Please ensure Javascript is enabled for purposes of website accessibility

Shares of Cleveland-Cliffs Continue to Rise on Its Debt Deal

By Tyler Crowe - Apr 23, 2020 at 1:19PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company is tapping the debt market to strengthen its balance sheet.

What happened

Shares of iron ore producer Cleveland-Cliffs (CLF -1.52%) were up 10.4% as of 11:45 a.m. EDT today. While the stock has been quite volatile lately without much news at all, this most recent run comes after announcing a new debt issuance April 21. Since that announcement, the stock is up 17.5%

So what

With so much news coming at us daily, some things can slip under the radar. Chances are this debt deal from Cleveland-Cliffs was one of them. On Tuesday, the company announced that it had issued $555.2 million in senior secured notes under a previous debt issuance. These new notes will come at an interest rate of 9.875% and will be due in 2025. 

That sounds like a pretty hefty price to pay. A 9.875% interest rate and having to put up assets as collateral for secured notes make it sound like Cleveland-Cliffs' credit looks shaky. 

equiment at an iron ore mine.

An iron ore mine. Image source: Getty Images.

The reason this ended up looking good in the eyes of Wall Street is that the company is using the proceeds to repurchase approximately $736.4 million in outstanding debt. The notes Cleveland-Cliffs is buying are currently selling for well less than par value, so it will be able to reduce its outstanding debt balance by $181 million. 

Now what 

When CEO Lourenco Goncalves took the helm several years ago, he inherited a bloated balance sheet and lots of unprofitable assets. For the past several years, he has been shedding those assets and using well-timed debt deals like this one to improve the balance sheet. Even after the most recent acquisition of AK Steel and assuming its debt load, the company has trimmed its outstanding debt load by $1.5 billion since 2013. 

CLF Chart

CLF data by YCharts.

Yes, the interest rate it used to retire that outstanding debt was high, and there is the possibility that the high rates could come back to bite it down the road. That said, the company's management has shown over the past few years that it knows how to handle extremely adverse situations. Prior to Goncalves coming on board, it was looking highly likely that the company would file for bankruptcy. 

This recent move shows how management can dip into its bag of tricks to make the best of a bad situation. That should give investors some sense of comfort that management is making moves to bide its time in this rough market and could make this company a value stock.

Tyler Crowe owns shares of Cleveland-Cliffs. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
CLF
$19.45 (-1.52%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
390%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.