Fortescue mines renminbi liquidity
Iron ore producer Fortescue is raising a Rmb3.6bn (US$500m) five-year senior term loan in a move that could spur other borrowers from Australia to turn to renminbi liquidity as a cost-effective funding alternative.
The renminbi’s appeal carries weight, especially for companies that have strong trade links with China.
China remains Fortescue’s largest export market, accounting for 86.3% of its sales for the six months to December 31, according to the company’s half-year report on February 20. That heavy trade reliance makes the renminbi loan an ideal choice for Fortescue, allowing the company to align its financing with its revenue streams while mitigating foreign exchange risks.
“The renminbi loan is a strategic step for Fortescue to leverage its relationships with existing banks and broaden its banking group with those that have capabilities to lend in that currency,” said a Beijing-based senior loans banker. “Australian companies like Fortescue, which ships the majority of its iron ore to Chinese steel mills, can use their renminbi revenues to offset currency risks.
“This aligns with China's multi-year effort to reduce reliance on the US dollar in cross-border transactions, particularly for critical imports like iron ore where it dominates global demand," the banker said.
China is Australia’s largest trading partner, with its exports totalling A$196bn in 2024, while the tally of imports from the Asian country was A$115.6bn, according to the Australian Bureau of Statistics.
Cheaper costs
Bank of China and Industrial and Commercial Bank of China are mandated lead arrangers, bookrunners and underwriters of Fortescue's five-year senior term loan. The borrowing has a fixed interest rate of 3.8% – significantly lower than the margin of 235bp over SOFR on a US$500m 4.5-year term facility Fortescue raised in December 2022. SOFR is around 4.35%.
Pricing is also well inside comparable US dollar funding costs for its Australian mining peers.
In December 2023, coal miner Whitehaven Coal agreed a US$1.1bn five-year loan to refinance a US$900m bridge financing backing its acquisition of metallurgical coal mines. The loan’s opening margins were guided at 400bp–450bp over SOFR for the three-year revolver and 600bp–650bp for the five-year term loan.
Coal miner Coronado Global Resources has signed a commitment letter for a US$150m three-year asset-based lending facility with a fixed coupon in the mid-teens. The company raised a US$150m three-year senior secured ABL in August 2023 with a margin of 280bp over SOFR.
Coronado, rated Caa1/CCC+/B−, has faced multiple credit downgrades this year. Fortescue is rated Ba1/BB+ (Moody's/S&P) while Whitehaven Coal is unrated.
Rate environment
Even though Australia is on a path of monetary easing compared to the US, borrowing in renminbi is more appealing given the benign interest rate environment in China. In May, the Reserve Bank of Australia cut its cash rate by 25bp to 3.85%, its second rate cut this year. The same month, the People’s Bank of China trimmed the one-year loan prime rate to 3% from 3.1%, and the five-year LPR to 3.5% from 3.6%, as part of its efforts to ease monetary policy and provide a buffer against the impact of a US-China trade war.
“It is a lot cheaper to raise debt in renminbi, even taking hedging and currency swaps into consideration. There are plenty of companies raising debt in renminbi and there are more and more,” said a Sydney-based loan banker at a Chinese bank.
Bankers said several Australian borrowers are looking at taking renminbi loans. One Melbourne-based asset manager said hedging and currency swaps could add 1.55%–2.5% to the annualised cost but raising in renminbi is still said to be cheaper than Australian companies' usual funding currencies.
China’s state-owned banks may also look to diversify their lending in the wake of the trade war and contribute to the internationalisation of the renminbi.
“Australian companies with trade exposure to China, especially those from the mining, resources and agricultural sectors, are well positioned to benefit from renminbi loans to lower their borrowing costs and secure more favourable terms from Chinese state-owned banks,” said a third loans banker.
“In addition, Chinese banks may incorporate broader geopolitical or strategic goals into loan agreements, such as offering flexible structures and incentives for borrowers to settle trade or contracts in renminbi instead of Australian or US dollars,” said the third banker.
A Hong Kong-based loans banker said Australian offshore subsidiaries based in Hong Kong or Singapore could be at the forefront of obtaining renminbi funding while effectively navigating China’s capital controls.
“Hong Kong boasts the largest pool of offshore renminbi deposits, free from China’s capital controls, along with highly active interbank markets, providing Australian firms with China-related business access to competitive renminbi loan rates,” he said.