Will the reduction in outstanding debt improve First Quantum's credit rating or borrowing costs?

Created August 06, 2025 at 10:04 PM

Short answer:

Yes – buying back up to $250 million of its 9.375 % senior secured notes should, all else equal, improve First Quantum Minerals’ credit metrics (leverage, coverage and interest‑cost ratios) and therefore creates the potential for a rating upgrade or, at a minimum, a modest reduction in future borrowing costs. Whether a rating agency actually raises the rating or a lender cuts its spread will depend on a broader set of factors (cash‑flow trends, commodity‑price outlook, ongoing capital‑expenditure plans, covenant compliance, etc.). Below is a detailed walkthrough of why the tender‑offer is credit‑positive, what limits its impact, and what the likely near‑term consequences could be.

1. What the tender‑offer actually does

Parameter	Detail from the release
Instrument being retired	9.375 % Senior Secured Second‑Lien Notes due 2029 (senior in the capital structure, but second‑lien to the first‑lien debt)
Maximum amount to be repurchased	Up to US $250 million (cash tender)
Current outstanding principal	Not disclosed in the press release, but historically First Quantum’s senior notes program has been in the $1.5‑$2.0 billion range. Hence the tender could retire roughly 12‑16 % of the total notes (if the full $250 m is exercised).
Interest expense eliminated	9.375 % × $250 m ≈ US $23.4 million of annual cash interest saved (pre‑tax).
Maturity profile improvement	The notes mature in 2029; retiring a chunk now reduces the amount that must be refinanced in 2029, easing rollover risk.
Cash source	The tender is funded by cash on hand / existing liquidity and not by new borrowing, so it is a deleverage‑by‑cash move.

2. How rating agencies view a cash‑tender of senior debt

Rating metric	Effect of the tender
Leverage (Net Debt/EBITDA)	Net debt falls by the amount repurchased (plus the cash outflow, which is offset by the same cash reduction). If First Quantum’s Net‑Debt/EBITDA was, say, 2.5× before the tender, a $250 m reduction could push it toward 2.2‑2.3× – a meaningful improvement.
Interest‑Coverage (EBIT/Interest)	Annual cash interest drops by ≈$23 m, raising coverage ratios proportionally (e.g., from 3.0× to roughly 3.6× if EBIT stays constant).
Maturity profile	The “balloon” of $X billion due in 2029 shrinks, reducing refinancing risk. Rating methodologies reward a longer average maturity for senior unsecured or secured debt.
Liquidity	Using cash reserves does reduce on‑hand liquidity, but the net effect is positive because the cash is exchanged for a liability that would otherwise have to be serviced. Agencies look at the quality of liquidity (cash vs. revolving lines) and the net balance after the transaction.
Covenant compliance	Senior secured notes often have financial covenants (e.g., leverage caps). Retiring a chunk of the notes can bring the company well within covenant limits, decreasing the chance of covenant breach and the associated negative rating drag.

Overall rating implication – Most rating agencies (S&P, Moody’s, Fitch) treat a material reduction in senior debt funded with cash as a positive credit event, typically resulting in rating watch‑outs (e.g., “Rating Positive Outlook” or “Rating Upward Review”) rather than immediate upgrades. The actual upgrade depends on whether the metric improvement is large enough to cross the agency’s rating thresholds and whether other risks have been mitigated.

3. Potential impact on borrowing costs

Lower coupon burden – The $23 m annual interest saved improves cash‑flow, meaning any new debt can be priced on a stronger basis (lower spread over benchmark).
Reduced spread on future refinancings – A tighter leverage ratio and better coverage can shave 10‑30 basis points off spreads on comparable senior unsecured or term‑loan facilities in the mining sector.
Improved market perception – Investors view the move as a signal that First Quantum is proactive about balance‑sheet management, which can compress yields on any secondary‑market trading of its remaining notes.
Potential for cheaper revolving credit – Lenders may offer a lower‑interest revolving line (e.g., LIBOR + 1.75% instead of LIBOR + 2.25%) because the company’s net‑debt load will be lower.

Note: The actual reduction in borrowing cost will also be influenced by external variables (e.g., global copper price trends, macro‑interest‑rate environment, and the mining sector’s risk premium). The tender‑offer alone is unlikely to produce a “dramatic” cost cut, but it creates headroom for incremental savings on future financing.

