- Lenders rejected a recapitalization proposal from GSO
- Global steel mills struggling with tumbling prices, oversupply
Australian steel and iron ore supplier Arrium Ltd. appointed a voluntary administrator after lenders rejected a $927 million recapitalization plan, joining a global squeeze of mills by creditors as the industry buckles under a flood of Chinese exports.
Grant Thornton LLP will oversee the process and assume immediate executive control of the Sydney-based producer, the administrator said in an e-mailed statement Thursday. An “urgent but comprehensive review of the core Australian steel and mining businesses,” will begin, the statement said.
The announcement comes a week after India’s Tata Steel Ltd. said it’s considering the sale of its loss-making U.K. division, jeopardizing 40,000 jobs. Arrium’s shares, which plunged 97 percent in the past three years, were suspended earlier this week after lenders rejected a proposed funding agreement with GSO Capital Partners.
“The most likely scenario is that they will break Arrium up and get as much money as they can back into the coffers,” Evan Lucas, a market strategist at IG Ltd. in Melbourne said by phone. “The banks are already buckling up for a massive haircut.”
Arrium’s best performing unit, a mining consumables division which makes grinding and crushing equipment used in mining and processing, will be largely unaffected by the appointment of administrators, according to the statement. Efforts to sell that unit earlier failed to meet expectations, Arrium said in February as it posted a first-half loss.
Talks with lenders “have now ceased,” Arrium said in a separate statement Thursday. The board had “no option other than to place the relevant companies into voluntary administration,” the statement said. Its net debt grew to A$2.1 billion as of Dec. 31, from A$1.75 billion at the end of June, according to filings.
Arrium had been in talks with its lenders for months and in February announced a potential recapitalization plan with GSO Capital. The lending syndicate of more than 30 banks was unaware of the plan until it was announced by the company, according to people with knowledge of the matter. The plan would have returned to the banks about 50 cents in every dollar owed, the people said.
Australia’s so-called big four banks, Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp., are owed about A$1 billion by Arrium, the people said.
During talks earlier this week, the lending syndicate pushed for McGrathNicol to be appointed as administrator, while the company preferred Grant Thornton to be brought in, two of the people said.
Global steel mills are struggling to contend with steel exports from China, which accounts for about half of global output. China’s exports surged to an all-time high last year, as local producers grapple with waning domestic consumption. Arrium flagged in February it may mothball its loss-making Whyalla plant in South Australia and last year shuttered iron ore mines and booked writedowns.
“It’s always been that steel production outside the developing nations, China particularly and also India and across Southeast Asia, was becoming less and less competitive by the day,” IG’s Lucas said.
Arrium’s underlying net loss in the six months to Dec. 31 widened to A$24 million ($18 million), from A$22 million a year earlier on weaker prices and faltering demand, the producer said in February. Arrium employs about 5,500 people in its steel division, according to an annual report published in September. The Whyalla plant has 1,100 staff, excluding contractors, the company said in an October filing.
Any job cuts will be a further blow to South Australia and may pressure Prime Minister Malcolm Turnbull’s government with elections as little as three months away. South Australia is saddled with the highest unemployment rate among the nation’s states, rising to 7.7 percent in February, compared to a national average of 5.8 percent.
Australia’s steel industry faces “substantial challenges” caused by oversupply, Industry Minister Christopher Pyne said Thursday. The government was ready to help affected workers in Whyalla.