Fortescue Metals Group Ltd has re-priced its $US4.95 billion term loan in a deal led by Credit Suisse Group AG, saving Australia’s third-biggest iron-ore producer $US50 million a year in interest payments.
Fortescue will pay interest at 3.25 percentage points more than the London interbank offered rate with a 1 per cent floor on Libor. This is a 1 per cent decrease in the spread compared to the original deal done just over 12 months ago.
Despite the fall in iron ore prices from $US149 a tonne to $US87 a tonne in 2012, Fortescue was extremely confident in the long-term future of the iron ore industry and its ability to deliver on its major expansion plans. This confidence, combined with the flexibility of their US term loan B, has enabled it to significantly reduce the cost of this debt.
The Fortescue deal reinforces the reputation of Credit Suisse in leverage finance Down Under. Credit Suisse has dominated US term loan and high-yield issuance in Australia for more than a decade through the leadership of Matthew Tehan, Paul Allan and Michael Tierney.
Since 2012 the firm has led about $US10 billion in term loans and about $US5.8 billion in high-yield issuance by Australian companies.
Historical low interest rates have resulted in debt capital market activity underpinning the bottom line of many bulge bracket investment banks as merger and acquisition and equity capital markets deals have been sparse until very recently.
Tehan, Allan and Tierney have all worked at Credit Suisse for much of their careers in various financing roles including stints on Wall Street at the firm’s New York office.
In 2000 Credit Suisse financed some of the first leverage buyouts in Australia including Amatek, Affinity Health and Repco. In February 2003 the firm did a landmark deal Down Under, the $2.4 billion refinancing of the combined Burns Philp, Goodman Fielder entity with a combination of Australian bank debt, US term loan market, US high yield market and NZ retail note market.
Since the collapse of Lehman Brothers Holdings Inc in September 2008, international bank regulations and regulatory changes require investment banks to hold more equity and liquid assets. That has shifted debt underwriting to capital markets teams such as those at Credit Suisse.
In turn, investments funds with billions of dollar under management have expanded to provide financing, especially to sub investment grade borrowers. Such firms have established offices in Australia such as Fortress Investment Group LLC, Blackstone Group LP and KKR & Co LP to be closer to the originators of the deals and the credit they wish to invest in.
Large institutional investors including superannuation funds have allocated more money to fixed income, further underpinning the growth of credit funds.
Leverage finance, formerly driven by buyouts, has now made its way into the mainstream of corporate Australia as companies have sought to diversify away from the local bank loan market. Australian companies have become more sophisticated to take advantage of liquid foreign markets that offer financing on enticing terms such as that secured by Fortescue.