(The following statement was released by the rating agency)
March 14 - Fitch Ratings has assigned FMG Resources (August 2006) Pty Ltd’s USD1bn senior notes due 2017 and 2022 expected ratings of ‘BB+(exp)'.
The notes will be unconditionally, jointly and severally guaranteed by Fortescue Metals Group Limited (Fortescue, ‘BB+'/Stable) and its subsidiaries currently representing more than 95% of the group’s consolidated total assets and net income. As a result, Fitch regards the credit risk associated with the senior notes to be the same as that of senior unsecured obligations of Fortescue itself.
The proceeds of the notes will be used to finance the expansion of Fortescue’s mining capacity to 155 million tonnes per annum (mtpa) and the acquisition of mobile mining equipment to support the expansion. The final ratings are contingent upon receipt by Fitch of final documentation conforming to information already received.
Fortescue’s Issuer Default Rating of ‘BB+’ reflects its position as a high- margin producer supported by its relatively low production costs and proximity to its customers in Asia.
Fitch expects Fortescue’s debt leverage and coverage ratios (FY11 adjusted leverage to funds from operations (FFO) and FFO/gross interest of 1.95x and 5.74x respectively) to weaken over the next two years as a consequence of the ongoing large-scale and debt-funded capex to meet output expansion. Credit metrics are then likely to recover from FY14 as the project reaches completion and begins ramping up. The execution risk in developing operations to the planned 155 mtpa from 55mtpa remains a constraint on the IDR. However, Fitch notes that the various mine, railway and port programmes are progressing well and according to management remain on track for completion by end-June 2013.
Fortescue’s ratings could be downgraded if projected adjusted gross leverage to funds from operations (FFO) exceeds 2.75x and/or funds from operations (FFO) gross interest cover falls below 4.0x on a sustained basis. The agency notes that leverage and coverage are forecast to be weaker than these guidelines in FY13 as capex ramps up before again becoming consistent with ratings once capex slows and production increases from FY14. However, a sustained material deviation from the business plan, such as delays or cost overruns associated with its expansion which may result in higher-than-expected funding requirements or weaker-than-expected production may result in negative rating action.