In a move that will rattle the Federal election campaign especially in South Australia, Arrium, the country’s second biggest steelmaker, has been put into voluntary administration with debts of more than $4 billion, making it one of the largest corporate collapses in Australia since the GFC.
News of the move, which has been on the cards since Monday of this week, came in a statement to the ASX yesterday just before 9 am.
It places at risk thousands (7,000 has been reported) of jobs in South Australia, Sydney and Melbourne and Brisbane. But most of the jobs are located at the steelworks in the South Australian city of Whyalla, and nearby at Arrium’s now loss-making export iron ore operations.
Arrium used to be known as OneSteel and before that was part of the old steel business of BHP before being spun off by the company along with BlueScope. It produces mostly long products and construction steel for domestic consumption. It lacks the export base that BlueScope has.
Administrators were requested by the board of the embattled company which appointed Grant Thornton as voluntary administrator.
That reportedly angered a syndicate of banks including Australia’s big four, ANZ, Commonwealth Bank, NAB and Westpac. The banks wanted the Arrium board to appoint the bank’s own hand-picked administrators, McGrath Nicol, so they could elevate themselves higher up in the queue of creditors and take a bigger role in dictating the future of the company.
The big four banks – they could lose a big whack of the $1 billion in loans to Arrium – are the biggest losers after the employees and suppliers of Arrium, unless it can be sold.
The big banks will have to reveal exposures in their upcoming March 31 interim profit statements in the cases of Westpac, NAB and the ANZ, while the CBA releases a third quarter trading update in mid May.
The banks will be reluctant to reveal any details, but they should be pressured by ASIC to do so.
The four big banks are owned around $1 billion of the approximate $4 billion owned to the banks and other creditors and debt holders (there are a reported 35 banks and debt holders). Staff entitlements amount for another half a billion dollars, around $1 billion is in trade creditors.
The ANZ has already lifted its already increased provision for bad debts by $100 million (to close to $1 billion for the March 31 half year). Arrium shares closed at 2.2 cents last Friday.
But don’t be surprised if the banks try to have McGrath Nicol appointed in a separate move, or even try to crash through any impasse by appointing a receiver – a move that would destroy the company.
But don’t blame the banks – even though they are upset and didn’t get their way.
Blame the Arrium board and management which have reportedly failed to consult with the banks on numerous occasions – such as the surprise move to do a refinancing deal with US group GSO (the debt/credit arm of the huge Blackstone financial group in the US), without informing the banks.
This deal, announced in February, also scuttled a deal Arrium was negotiating to try and sell its Moly-Corp mining consumables business for up to $1 billion – which would have raised cash and lowered debt.
But it would have also removed a source of cashflow and earnings. From all reports, relations between the company and the banks and other financiers were poisonous towards the end.
In the gun is Arrium chair Jerry Maycock – an experienced manager (a former CEO of CSR) and director.
He is also chair of AGL Energy. Arrium’s collapse is not a good look. And another is current CEO Andrew Roberts. The board includes two women non-executive directors, Denise Goldsworthy and Rosemary Warnock
Grant Thornton’s Paul Billingham, Said Jahani, Michael McCann and Matthew Byrnes have been appointed as administrators.
Arrium said in its short, four-paragraph announcement to the ASX that discussions with its bankers and noteholders “have now ceased”. It was rather a cut and less than fullsome announcement, with no evidence of any explanation.
"After considering the available alternatives, in the current circumstances it has become clear to the board of Arrium that it has, unfortunately, been left with no option other than to place the relevant companies into voluntary administration in order to protect the interests of stakeholders".
Grant Thornton’s Paul Billingham said the voluntary administration provides Arrium and its stakeholders time to develop options that will help preserve long-term value and optimise the position of its creditors.
"Our focus will be to stabilise current trading, maintain business as usual across the group’s affected operations, identify ways to restore the performance of key business units and develop an optimal solution that maximises the return of creditors," he said.
Mr Billingham said the overseas operations of Arrium, primarily the Moly-Cop business, should be largely unaffected by the appointment. Grant Thornton intends holding a first meeting of creditors within eight days.
The appointment of the administrators came after talks on Wednesday night failed to find a way to settle the impasse. The loss of trust the banks and others had in the Arrium board seems to have been a major reason for the failure of the talks to succeed.
