Caixin
Oct 09, 2019 07:31 PM
BUSINESS & TECH

Two Steel Makers in New State-Assisted Fundraising

A Baotou Steel Union production line in Baotou, Inner Mongolia, June 20, 2019. Photo: VCG
A Baotou Steel Union production line in Baotou, Inner Mongolia, June 20, 2019. Photo: VCG

Two Chinese steelmakers announced plans to raise fresh funds to improve their working capital, reflecting pressures being felt in the oversupplied sector as it continues to consolidate.

The new plans will see Guangxi Iron and Steel Group raise nearly 5.2 billion yuan ($728 million), while Inner Mongolia Baotou Steel Union Co. Ltd. will raise an unspecified amount from a major brokerage by using company shares held by its parent as collateral, according to separate stock exchange statements dated on Wednesday.

China is the world’s largest steel producer, providing more than half of global output, following a massive buildup over the last three decades that helped to fuel the country’s rapid economic expansion. But as the nation’s economy enters a new phase of slower growth, Beijing is leading a sector-wide consolidation of a group of mostly state-owned companies, including merging smaller players with larger rivals and shutting down less-efficient capacity.

While that happens, many smaller players are still feeling the pinch of oversupply, prompting them to look for additional money to continue funding their operations.

Under its fundraising plan, Guangxi Iron and Steel will get a 5.16 billion yuan capital injection from Liuzhou Iron & Steel Co. Ltd., also based in Southeast China’s Guangxi Zhuang Autonomous Region, according to a statement from Liuzhou Iron and Steel. As part of the deal, Guangxi Iron and Steel will boost its registered capital and issue new shares that will result in it becoming 27.78% owned by Liuzhou Iron and Steel.

In the other capital-raising, Inner Mongolia Baotou Steel said that 1.1 billion of its shares held by its state-owned parent will be used as collateral as part of a fundraising exercise in conjunction with an asset management arm of China Galaxy Securities, one of the nation’s major brokerages, according to a separate announcement. Those shares would have a market value of about 1.6 billion yuan, based on Baotou Steel Union’s latest closing price.

Such use of shares as collateral, often for bank loans, is a relatively common practice in China, as companies with shaky finances look for ways to reassure lenders that borrowed money will get repaid. But such plans sometimes run into trouble if those shares fall in value, undermining their worth as collateral.

Baotou Steel Union’s parent owns 54.66% of the listed company, but has pledged more than half of that as collateral. With the latest move, the parent has now pledged about 9.3 billion Baotou Steel Union shares as collateral, or 37.47% of the listed company’s total shares.

“This pledge of shares … is to supplement the liquidity capital needs of the enterprise,” Boutou Steel Union said.

Contact reporter Yang Ge (geyang@caixin.com; twitter: @youngchinabiz)

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