Arrium Ltd’s bankers push for voluntary administration

Arrium Ltd (ASX: ARI) could be about to fold into voluntary administration as early as this afternoon.

A report by the Australian Financial Review (AFR) states that the company’s banking syndicate have agreed to lend the steel and iron ore producer an additional $400 million, but only if the company delivers itself into the hands of an administrator.

Oh, and that administrator needs to be hand-picked by the 35-strong lending syndicate.

Australia’s big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are owed about $1 billion in total, in equal amounts, but the debt is unsecured.

The new lending would more than likely be secured against the company’s assets, pushing the banks ahead of other unsecured creditors, including employees, the government and trade creditors.

It seems the banking syndicate has lost patience with the company, after Arrium’s board negotiated a US$927 million rescue package proposed by Blackstone-owned GSO Capital. But the bankers weren’t having any of that, particularly as they would have been forced to take a haircut on the debt they are owed.

GSO Capital was also going to make a significant amount of money, loaning Arrium US$665 million at an annual interest rate of LIBOR plus 11%, and an additional USD$140 million at USD LIBOR plus 7%. The one-month LIBOR rate is currently 0.43%, and both loans were secured against Arrium’s assets.

GSO Capital would have also received warrants equivalent to 15% of the company’s issued share capital after a US$262 million rights issue, fully underwritten by GSO and/or a professional underwriter.

In other words, Arrium shareholders would have been forced to kick in more capital, or see their shareholdings diluted, but still end up with a majority of the company owned by GSO Capital.

Foolish takeaway

The Federal government could play a part too, with Arrium employing 8,000 workers across 15 countries, including between 800 and 900 permanent staff and an additional 200 contractors at the Whyalla steelworks. But propping up unprofitable operations has been proven to just extend the agony in the past. Better to shut it down and help the employees get work elsewhere.

The AFR also reports that despite Arrium’s various plans to avoid administration, the company’s major bankers are confident the company will be in administration by the end of today. That wouldn’t surprise me in the least, and we’ve repeatedly warned that Arrium was not investment grade since 2011.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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