G Steel Plc has made a bid to become a major shareholder in the heavily-indebted Nakornthai Strip Mill Plc (NSM), a move which both sides expect will increase business synergy but which raises doubts about G Steel's future financial strength.

Analysts said the deal would provide synergies to both parties and make them more competitive with industry leader, Sahaviriya Steel Plc.

But two major credit-rating agencies - Standard & Poor's and Moody's Investors Service - have a different view on the deal.

Standard and Poor's placed its ratings on G Steel, including the B+ corporate credit rating, on credit watch with negative implications.

"The credit watch placement reflects G Steel's higher debt and potentially weaker financial profile following its decision to acquire convertible claims in Nakornthai Strip Mill Plc," said Standard and Poor's credit analyst Cheow Hon Lee.

The move may result in an improved competitive position for G Steel. Nevertheless, Standard and Poor's believes the increased leverage may significantly weaken G Steel's financial profile. Standard and Poor's will assess the potential strategic benefit from this investment along with the possible weakening in its financial profile. The credit watch is expected to be resolved following the completion of the deal over the course of the next few months, and when more details of the deal are available.

Moody's Investors Service also placed G Steel's B1 corporate family rating and senior unsecured bond rating on review for a possible downgrade.

"Moody's is concerned that this majority debt-funded transaction could weaken G Steel's credit profile and raise a refinancing risk, given that an appropriate long-term funding arrangement has yet to be put in place," said lead analyst Angela Choi. "NSM is also restructuring its debt and may issue further calls for capital support from its shareholders, including G Steel."

She added: "In its review, Moody's will evaluate how the purchase of NSM's convertible bond will be funded and the subsequent impact on G Steel's financial profile. Moody's will also assess G Steel's financial policy and business strategy relative to NSM as well as its commitment to provide ongoing support for NSM's operations."

At noon yesterday, share prices of G Steel were up 1.3 per cent at Bt1.26 while NSM had surged 4.7 per cent to Bt0.45 on the news. At the close, NSM had dropped to Bt0.44, up 2.33 per cent from the previous close, while G-Steel's shares dropped 0.81 per cent to Bt1.23.

Under the transaction, G steel's board of directors approved the investment plan on Monday. Of the total US$180 million (about Bt7 billion) price tag, G Steel plans to pay $60 million from an issuance of up to 2.2 billion new shares to On City, a creditor of NSM. G Steel plans to sell unallocated shares to finance the investment.

Meanwhile, G Steel's unit Oriental Investment Co Ltd will borrow the remaining $120 million from financial institutions, G Steel said in the filing to the Stock Exchange of Thailand.

The bond purchase will allow G-Steel - upon conversion - to acquire around 19 per cent of NSM's shares within six months. G Steel may exercise its right to increase the proportion of debt it would convert into equity in the next 18 months if it deems such an exercise as worthwhile. In this case, the stake in NSM will rise to 33 per cent.

A shareholders' meeting is scheduled for August 2 to consider the investment plan. The transaction is expected to be completed by the end of August.

G Steel is the country's second largest hot-rolled steel producer. It produces hot-rolled coils in different grades and gauges while NSM produces thin-slab, flat-rolled steel.

NSM is in a debt-restructuring process that focuses on the conversion of debentures to equity.

G Steel is capable of boosting its capacity to 3.4 million tonnes a year, from 1.8 million tonnes at present. Meanwhile, NSM's full capacity will be 3 million tonnes, from its current 1.5 million tonnes production.

Ryuzo Ogino, director of G Steel, said the exercise would be considered after discussions with potential partners.

"This would increase business synergy as we could focus on the production of products according to our expertise. Moreover, we'd have a higher bargaining power in raw material procurements and transportation cost," Ogino said.

NSM chairman Sawasdi Horrungruang welcomed G Steel's move, saying that it is better to have a new Thai shareholder than a foreign one.

"After the transaction, we'll be a major hot-rolled steel producing group, with a combined capacity of about 3 million tonnes," he said.

Siriporn Chanjindamanee

The Nation