FMG shares drop on debt request

13 Sep 2012, 8:33 pm   -   Source: AAP
Fortescue Metals has had $1.5 billion wiped off the value of its share price. (AAP)

Fortescue Metals has had $1.5 billion wiped off the value of its share price. (AAP)

Fortescue Metals has had $1.5 billion wiped off the value of its share price amid reports it asked lenders to waive its debt covenants for 12 months

Fortescue Metals Group has had $1.5 billion wiped from the value of its market capitalisation as its share price slumped to a fresh three-year low, amid reports it has asked lenders to waive its debt covenants for the next 12 months.

Concerns are growing about the ability of Fortescue to meet its debt obligations as the spot price of the iron ore has plunged more than 30 per cent in the past two months.

A Fairfax newspaper reported on Thursday that Fortescue had asked lenders to waive all of its loan covenants - obligations imposed on the structure and payment of its debt.

Analysts say the highly leveraged company's net debt will peak at about $US10 billion ($A9.60 billion) with current gross debt $US8.5 billion ($US8.35 billion).

The share price of Fortescue - Australia's third largest iron ore miner after BHP Billiton and Rio Rio Tinto, closed down 48 cents, or more than 13.8 per cent weaker, at $2.99.

It had been trading at $3.35 at 1500 AEST as news broke of the debt request.

If bankers do not meet that request and it cannot meet its covenants, Fortescue might not be able to draw down further on its finance facilities and meet payment obligations.

It could also mean its debt falls due immediately.

Fortescue said in a response to a stock exchange query about the sharp fall in its share price that "other than continued market speculation regarding iron ore prices, the company was not aware of any other explanation for the recent price change".

Fortescue also said it was compliant with the Australian Securities Exchange rules about the timely disclosure of information that may affect the value of its securities and the investment decisions of its shareholders (listing rule 3.1).

Standard & Poor's has also joined Moody's and Fitch, putting Fortescue's credit rating on review for a possible downgrade.

The group's BB-plus corporate credit and issue ratings were on CreditWatch with negative implications, with the company at "serious risk of breaching its banking covenants", said S&P.

Fortescue founder and chairman Andrew Forrest, whose shareholding is worth 33 per cent, has insisted the company can ride out the downturn and that demand from China will return.

Fortescue recently shelved nearly $US1.6 billion ($A1.55 billion) of this year's massive expansion plans and cut about 1000 jobs because of the weak iron ore price.

Many analysts believe that, unlike BHP and Rio Tinto, Fortescue is currently not a profitable company and will remain so if iron ore prices stay at $US90 or below.

Morningstar analyst Mathew Hodge said he agreed with entrepreneur Warren Buffet's philosophy that "you have to be in a position to play your own hand" and Fortescue wasn't.

"They don't have the position on the cost curve, they don't have the margins and have got a highly leveraged balance sheet and cash flowing out the door left, right and centre in capital expenditure," he told AAP.

"When it comes to debt, by having to rely on banks for your credit you lose an element of control and the ability to prosper through the cycle and make independent decisions through the cycle."

He said it was significant and a concern that while BHP Billiton and Xstrata Coal were planning to close coal mines in Queensland because of lower prices, Fortescue was committed to plans to build new iron ore mines.

He described Fortescue as a company built to grow and a product of its environment, but that was environment was changing.

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