It is a measure of the plight BlueScope Steel finds itself in that it has been forced to raise equity in the most unfavourable of circumstances.
BlueScope announced today that it would raise $600 million of new equity through a fully underwritten four-for-five entitlement offer at a meagre 40 cents per share.
Before the global financial crisis erupted and engulfed the steelmaker, BlueScope shares were trading solidly above $8. The pricing of the issue, and for that matter the 61 cents a share at which the company was trading on Monday, is an indication of the distress the group has been experiencing.
No board would willingly embark on a big equity raising in the current difficult and volatile market circumstances – and few have this year. The decision to go to the market, therefore, is a measure of how dire BlueScope’s position is.
Having lost more than $1 billion last year and having foreshadowed another significant loss in the first half this year as it continues its wrenching restructuring, including the halving of its steel making with the closure of the No. 6 blast furnace at Port Kembla, BlueScope was in a vulnerable position.
Its net debt had blown out from about $1 billion at the end of the last financial year to about $1.6 billion by October 31 as a result of the costs of the massive restructuring program within its Australian coated and industrial products business.
While anticipated, that ballooning in its debt at a time of big losses and with only $575 million of headroom left in its borrowing facilities would have been anxiety inducing for the board and management, as well as their lenders.
BlueScope expects the restructuring to release between $400 million and $500 million of working capital over the rest of this financial year and, excluding the restructuring costs and impairment charges, it also expects only a small underlying loss in the first half.
The margins for error, however, were wafer thin and while the company has no maturing borrowings until mid-2013, the weakness and fragility of the external environment and the re-emerged fear in credit markets would have preyed on the minds of the board and their executives.
While raising equity in today’s market at BlueScope’s massively depressed share price might not be ideal, securing its balance sheet is of far greater consequence than the cost of that insurance against the conditions.
A strong Australian dollar, low steel prices, high raw material costs and weak economic conditions have provided the backdrop for both the restructuring and the continuing pressure on the company. While it will gain compensation, it also faces the prospect of the carbon tax.
It was the combination of those adverse external (and uncontrollable) factors that forced the group to take the difficult decision to shut down its export business earlier this year. It had been losing almost $500 million on its export sales – about $1 billion of losses over the past three years – and was therefore forced to take drastic action, closing the furnace at Port Kembla and its hot strip mill at Hastings in Victoria.
BlueScope’s chief executive, Paul O’Malley, said the group was continuing to look for cost reductions and was also looking for potential asset sales from within its portfolio. The group is in survival mode.
The only positive for shareholders in today’s announcement is that the restructuring does appear to be tracking almost exactly as the company had anticipated and, indeed, the costs of the program appear to be running at the lower end of the range BlueScope had forecast.
With the $600 million of new equity and the roughly $250 million of working capital it expects to release once the continuing restructuring costs have been taken into account BlueScope will have bought itself time.
While the restructuring will substantially reduce its cost base – it should improve underlying earnings by roughly $240 million a year – the company need some relief from the pressure being exerted by the strength of the dollar and the squeeze on margins created by weak steel prices and strong iron ore and coking coal prices if it is to properly stabilise and secure its position.
BSL Price at posting:
51.7¢ Sentiment: None Disclosure: Not Held
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