- Cleveland-Cliffs announces pricing of $725 million notes due 2026.
- Previously, the company wanted to sell a mix of secured and unsecured notes due 2028, a move that was in the original merger plan.
- The current market situation disrupted this plan, but the combined company will still have a 4-year maturity-free window in 2020-2023.
Cleveland-Cliffs (NYSE:CLF) has recently announced the pricing of $725 million of senior secured notes due 2026, a move that completes the company's refinancing efforts related to the upcoming merger with AK Steel (NYSE:AKS). As per the press release, the notes will bear interest at an annual rate of 6.75% and will be issued at a price of 98.783% of their principal amount.
Earlier, the company has announced proposed offerings of $550 million senior secured guaranteed notes due 2028 and $400 million senior unsecured guaranteed notes due 2028. These notes were supposed to finance the tender offers which were announced on February 26, 2020:
Source: Cleveland-Cliffs press release
Previously, the company made a tender offer for AK Steel's 6.375% senior notes due 2025 and 7.00% senior notes due 2027 (I wrote about it here). These notes were tendered for new Cleveland-Cliffs 6.375% senior notes due October 15, 2025, and new 7.00% senior notes due March 15, 2027.
The fact that Cleveland-Cliffs was able to place $725 million notes (at a discount) due 2026 instead of a mix of $950 million of secured and unsecured notes due 2028 means that the market was not as receptive as Cleveland-Cliffs' management hoped it would be. Still, the company was able to push legacy AK Steel maturities to 2026 with an interest rate below that of legacy AK Steel notes. Cleveland-Cliffs stated that the tender offer will be financed by the proceeds from the new notes, as well as borrowings under the new asset-backed revolving credit facility and cash on hand.
Source: original merger presentation
The merger is set to be completed on March 13, and Cleveland-Cliffs has completed its refinancing efforts - the legacy AK Steel bonds have been refinanced, and the new asset-backed credit facility has been established. Let's now look at the original plan:
Source: original merger presentation
The company has secured a 4-year window without any maturities. However, it failed to establish 2028 maturities and will now have to deal with 2026 maturities. Thus, the company will have a cluster of maturities in 2024-2027, without any gaps. In my opinion, the current market panic played a material role in Cleveland-Cliffs' failure to attract buyers for 2028 notes so that the company had to change them into 2026 notes. A major rush to safety that pushed Treasuries towards the 1.00% mark did not play well for a riskier merger in the steel industry.
I must admit that this is the first time that "buying the dip" strategy really failed in Cleveland-Cliffs' shares in the near term. The stock has found itself under increased pressure after the earnings release. In my opinion, the main problem was that the stock was close to an important support level at a time when the general market experienced its worse week in many months. Fears of recession emerged, nearly all stocks tanked, and the downside in Cleveland-Cliffs' shares was additionally fueled by those speculative investors and traders who have planned to play the rebound from the support level after earnings and put their protective stop orders below this support level. From a technical point of view, the near-term situation does not look well for Cleveland-Cliffs shares, and the current downside move may continue if the general market continues to drop.
From a fundamental point of view, the merger with AK Steel created material uncertainty, but past performance of Cleveland-Cliffs' management team brings hope that they can turn around the AK Steel business which has been lagging for quite some time. Even at times of coronavirus panic, the company was mostly able to stick to its original financing plan and provided itself with a four-year maturity-free window. The iron ore prices, as well as domestic steel prices are rebounding - in fact, Nucor (NUE) and US Steel (X) have reportedly raised prices to profit from tighter supplies. Coronavirus brings a lot of uncertainty, so I'd be very careful trying to catch the falling knife here for a short-term trade. Longer-term, I maintain confidence in Cleveland-Cliffs' success, and I am longer-term bullish at current levels.
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