Cliffs subject of class action suit brought for 8%, 6¼% bondholders

By Wendy Van Sickle

Columbus, Ohio, March 14 – A class action lawsuit was filed against Cliffs Natural Resources Inc., alleging that the company violated federal law when it executed a private debt exchange that allowed only a select group of institutional bondholders to exchange their unsecured corporate bonds for secured bonds, according to a Monday press release.

Law firms Grant & Eisenhofer and Gardy & Notis brought the suit on behalf of all holders of the 5.9% senior notes due 2020 and 6¼% senior notes due 2040 who are not qualified institutional buyers.

The complaint alleges that, faced with falling commodity prices, Cliffs attempted to alleviate pressure on servicing its debt by making the exchange offer last month to a limited number of its bondholders.

Under the offer, certain senior notes would be exchanged for newly issued 8% 1.5-lien senior secured notes due 2020.

The suit contends that the Feb. 29 exchange – which allowed participation only by bondholders who were qualified institutional buyers as defined under Rule 144A of the Securities Act of 1933 – violated the rights of the remaining non-qualified institutional buyers.

Prior to the exchange, the total principal of the outstanding 2020 and 2040 notes outstanding was about $783.6 million. A total of about $259.5 million of the notes were tendered in the exchange offer.

The two law firms said they brought a similar suit last month against Vanguard Natural Resources, LLC and one of its subsidiaries, also alleging retail investors were wrongfully cut out of an exchange offer that was presented only to qualified institutional buyers.

“In both the Cliffs case and in the Vanguard matter filed recently, you have companies facing financial stress making respective exchange offers that effectively shut out retail investors and result in the creation of two classes of bondholders with very unequal rights,” Jay Eisenhofer, managing director of Grant & Eisenhofer, said in the release. “Qualified institutional buyers of corporate debt in each case had a distinct advantage over the companies’ retail investors – they were privy to a transaction that allowed them to exchange their unsecured notes for secure[d] notes. That is an outright violation of the law.”

The suit against Cliffs contends the company disclosed only to qualified institutional buyers its views on the risk of not exchanging the unsecured senior notes into the senior secured notes.

“Risk of an exchange offer wasn't disclosed by Cliffs in their offering prospectuses for the unsecured senior notes, nor could it have been foreseen by retail investors and non-qualified institutional buyers at the time they purchased their bonds,” Eisenhofer said.

The release calls the action part of a “disturbing pattern among financially troubled commodity companies” and says the firms’ analysis has uncovered similar conduct by other companies and that the firms are exploring options for retail bondholders on a case-by-case basis.

Cliffs is a Cleveland-based iron ore and coal-mining company. Vanguard is a Houston-based oil and gas exploration and development company.

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