uploads///Debt maturity

Has Recent Debt Payment Given Cliffs Some Financial Leverage?

By

Nov. 28 2016, Updated 8:04 a.m. ET

Financial leverage

While it’s important to keep an eye on a company’s financial leverage, it becomes increasingly important to do so in today’s volatile times. Cliffs Natural Resources’ (CLF) debt has escalated due to acquisitions at the peak of the cycle and subsequent write-downs.

The rise in debt has put immense pressure on its stock price. In fact, higher financial leverage has been the major burden on its stock for the last few years.

Cliffs Natural Resources’ new management has been earnestly trying to reduce the company’s indebtedness since it took over in August 2014. Management maintains that its top priority for proceeds from any source is to retire its debt.

Article continues below advertisement

Issuing equity to improve its balance sheet

Recently, Cliffs Natural Resources raised $300.0 million in equity with the intention of using the proceeds for general corporate purposes such as repaying debt, particularly its notes due in 2018.

The company’s management noted during its 3Q16 earnings call that it reduced its debt by $500.0 million in 3Q16, bringing its net debt down to $2.0 billion. It was $2.5 billion at the end of 2Q16. Debt reduction also lowered net expenses by $17.0 million annually.

Cliffs’s next major repayment comes due after 2020, which gives the company ample time to accumulate cash to reduce its financial leverage.

Other US (VTI) steel companies with high financial leverage such as ArcelorMittal (MT), AK Steel (AKS), and United States Steel (X) are also making efforts to reduce their debt.

Liquidity

Cliffs Natural Resources (CLF) ended 3Q16 with $132.0 million in cash and $247.0 million in asset-backed lending facilities. These figures amount to $379.0 million in total liquidity. The company outlined the receipts of proceeds from equity issuance and the corresponding repayment of 2018 notes as the two major liquidity events in the quarter.

The reduction of debt in a difficult market environment has certainly acted as a major tailwind recently for Cliffs stock.

Advertisement

More From Market Realist