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

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

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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.

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