Cliffs Natural Resources Inc. (NYSE: CLF) is a mining company focused on supplying domestically mined iron ore to the North American steel industry. It sold its metallurgical coal business at the end of 2015 in response to the changing business environment, in which both iron ore and coking coal, the two principal steel-making ingredients, saw their prices plummeting in 2015 as steel outputs drop amid slow economic growth. The company is now calling for a US. iron ore-centric and environmentally compliant strategy in an effort to return to profitability.

Cliffs Natural Resources has experienced dramatic declines in revenue and operating income during the five years before 2016. Revenue and operating income were $6.56 billion and $2.3 billion, respectively, for 2011, but down to $2.01 billion and $544 million each in turn for 2015, both losing about 70% in total over the period. Additional losses from extraordinary items in 2014 and 2015 led to negative net income, depleting the company's equity into a $1.98 billion hole. With $2.7 billion in long-term debt at the end of 2015 and only $2.1 billion in total assets, the company is technically insolvent on the books. Therefore, refinancing some of its existing debt to reduce principal amounts and save on interest payments may provide the company a breather to turn around its business and in the end, fully honor its remaining debt obligations.

Reduce Debt

Prior to its July, 31, 2015 debt tender offer, Cliffs Natural Resources had previously on Feb. 26, 2015 announced exchange offers of new senior secured notes for certain outstanding unsecured senior notes at reduced principal amounts but a higher interest rate and with the same or early maturities. The exchange offers were intended to save on total debt expense before all is paid off. The higher interest rate on the new debt should be more than offset by principal reductions, the least of which amounts to only 73 cents on the dollar, meaning a dollar of the old unsecured debt is now worth 73 cents in the new secured debt.

The tender offer after the earlier exchange offers was aimed at further reducing the company's outstanding debt, which stood at $2.89 billion as of June 30, 2015. The tender offer called for purchasing for cash the company's outstanding 3.95% senior note due 2018 up to $100 million aggregate principal amount initially. Pursuant to the Offer to Purchase, holders of the note get $500 in cash for every $1,000 of note principal and the accrued but unpaid interest up to, but not including, the settlement date on Aug. 28, 2015.

This effectively saved the company half on principal payments on the note tendered. Subscriptions to the tender offer exceeded the initial maximum amount of $100 million and the subsequently increased maximum amount of $123,694,000, and reached $124,839,000. The total outstanding senior note was $436 million prior to the tender offer and with $124,839,000 in principal amount tendered, it was about a 29% debt reduction off the balance sheet.

Restore Equity

Prior to the tender offer, Cliffs Natural Resources' total shareholders' equity was a negative of $1.92 billion as of June 30, 2015. Since the company paid only half the principal amount of the note tendered to retire the debt in full principal, excluding any early tender premium awarded to some note holders, the 50% free-reduction on the debt became a benefit to shareholders. Therefore, $62,419,500 in principal savings was added back to total equity, lifting it to a negative of $1.86 billion.

Increase Earnings

The tender offer would also benefit Cliffs Natural Resources to improve earnings results in which interest payments are a major expense item. Since the tender offer allowed the company to eliminate $124,839,000 in debt, at 3.95% annual interest savings would be around $5 million from this tender offer alone. On Jan. 27, 2016, the company would have conducted yet another exchange offer for its outstanding notes. With interest savings from all the debt rearrangement offers, interest expense would be even less over time, a bolster to earnings.

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