The Rising Influence of Rising Affluence

[DewDiligence]

CLF reworks credit line—onerous debt/EBITDA covenant replaced:

http://www.sec.gov/Archives/edgar/data/764065/000076406514000113/a20140630-defa14axcliffsis.htm

Cliffs Natural Resources Inc. announced today that it has entered into an agreement to amend its existing $1.75 billion unsecured revolving credit facility with its syndicate of banking partners.

…this amendment addresses the leverage covenant for the life of the facility, while also retaining the full $1.75 billion facility size and the existing maturity date of Oct. 16, 2017. The new amended terms are effective June 30, 2014 and received the unanimous support of the entire lender group…

…The amended terms replace the current leverage covenant ratio of Debt-to-EBITDA less than 3.5 times with a Debt-to-Capitalization ratio of less than 45% [i.e. EBITDA no longer figures into this covenant at all]. This new covenant will allow the Company’s borrowing capacity to be less susceptible to the impact of volatile iron ore and met coal pricing.

The amendment agreement also increases the current EBITDA-to-Interest covenant to a minimum requirement ratio of 3.5 times.

The old covenant for interest coverage had been EBITDA/interest >=2.5x, so the new interest coverage covenant is actually stricter than the old one; however, replacement of the onerous debt-to-EBITDA covenant in the third quoted paragraph above by a debt-to-total-capital covenant greatly outweighs the tightening of the interest coverage covenant, resulting in greater financial flexibility for CLF. (Total debt is obviously a very much greater number than annual interest payments.)

Today’s announcement eliminates the threat of the “proxy put” (#msg-102645938), which was presumably a bluff by management all along.