Why Cliffs amended its debt agreement again

Anuradha Garg - Author

Aug. 18 2020, Updated 6:31 a.m. ET

Short-term liquidity

Cliffs Natural Resources Inc (CLF) made a debt payment of $100 million during 3Q 2014 despite falling iron ore prices and proxy contest charges. The company’s short-term liquidity remains at ~$1.4 billion, including revolver facility of $1.3 billion and cash and cash equivalents of $244 million. During the call, Cliffs’ CEO underlined that debt repayment is a priority and something the company will continue to do, regardless.

Impairment charge

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Iron ore and metallurgical coal price have declined and the price outlook is weak. As a result, Cliffs recorded an impairment of $5.5 billion, after tax, for its seaborne iron ore and coal assets in 3Q 2014. To book this impairment and to comply with its covenants, the company had to negotiate another bank amendment.

New debt agreement

The latest amendment eliminated the 45% debt-to-capitalization covenant. The original covenant was introduced in June 2014. It’s now been replaced with a covenant for which leverage ratio of secured-debt-to-EBITDA cannot exceed a multiple of 3.5. Also, the interest coverage ratio requirement will be reduced from 3.5x to 2.0x once certain collateral requirements are satisfied. Lastly, the amendment reduces the revolver credit facility from $1.25 billion to $1.13 billion and includes a security agreement.

Cliffs’ credit outlook is weaker than that of its peers (XME). BHP Billiton Limited (BHP), RIO Tinto (RIO), and Vale SA (VALE) have a less heavy debt load than Cliffs in this weak commodity price environment.


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