Shares in everyone’s favourite North Yorkshire potash miner Sirius Minerals (LSE: SXX) are falling again today after the company announced that it has decided to suspend its junk bond offering, that offering being required as part of the next funding stage.
Funding agreement
Under the terms of its funding agreement signed with Wall Street heavyweight JP Morgan earlier this year, Sirius agreed to fund a portion of its $3.8bn financing package with the issue of new shares and convertible bonds itself.
Sirius has completed the first stage of this process, selling $800m of new shares and bonds during the first half of 2019. However, to unlock the full $2.5bn revolving credit facility JP Morgan has offered to provide, Sirius has agreed to issue bonds worth $500m on top of the $800m shares and convertibles element.
If the company can’t get this last stage of financing off the ground, there’s no guarantee JP Morgan will provide the funding needed to progress with the development of its giant fertiliser mine in North Yorkshire.
The fact that management has decided to pull the offering is ominous, although it is not that unusual. The company announced that it had started the offering process on July 19. Since then, market conditions have deteriorated, and investors have taken fright.
Market conditions
It is not a rarity for companies to postpone stock or bond offerings during periods of market turbulence. Investors tend to batten down the hatches and become risk-averse, which makes it challenging to get deals off the ground. In its press release, the company says that it “intends to revisit the market when conditions have improved later this quarter,” so this is not the end for the offering.
However, reports suggest that the company had been finding it difficult to get investors on board before the recent market tantrum. The Financial Times reports that Sirius had to offer investors an interest rate of 13% to buy the bonds, higher than almost every other deal that’s been offered in 2019 so far.
Analysts had been expecting investors to demand a high rate of return for the risk of lending to Sirius, but 13% seems to be above what many had been expecting.
What’s next?
The decision to postpone its bond offering isn’t a disaster. The company has plenty of cash on hand to continue operations for the foreseeable future.
It has already completed a $425m fundraising through the sale of new shares and a $400m convertible bond issue as part of its financing process, but the firm needs to get investors to buy into its $500m bond offering. If management can’t convince investors that the project is worth backing, JP Morgan could withdraw its $2.5bn funding offer. This would send the group back to stage one.
If JP Morgan does pull out, it is going to be hard to tell what the future holds for Sirius. Without funding in place, construction will grind to a halt, and the company could ultimately collapse.
However, this is just the worst-case scenario. As of yet, JP Morgan has not indicated that it is considering abandoning Sirius, and the company still has time to get its bond offering off the ground.
