LUK Takes Fortescue to Court - Analyst Blog

Leucadia National Corporation (LUK) sued Fortescue Metals Group Ltd., an Australian iron-ore miner, its subsidiary Chichester Metals Pty Ltd., and Andrew Forrest, its CEO in an effort to stop them from raising more funds through an issue of additional subordinated notes.

Fortescue Metals Group claims that the company is entitled to issue unlimited amount of notes which are identical to $100 million principal amount notes held by Leucadia since August 2006. Leucadia is astonished at such unexpected claims, since such terms were not bargained when the amount was raised by Fortescue Metals Group for their mining project.

The notes with the maturity period of 13 years are guaranteed by Fortescue Metals Group and carry an interest equivalent to 4% of the revenue, net of government royalties, invoiced from the iron ore produced from the project’s Cloud Break and Christmas Creek areas. The notes held by Leucadia are unsecured and subordinated to the project’s senior secured debt.

The issuance of additional notes would dilute Leucadia’s share of interest and would adversely hurt the company’s future cash flow from these notes and financial results. Leucadia’s net investments in these notes, as of June 30, 2010, stand at $203.5 million.

On July 30, 2010, Leucadia received approximately $154.9 million in payment of the accrued interest due through June 30, 2010, from Fortescue Metals Group. Interest on notes (in question) is paid semi-annually within 30 days of June 30 and December 31 of each year. Any deferment in interest payments carries a simple interest of 9.5% annually.

Leucadia, in addition to $100 million subordinated notes, also holds approximately 248 million common shares of Fortescue, representing roughly 8% of the outstanding Fortescue common stock as on June 30, 2010. In February 2010, Leucadia sold 30 million shares for net cash proceeds of $121.5 million and recognized net securities gain of $94.9 million in the first half of 2010.

Leucadia engage in manufacturing, telecommunications, oil and gas drilling services, property management and services, gaming entertainment, real estate activities, medical product development operations and various other investment activities in the United States. We currently maintain our Neutral recommendation on Leucadia.

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LUK Takes Fortescue to Court - Analyst Blog

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