotiate existing debt facilities. It is also in the spotlight since its shares were suspended on Friday, when it said it expected to make an announcement about restructuring its heavy debt load by this week.

Fortescue has become something of a lightning rod for investor concerns about the prospects for Australia's resources boom, which is stumbling after a seven-year bull run. The stock is down 39 per cent since the end of June.

"There is speculation Fortescue may renegotiate covenants on existing facilities," Instanter reported, noting that the firm's decision to postpone some development should save US$1.6 billion in capital spending for the 2013 fiscal year.

Fortescue was also the subject of a Moody's rating review on August 30. The rating agency said the group needed to "raise substantial incremental funding to meet project delivery schedule" and maintain debt-to-consolidated cash flow covenants.

Fortunes of the world's No4 iron ore miner, which is almost entirely exposed to Chinese demand for the steel-making ingredient, have suffered in tandem with a near-halving in ore prices over the past year.

Shares dived the most in almost four years on Thursday, closing down almost 14 per cent, after a report that the firm had asked its lenders to waive all debt covenants for the next 12 months.

Fortescue, which has more than US$11 billion in debt, reiterated it was meeting all its debt covenants and said it expected to make an announcement regarding "the restructure of its bank-related facilities" by the start of trade today.

"It's clearly a company in strife, and if they hadn't gone into a trading halt today, who knows where their shares would have gone," Tim Gerrard, an analyst at Investec, told Reuters on Friday.

Since early this month, Fortescue's share price has slumped on concerns it will have to raise equity to shore up its funding, a move that founder and one-third shareholder Andrew "Twiggy" Forrest has resisted.

Forrest, a hard-dealing former stockbroker, has almost all his wealth tied up in the company he built, mostly with borrowed money.

Analysts at CLSA, which hosted Fortescue chief executive Nev Power at a forum in Hong Kong on Thursday, said they expected the firm to raise more cash.

In the meantime, BAML's US$1.5 billion syndication comprised a US$750 million loan and US$750 million revolver, offering "high pricing and a short maturity", Instanter reported.