Baosteel, China's leading steelmaker, has obtained approval to raise up to 20 billion yuan (US$2.93 billion) in new capital in a bond issue to help trim its debt servicing costs.

The Shanghai-based steelmaker said that the National Association of Financial Market Institutional Investors (NAFMII) had given its support to its capital-raising plan. NAFMII was set up in September 2007 under the regulation of PBOC, the central bank, to manage the inter-bank markets for fixed income securities, foreign exchange and gold.

Baosteel's latest capital-raising plan calls for the issuing of 10 billon yuan of 7-year medium-term notes and another 10 billion yuan of one-year financing bills for sale mainly to institutional investors.

The fund raised will be mainly used to strengthen current capital flow and replace bank loans, Baosteel said. Chen Ying, board secretary with Baosteel, said that the notes and bills would be issued either in one go or in several tranches, depending on the market conditions, interest rate movements, and the company's capital requirement.

Zhu Limin, an analyst with Shanghai Securities said the new capital could significantly reduce Baosteel's financing cost. "It is uncertain what the coupon rates of the proposed Baosteel bond issue would be, but it should be no higher than that of bank loans," said Zhu.

"With the new cash infusion, Baosteel can boost the consolidation and integration of its projects, including the Zhanjiang project and the newly acquired Ningbo Steel," said Paul Bartholomew, China editor with Steel Business Briefing in Shanghai.

According to Bartholomew, a large steel plant capable of producing 10 million metric tons of steel will be built in Zhanjiang Port of Guangdong Province, as an important part of the restructured Guangdong Iron & Steel Enterprise Group, in which Baosteel holds 70 percent stake.

The construction of the steel plant would be completed by end-2011. "But so far, the progress there has been quite slow. I think Baosteel may boost construction efforts with the aid of new cash," said Bartholomew.

Another big spending will be on Ningbo Steel, in which Baosteel acquired a 56 percent stake in March for 2 billion yuan.

"The Zhanjiang steel plant and Ningbo Steel will expand Baosteel's capacity, and help fulfill its annual production goal of 80 million metric tons," said Zhang Tieshan, an analyst with mysteel.com.

"It is clear that Baosteel will use the money to replace bank loans as a priority. Although I don't think Baosteel will carve a large share of the fund for mergers and acquisitions, the strengthened capital flow will benefit M&A indirectly," Jiang Qiu, an analyst with Guotai Jun'an Securities, said.

(China Daily May 20, 2009)