Iron ore producer Cliffs Natural Resources Inc's bondholders are suing the company over a bond exchange offer in January. The legal action took place after the Cliffs commodity prices went down and aimed at reducing the company's debt.
According to CNBC, the plaintiffs accused Cliffs of only favouring larger bondholders to participate in offering, while reducing the worth of notes of bondholders who were not eligible to participate. "The defendant's decision to pursue this transaction benefiting only themselves and a minority of holders of class notes violated the implied covenant of good faith and fair dealing," the plaintiffs stated in a class action lawsuit.
Cliffs and other U.S. miners have been hit by a downfall in the demand from steel mills. It is also triggered by the weak iron ore prices due to excess supply from big miners such as Vale SA, Rio Tinto Plc and BHP Billiton Plc, as reported by Reuters.
Two investors claimed, in a proposed class-action or group court proceeding, that the company made a violation in the federal securities law. The violation took place when it executed the private debt exchange that only allowed a select group of institutional bondholders to exchange their unsecured corporate bonds for secured bonds.
Bloomberg claimed that it also wrongfully denied retail bondholders an opportunity to participate. "As a result, class members were not only precluded from participating in the exchange offer, but were kept in the dark regarding defendant's view of the exchange offer," as written in the complaint filed on Monday in Manhattan federal court.
The new notes Cliffs issued rank over the unsecured debt the complainants hold, and in their court case, they mentioned that the ruling only created "two classes of holders of class notes with very unequal rights," as claimed by the complaint filed by investors Gary Waxman and Leonard Hammerschalg.
Moreover, Intelligence analyst Richard Bourke stated that Cliffs' debt exchange was the same with the "other distressed debt swaps that offer structurally subordinate security holders the opportunity to move up the capital structure." Cliffs Natural increased over 15 percent on Monday after it announced it will begin a key mine.
Meanwhile, a spokeswoman for the company, Patricia Persico, did not immediately respond to phone and e-mail messages after regular business hours seeking comment on the court case. But the company said that it will restart production of iron ore pellets at its Northshore Mine in Minnesota by May 15.
