FMG 0.04% $24.83 fortescue metals group ltd

I was thinking about how FMG is not yet rated as "investment...

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    I was thinking about how FMG is not yet rated as "investment grade status" by the credit rating agencies. I find this a little puzzling when FMG made a $2.721 Billion NPAT (AUD) last year.  I believe the investment grade status is part of the reason why FMG trades on a current PE of  8.31, when BHP has 12.66 PE and RIO 11.57 PE (per Commsec estimates) i.e. FMG is 52% discount to BHP and 39% discount to RIO.

    So I did a google search and found an AFR article which was published 24 March 2017 (nearly a year ago), which I posted below.  The credit agencies mentioned, S&P and Moodies, have FMG rated at BB+ and Ba1 respectively, both one rating below investment grade status. The senior analysts interviewed acknowledge that 1 year ago, FMG was close to achieving investment grade status, however it appears there were 2 issues which were holding this back;

    1. "How the company is going to look at potential growth initiatives and or diversification" i.e. preferably they need to diversify and mining another metal other than Iron Ore (which management has stated is an objective in the not too distant future).

    2. "And typically when we look at investment grade ratings we see completely unsecured capital structures with little to no secured debt." At the time of this article, Fortescue was paying $1 billion off their debt leaving them with; "$US976 million under its 2019 term loan as well as $US2.2 billion senior secured notes and $US478 million senior unsecured notes maturing in 2022.
    I am not sure with the latest restructuring of debt, how much that leaves FMG with secured note debt. Does anyone on here know?

    It does seem from management's recent announcements that they are working towards overcoming both of the impediments raised by the rating agencies.

    I believe if and when FMG announces a diversification into another metal (regardless of what that metal), we will hopefully see a double bounce in SP from (1) the diversification announcement & (2) the subsequent re-rating of FMG to investment grade status by the rating agencies and a re-rating of FMG's SP and PE ratio.


    AFR article from 24 March 2017

    Fortescue needs to do more than repay debt to reach investment grade status
    http://www.copyright link/content/dam/images/g/s/d/8/9/6/image.related.afrArticleLead.620x350.gv5gze.png/1505443457295.jpg
    CEO Nev Power is stepping down as Fortescue CEO in February. Matt Reed
    Fortescue Metals Group will repay another $US1 billion ($1.3 billion) of debt next week, taking the former junk bond king one step closer to securing investment grade status.

    But credit rating agencies say they want more clarity on Fortescue's financial policies and growth strategies before considering what would be a major milestone in the iron ore producer's transition.

    Fortescue announced on Friday it would repay $US1 billion, or just over half, of its remaining 2019 term loan at par on March 30.

    It comes after $US1.7 billion of repayments in the first half of fiscal 2017 and continues the miner's strategy of taking advantage of strong iron ore prices to significantly reduce its debt pile, which peaked at $US12.7 billion in 2013.
    http://www.copyright link/content/dam/images/g/v/5/w/y/n/image.imgtype.afrArticleInline.620x0.png/1490330805143.png
    S&P Global Ratings analyst Sam Heffernan said while the repayment was consistent with Fortescue's commitment to reduce debt, it didn't impact S&P's BB+ rating on the company, which is one notch below investment grade.

    "Typically for a single commodity producer we would like to see financial policies that are more in line with an investment grade level but also some evidence and a willingness and commitment to support the business at that level through the cycle," he said.

    Bolsters rating

    Moody's Investors Service senior credit officer Matthew Moore said the repayment would further strengthen Moody's Ba1 rating, also one step lower than investment grade.

    "The company has very strong credit metrics for the current rating so any further upward pressure on the rating would depend on the company's ongoing financial policy and ongoing growth strategy," he said.

    "We would be looking for more detail on the company's strategic intentions going forward, how the company is going to look at potential growth initiatives and or diversification.

    "And typically when we look at investment grade ratings we see completely unsecured capital structures with little to no secured debt."

    Thursday's repayment will leave Fortescue with $US976 million under its 2019 term loan as well as $US2.2 billion senior secured notes and $US478 million senior unsecured notes maturing in 2022.

    While an upgrade to investment grade could help Fortescue secure better terms for a refinancing UBS analyst Glyn Lawcock said the miner was generating enough cash to knock off all of its debt at current prices of about $US86 a tonne.

    "I think an investment grade rating is nice to have but is it going to make them run out and change their capital structure? Probably not," he said.

    "I think the benefit from that would be more if they are looking to do other things outside of their current business and need to borrow to do that.".....

    Read more: http://www.copyright link/business/...nt-grade-status-20170323-gv5gze#ixzz59LnOdV45
    Last edited by Big Short: 11/03/18
 
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