Fortescue has made a name for itself, not just in the iron ore mining business but also in the bond trading business. As recently as February, Fortescue took advantage of nervousness in corporate bond markets to buy back a chunk of its outstanding debt at a sizable discount to face value.
Now Rio Tinto, a blue-chip titan of global iron ore mining, has announced a tender for up to USD$1.5 billion of four different series of 2017 and 2018 bonds issued by Rio Tinto Finance plc. The offer is to buy 2017 and 2018 bonds, with the two series of 2017 bonds to be repurchased at US Treasury Notes + 30bps. Funds which are left over after this transaction will be available for a Dutch auction of two series of 2018 bonds, which will also be priced with reference to US Treasury Notes.
Three of the four series bonds in question are trading at close to face value after recovering from price falls early in the year. Assuming these bonds are purchased by RIO at a price not too different from the current price, Rio will make either a very modest profit or loss on the transactions. On the other hand, the 6.50% 2018 bonds were last quoted at closer to USD$109 per USD$100 face value and Rio would make a very definite loss if it were to purchase any of these bonds.
Rio is an exceptionally large company and potentially making a loss on the 6.25% bonds could be considered as just an inconvenience. A company with sales revenues in the tens of billions may well be justified in considering a few (tens of) millions of dollars as just loose change but typically a company repurchasing debt like this only does so if it can refinance the debt cheaper elsewhere or if it has excess cash. In the case of having excess cash, the company may decide that bond repurchases are the best use for the funds in the absence of any obvious acquisition targets or infrastructure investments. Any such loss however will preclude them from bragging rights when it comes to bond trading skills.