4. What could limit the rating/borrowing‑cost benefit?

Potential limitation	Explanation
Partial utilization	If the tender is under‑subscribed and only a small fraction of the $250 m is repurchased, the leverage improvement will be modest.
Cash drain	The transaction consumes cash that could otherwise be kept as a liquidity buffer for capex, dividends, or unforeseen commodity‑price shocks. If cash reserves dip below certain thresholds, agencies might penalize the liquidity metric.
Commodity‑price exposure	First Quantum’s earnings are heavily tied to copper (and to a lesser extent gold). A sustained decline in copper prices could erode the EBITDA gains from lower interest, offsetting the leverage benefit.
Capex commitments	The company is planning new mines or expansion projects that could raise debt levels again in the near term, which may offset the short‑term deleveraging effect.
Existing covenant structure – If the senior notes contain a “step‑up” coupon or prepayment penalties that are triggered by early redemption, the net benefit could be smaller than the headline interest saving.

5. Bottom‑line assessment

Question	Answer
Will the reduction in outstanding debt improve First Quantum’s credit rating?	Potentially. A cash‑tender that removes up to $250 m of senior secured notes will improve leverage and coverage ratios, which are core inputs in rating models. Rating agencies typically respond with a positive watch or a modest upgrade if the improvement is sizable relative to the company’s overall capital structure. The final rating decision will still hinge on broader operational and market risks.
Will it lower borrowing costs?	Yes, in a relative sense. By cutting interest expense and tightening key financial metrics, First Quantum positions itself to negotiate lower spreads on any new senior unsecured or term‑loan facilities and may see a modest compression (10‑30 bps) in yields on its remaining notes. The magnitude of the cost reduction will be modest and contingent on how much of the $250 m tender is actually exercised and on external market conditions.

Question

Answer

Will the reduction in outstanding debt improve First Quantum’s credit rating?

Potentially. A cash‑tender that removes up to $250 m of senior secured notes will improve leverage and coverage ratios, which are core inputs in rating models. Rating agencies typically respond with a positive watch or a modest upgrade if the improvement is sizable relative to the company’s overall capital structure. The final rating decision will still hinge on broader operational and market risks.

Will it lower borrowing costs?

Yes, in a relative sense. By cutting interest expense and tightening key financial metrics, First Quantum positions itself to negotiate lower spreads on any new senior unsecured or term‑loan facilities and may see a modest compression (10‑30 bps) in yields on its remaining notes. The magnitude of the cost reduction will be modest and contingent on how much of the $250 m tender is actually exercised and on external market conditions.

6. Practical next steps for First Quantum (and stakeholders)

Monitor tender participation – The actual amount retired will be the decisive figure for rating impact.
Communicate the balance‑sheet benefit – A clear press release or investor‑presentation that quantifies the post‑tender leverage and coverage can help analysts incorporate the improvement into their models.
Engage rating agencies proactively – Provide them with updated financials after the tender, highlighting the new debt ratios and the continued cash‑flow generation forecasts.
Maintain liquidity – Consider keeping a portion of cash in a revolving credit facility to offset the cash outflow and preserve a safety net, thereby protecting the liquidity metric.
Align future financing – Use the improved metrics to negotiate lower‑cost financing for upcoming expansion projects (e.g., new copper mines), thereby reinforcing the credit‑rating benefit over the medium term.

TL;DR

The tender offer enables First Quantum to retire up to US $250 million of high‑coupon senior secured notes, cutting annual interest by roughly $23 million and potentially lowering its net‑debt ratio by 12‑16 % of the notes’ outstanding amount.
Such a cash‑driven deleveraging is generally viewed favorably by rating agencies and can lead to a rating upgrade or at least a positive outlook if the reduction is material and the company’s operating fundamentals remain strong.
It also creates headroom for lower borrowing costs (10‑30 bps spread compression) on any new debt, but the exact benefit will depend on how much of the tender is exercised and on broader market and commodity‑price conditions.

In short, the debt reduction should improve First Quantum’s credit profile and reduce future financing costs, but the magnitude of the improvement will be determined by the actual execution of the tender and the company’s overall financial and operational health.