Some calculations on carrying costs. Why it might make sense for...

Some calculations on carrying costs.

Why it might make sense for FMG to not pay down further 2019 debt just yet but to invest the cash and earn interest on it.

Assumption the 2019 debt of 2,976 billion carries an effective rate of LIBOR plus 3.5% so say 4.5%. Libor could be higher, 3.5% could be lower.

So if instead of using 478 million cash USD (or 100/75 to convert to AUD = 637.3million) on hand to pay off 2019 debt, FMG invested it for 90 days (currently at 1.7pc) the carrying cost of doing that would be the interest on the 500 million USD x 4.5pc - 1.7pc = 2.8pc (=500 m * 0.028 = 14million per year USD or 14/ (4/12) or 4.67m USD).

The carrying cost

Come April 2017, the 478 million (6.875% debt could be paid out in full).
That's about 4 months or 1/3rd of a year.


Come March 2018, chunks of the 2,160 million (9.75% debt could be paid off)
That's about 15 months away or 1 and 1/4 years.
Currently 3 year aussie bonds can yield about 1.93%, so assume could get an interest rate of 1.9% per annum for funds made available over 15 months.

500m US or 667 Aussie invested at 1.9% over 15 months rather than used to repay 2019 debt has a carrying cost of 4.5pc - 1.9pc = 2.6pc or (13 million USD pa, or 13m*(5/4) = 16.25 million carrying cost.

Knocking 500 million of the 2022 9.75% note on the first day it is possible would save FMG 500m * 0.0975 or 48.75 million per year in interest payments.

Compared with a carrying cost of 16.25 million.


EDIT: numbers slightly wrong (478 and 500 million) but gist I think is right.