Amending debt terms for buyback
Cliffs Natural Resources’ (CLF) new management changed the terms of its debt agreement to repurchase the company’s shares. The shares are worth up to $200 million. Earlier, the terms of its revolving credit facility didn’t allow any share buybacks.
Now, the company has the option to buy back shares until December 31, 2015. However, according to the amended facility, the company’s unsecured revolver facility has been reduced to $1.25 billion from $1.75 billion.
The new management team was formed after activist Casablanca took control of the board. It always thought that Cliffs’ previous management wasted money on non-core and non-productive assets.
Even buying back shares at this point in time—depressed iron ore and coal price environment—wouldn’t be the best use of the available cash. It could leave the company in a worse position. If the company purchases its shares, then it might not be able to reduce the size of its debt. Its debt was $3,454 million for the quarter ending in June 2014.
The move seems to be motivated by short-term motives. The motives are to improve the share price and increase investor returns. The short-term motives hurt the company’s long-term financial health.
Management sacrificed $500 million of a funding source in a tight liquidity scenario for a buyback worth $200 million.
Currently, Cliffs’ share price is at the lowest levels in many years. Management might want to take advantage of the low share price. It could buy its own shares at a discount. However, such a move makes sense if there’s any expectation of an upside potential in prices. Currently, this seems unlikely.
The overcapacity situation created by Cliffs’ international peers—including BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE)—is making the situation worse. These companies are part of the SPDR S&P Metals & Mining ETF (XME).