Earlier this month YieldReport reported on Fortescue Mining’s announcement of a tender to buy back some of its 2019 and 2022 bonds. This week the company announced the results of the tender with offers received worth $1278.6million in face value terms. Fortescue bought back $750million in face value terms but only paid an average 83.5 cents in the dollar recognising a pre-tax gain of USD$124 million in the process. The purchases were funded by cash Fortescue has on hand and might be an easier way for Fortescue to make money than digging the red dirt out of the ground.
The large volume of offers and the discounted price to face value suggests the investors are nervous about: a) the company’s prospects; b) commodity prices in general; c) global interest rates rising or d) a combination of the above. Typically an investor would sell company bonds before maturity if they thought that the price of the bond would fall (or yields spike higher).
Of course the consequence of buying back debt and having a smaller balance sheet is the company now has less liquid assets which can be used in the here and now. Thus the degree of balance sheet and funding flexibility has been reduced as the bonds it bought back were some years away from maturity. The other consequence is that should Fortescue wish to issue bonds in the future, investors may be less enthusiastic and/or demand a higher return. The alternate view is that the company is actually supporting the bond price and hence investors.