Andrew "Twiggy" Forrest can breathe again. After a few tense weeks, Fortescue has secured a $4.5-billion (U.S.) loan that allows the Australian miner to avoid breaching its bank covenants, or an equity issue that would have diluted its chairman and largest shareholder.
Other creditors won't like being pushed down the pecking order. But the alternative was probably worse.
Fortescue's new five-year facility, underwritten by Credit Suisse and JPMorgan, frees the company from loan covenants that could be triggered by the sudden sharp drop in the price of iron ore.
The facility doesn't even look that expensive. It is priced at less than the roughly 7 per cent annual interest rate that the miner pays on its unsecured loan notes.
But there's a catch: In return, Fortescue has given its banks the first claim over all its main assets.
This arrangement buys Fortescue time: The company does not have to repay any debt until November, 2015.
In the meantime, some of the company's hefty new investments will come on stream, boosting its output. It will also have more time to cut costs to adapt to a world where Chinese demand for iron ore is less voracious than in the past.
Fortescue is not completely in the clear: Though it has cut planned investment for the current fiscal year from $6.2-billion to $4.6-billion, that's still 60 per cent more than operating cash flow for the 12 months to last June.
One possibility is selling some assets: Fortescue says it has received "strong interest" from potential partners. But there may not be that many peripheral assets left to offload: The recent sale of a power station at its Solomon mine fetched just $300-million.
The banks aside, the main winners from Fortescue's move are the shareholders – including 33-per-cent shareholder Mr. Forrest – who dodge a potentially dilutive equity issue. The losers are holders of some $7-billion of unsecured loan notes, who have been pushed down the capital structure. On balance, though, that fate is probably less severe than the pain they would have suffered in a messy debt restructuring.