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ATLAS IRON: THE STATE OF PLAY

As with Elders beforehand, Atlas Iron keeps on giving to the restructuring industry.

In FY15, operating costs were slashed as key operating counterparties exchanged contract rights for equity and some profit distribution rights. This left a heavy senior debt load on the company in the form of Term Loan B instruments. Those instruments were held by a range of US and Australian financial investors, including a large Australian bank for which we act. 

The key question for 2016 was how to right size senior debt spread across dozens of holders of paper. 

 

 

Let's recap from last year. Atlas Iron listed on the ASX in December 2004, as a gold company. All did not glitter. Instead, it was David Flanagan in 2006 who changed the focus of the company to one of iron ore, a decision seemingly made good when Pardoo came into production in late 2008 and other projects came to be added to reserves. Atlas Iron debt gearing was low until December 2012 when the company wrote Term Loan B instruments to fund the expansion of production programs.

TLBs are a covenant-lite product mirroring senior debt, funded by large corporates, funds and non-financial services institutions (though some banks looking to spread risk also like to take a piece of these investments). In common with other high yield products, TLBs feature incurrence rather than maintenance covenants, making these instruments attractive to miners like Atlas Iron exposed to revenues variable against commodity prices, foreign exchange rates, high cost burdens and logistics risks. The instruments are usually written under US law, both exposing the issuer to currency risk and differing, in some material respects with Australian law, particularly in terms of the other funding instruments the borrower is allowed to enter into, without TLB consent.

This is fine so long as relationships stay strong with the holders of TLBs. In the case of Atlas Iron, the relationship became strained as iron ore prices tumbled below $50 per tonne and looked like plummeting below $40 per tonne. As fast as Atlas Iron chased down costs, pricing took a steeper descent. 

 

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