Australia’s biggest steelmaker, BlueScope Steel, has surprised the market and investors with a massive $2 billion plus fund raising via a share issue and new debt facilities that’s designed to end speculation that the company is running short of cash and is in under growing pressure.

Late last week we reported research from Deutsche Bank that BlueScope Steel could be looking for a billion ore more in fresh capital, and nothing happened.

Five days on, the company confirmed that and more with a massive restructuring of its balance sheet valued at $2.1 billion.

The company is raising $825 million from shareholders in an accelerated one-for-one issue at $1.55 a share, compared with the market price of $2.57 yesterday, a substantial discount of 38%, another indicator of the amount of desperation in the fund raising.

That fund raising is underwritten, meaning the company will get it. Hopes for a further $600 million from all shareholders is a bit more problematic given the sharp fall in the share price and the huge discount the offer is being made at (the bigger the discount, the greater the dilution of existing shareholders and the greater the amount needed, as fast as possible).

It is also raising a total of $1.275 billion in two new separate loan arrangements that will give BlueScope more flexibility and time before they become due.

The hope is that the company will be able to continue paying its way while riding out the market slump. The huge and expensive maintenance of its most important asset, the Number 5 blast furnace at Port Kembla, south of Sydney is costing upwards of $400 million.

Shareholders will pay with the final dividend being omitted, a sign that the company is struggling and needs the cash urgently approaching the new financial year. The final dividend last year was 27 cents a share, now that’s gone. The company slashed its interim dividend this year from 22 cents to 5 cents a share, so for some holders, the income loss will be noticeable. That will save the company $334 million.

The company is facing enormous pressure on its cash flows as revenue falls because demand at home and internationally for steel and steel products is still weak (and falling here). Prices for a wide range of steel products are down and the company, along with OneSteel, has seen revenue and cashflows drop sharply, putting growing pressure on its debt servicing ability.

Demand for construction, automotive, whitegoods and rebar (reinforcing bar) is weak and falling in Australia as the resources boom sours, business investment slows and housing starts plunge.

The reline at of the Port Kembla blast furnace is adding to the financial pressures because cash flows have fallen as production has stopped.

The fund raising and debt comes a month or so after its smaller rival, OneSteel, revealed a restructuring plan of its own that will lead to unquantified job losses. The company also raised around $580 million from shareholders.

BlueScope told the ASX this morning that: “following the capital restructure BlueScope Steel will have raised a minimum of A$2,100 million (gross) in committed funding from: approximately A$825 million from the underwritten portion of the Offer (before fees and expenses); A$1,275 million syndicated loan note facility of which A$200 million maturing more than two years from the date of this announcement and A$1,075 million maturing more than three years from the date of this announcement.

“Proceeds from the capital restructure will be used to replace the following: US$375 million (A$550 million) of bilateral facilities; A$1,192 million existing loan note facility; and A$350 million working capital facility.”

The huge restructuring of the company’s debt is a sign that BlueScope has decided to try once and for all to clear up the speculation about its debt burden and the fact that it will become due later this year.

Peter Fray

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