Cliffs Natural Resources had $300 million Q1 liquidity; touts impact of secured notes exchange

By Paul Deckelman

New York, April; 28 – Cliffs Natural Resources, Inc. ended the 2016 first quarter with over $300 million of total liquidity, company executives said on Thursday.

They also noted the completion during the quarter of a successful exchange of new 1.5-lien secured notes for a considerably larger face amount of the Cleveland-based iron ore producer’s existing debt – a transaction that is expected to reduce the company’s annual cash interest expense by nearly $15 million going forward.

The company’s chief financial officer, P. Kelly Tompkins, told analysts on the conference call following the release of the results for the quarter ended March 31 that “overall, we see this as yet another successful step in better aligning our debt and EBITDA – but also with the understanding that we’ve got plenty more work to do.”

Exchange offer cuts debt

Cliffs announced on Feb. 29 that the company had accepted for exchange about $512 million total principal amount of the existing notes that were tendered in the exchange offer, with holders slated to get in return some $219 million face amount of newly issued 8% 1.5-lien senior secured notes due 2020.

The exchange offer took out $17.6 million of 3.95% senior notes due 2018; $65.1 million of 5.90% senior notes due 2020; $114 million of 7¾% second-lien notes due 2020; $44.7 million of 4.80% senior notes due 2020; $76.3 million of 4 7/8% senior notes due 2021; and $194.4 million of 6¼% senior bonds due 2040.

Tompkins said that the exchange was “our largest liability management initiative to date.”

He said that “as a result, our cash interest expense expectation has been reduced to $185 million for the full year 2016.”

Besides cutting the annual interest expense, the transaction also created implied equity value of nearly $300 million.

The CFO told the analysts that because of the accounting treatment of the debt exchange, the new 1.5-lien notes “will sit on our books at their $219 million face value, plus the total undiscounted interest to be paid until maturity of $79 million. No future interest expense will be recorded on these notes as a result of this accounting treatment, but the interest will be reflected in our future cash flows.”

“As such,” he continued, the company’s reported gain of $175 million from the restructuring or extinguishment of debt from the transaction “does not fully reflect the $219 million face value debt reduction that we actually realized in the exchange.”

He further said that Cliffs did record a small tax expense of $8 million in the quarter, primarily related to this transaction.

‘Ample’ operating liquidity

At the end of the first quarter, the company’s balance sheet showed some $2.499 billion of long-term debt – down from $2.699 billion at the end of fiscal 2015 on Dec. 31, and down further still from around $2.9 billion at the end of the year-ago quarter.

It had a cash balance of $59.9 million for the latest quarter – down from $285.2 million on Dec. 31 and $356 million a year ago.

Tompkins said that Cliffs ended the quarter with over $300 million of total liquidity, net of outstanding letters of credit. Besides the cash on the books, he said, the company had no borrowings on its asset-based lending facility at the quarter’s end.

He said that liquidity was down quarter-over-quarter “primarily due to the higher weight of interest payments in Q1 – both normal coupons and the cash payout of accrued interest [on the existing tendered notes] related to the secured notes exchange, and an $80 million usage of working capital related to payables and accrued expenses.”

Cliffs also used about $60 million in cash to rebuild inventory during the quarter, although he noted that “we retained a majority of the value of this as borrowing-base liquidity on our ABL facility.”

The company also made over $70 million in repayments on its outstanding equipment loans during the quarter.

The CFO said that this was a use of cash, but it was “effectively a wash from a liquidity standpoint, since our letters of credit subsequently were released.”

He said that Cliffs will be converting inventory into cash during the second half of the year, as shipments of iron ore pellets peak. He predicted that “the working capital benefit will be even greater this year, as our expected sales exceed our expected production volumes by 1.5 million long tons.

“This working capital benefit, the seasonal pickup in shipments, combined with our still historically low capex, reduced cash interest expense and increased price levels, provide us with ample liquidity to operate our business,” Tompkins concluded.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.