S&P rates Fortescue notes BB+

S&P said it assigned a preliminary long-term issue credit rating of BB+ to Fortescue Metals Group Ltd.'s new $750 million senior unsecured notes due 2022 and $750 million senior unsecured notes due 2024 following the completion of the company's issuance offering.

FMG Resources (August 2006) Pty Ltd., Fortescue's financing arm, is the issuer of the new notes, S&P said.

The proceeds will be used to repay its $976 million senior secured credit facility and $478 million outstanding 2022 senior unsecured notes.

Upon settlement, S&P said it will assign long-term issue credit ratings of BB+ to the new senior unsecured notes.

The agency said it will withdraw the ratings on the repaid $976 million senior secured credit facility and $478 million outstanding 2022 senior unsecured notes.

The repayment of the term loan and reduction of senior ranking debt improves significantly the recovery value of Fortescue's unsecured notes under the hypothetical default scenario, S&P said.

As such, the new 2022 and 2024 senior unsecured notes have a recovery rating of 4, indicating 40% expected default recovery.

Upon successful completion, S&P said it will revise the recovery rating to 1 from 2 on the outstanding $2.2 billion 2022 senior secured notes because of the reduction in senior secured notes.

This higher recovery rating does not affect the current issue ratings on the outstanding secured notes, the agency noted.

The corporate credit rating on Fortescue is unaffected by the proposed new notes.

The ratings reflect Fortescue's low-cost position on the global iron ore cost curve, as well a view of the company's ability to sustain credit metrics in line with the BB+ rating level even under a moderate stress scenario, S&P said.

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