Debt to Equity Conversion Scheme
1. Procedures, Objectives and Policy of Debt to Equity Conversion
1.1 Objective and policy of Debt to Equity Conversion
According that G Steel Public Company Limited (“GSTEEL”), a parent company of the Company which holds 43.9% of the total shares sold of the Company, has the plan to issue and offer 11,920,000,000 newly issued ordinary shares with the par value of Baht one per share (“GSTEEL New Shares”) to ArcelorMittal Netherland B.V. (“AM”) at the offering price of not lower than Baht 0.63 per share. This price is not lower than 90% of the weighted average of GSTEEL’s share price as measured by the trading on the SET during the period from February 7, 2011 through February 28, 2011. This period represents fifteen consecutive business days prior to the date on which the Board of Directors of the Company passed the resolution to propose the agenda to issue the GSTEEL New Shares to the meeting of shareholders for approval. The total subscription proceeds from the GSTEEL New Shares has a total value of up to Baht 7,509,600,000 (the “AM Transaction”). A significant restructuring and reduction of GSTEEL’s liabilities is a required condition of the AM Transaction. Therefore, the following Debt to equity conversion shall take place; amongst other restructuring:
(i) the debt to equity conversion in GSTEEL, a major shareholder of the Company, for the amounts owed to Kwang Sogo Investment Company Limited and Pacific Harbor Advisors Pte. Ltd.; and
(ii) the debt to equity conversion in the Company for the amounts owed to GSTEEL and Oriental Access Co., Ltd (“OA”) (the “Debt to Equity Conversion Program”).
Given the debt reduction conditions required by the AM Transaction, the Company is required to carry out the debt to equity conversion for the debt owed to GSTEEL and OA (a subsidiary in which 99.98% of the total shares are owned by GSTEEL), therefore, the Company is accordingly required to issue and offer the newly issued ordinary shares to GSTEEL and OA in accordance with the said debt to equity conversion (hereinafter referred to as “the Transaction”)
1.2 Procedures of Debt to Equity Conversion
To allocate 6,854,166,667 newly issued ordinary shares, with a par value of sixty-nine satang per share, to the creditors, GSTEEL and OA, in accordance with the Debt to Equity Conversion Program at the price of Baht 0.24 per share, being the price not lower than 90% of the Market Price.
propose the agenda in offering to sell the Company’s newly issued ordinary shares to the meeting of shareholders for approval, which is the period during February 7, 2011, and February 28, 2011, equaling to Baht 0.26 (Information from SETSMART in www.setsmart.com of the SET).
Such offering price is lower than the par value of the Company’s shares so the Company is required to comply with Section 52 of the Public Limited Company Act B.E. 2535 (as amended) (“PLCA”), and obtain approval from the meeting of shareholders.
1.3 Rationale, advantage and disadvantage and benefits which the Company will obtain from Debt to Equity Conversion Program
In the second half of 2008, the world economic crisis caused significant fluctuations in steel product and raw material pricing. As a result, the Company and GSTEEL have suffered repeated losses since 2008 whereby the Company’s liquidity and working capital position has been significantly challenged. Also, the Company and GSTEEL defaulted on their debt payment to certain major creditors together with defaulted on the payment to financial institution. Moreover, the Company’s general lack of liquidity has caused the Company to make an allowance for assets reflecting the uncertainty and lack of liquidity which such allowance has a significant impact on the Company’s shareholders.
As a result of the aforementioned circumstances, the Company and GSTEEL’s auditor, KPMG Phoomchai Audit Limited, has rendered its disclaimer opinion to the Company’s financial statement for the year ending 31 December 2009 and GSTEEL’s financial statement for the year ending 31 December 2008 and 2009 whereby, according to the rules and regulations of the Stock Exchange of Thailand (“SET”), if the Company and GSTEEL failed to rectify the qualified audit opinion for 3 consecutive years, then the Company and GSTEEL may be delisted from the listed company under the SET.
In this regard, the Company is required to seek the best alternative solution to help strengthening the Company’s financial situation whereby there are several possible solutions that were explored as a remedial package for the Company’s current challenged financial position including debt to equity conversions, capital increase via right offering or public offering, sourcing the financial support form new financial institutions and attracting a strategic investor.
As a result of the aforementioned rationale and upon the careful and thorough consideration of the management team, the capital increase by a new strategic investor is the most suitable solution for the Company because apart from the new capital injection by the strategic investor, the Company will procure certain benefit from the strategic investor that can help the Company with the turnaround of its operation such as management, purchasing, production technology, sales and marketing and etc. The support from the strategic investor will not only improve the Company’s operation, but also enhance the plant’s production capability. As aforementioned, this solution will help improving the Company’s operation and turning around the Company’s profitability which will benefit the Company’s shareholders.
Other supports under this Transaction include the provision of USD 500 million credit facilities by AM to the Company and GSTEEL for working capital, capital expenditure and debt restructuring.
Furthermore, AM will further assist the ongoing operations of GSTEEL and the Company by entering into a business assistance agreement with GSTEEL and the Company pursuant to which AM will provide management, procurement, commercial, technical and operations-related services to GSTEEL and the Company. These services will include commercial integration and best practices such as advice on sales and purchase integration, profit optimization, competitive raw material purchasing, developing strategic, operational and financial plans and marketing by leveraging on AM’s distribution network. Production related services will include operational and technical advice and assistance that will seek to improve production targets and engineering standards to bring them on par with market leading international standards.
2. Source of Debt
The debt claims in the Company that will be subject to the Debt to Equity Conversion Program are as follows:
paid by the private placement cash subscription by GSTEEL contemplated by this Transaction. GSTEEL currently holds 22.33% of the total share sold of the Company. Assuming the same above-referenced parameters, GSTEEL’s ownership stake in the Company will be increased to approximately 28.58% of the total shares sold following the conversion before giving effect to the above-referenced cash investment by GSTEEL. Assuming the above-level cash subscription by GSTEEL and the parameters noted above, GSTEEL’s ownership following all transactions would be approximately 45.93% of the total shares sold and when consolidated with OA’s ownership, approximately 63.75% of the total shares sold.
“The Counterparty” who entered into the tri-party agreement with GSTEEL as debtor and the Company as creditor is a steel industry trading company that had purchased goods from GSTEEL (and had an unpaid receivable) and sold downstream expansion equipment to the Company (and had a payable owed to them by the Company). As the relationship became more tenuous following the collapse of the steel market and all parties deteriorated financial position as a result, GSTEEL, the Company and the Counterparty agreed to offset the Company’s debt owed to the Counterparty against the debts owed by the Counterparty to GSTEEL. This transaction made GSTEEL a direct creditor to the Company for the amounts originally owed by the Company to the Counterparty.
concurrent with this conversion, OA’s ownership stake in the Company following the conversion will be reduced to approximately 17.82% of the total of shares sold.
Share proportion prior to and after the newly-issued shares
Prior to the newly-issued shares After the newly-issued shares
Major Shareholders
Number of shares % Number of shares %
GSTEEL 8,911,266,071 22.33 28,365,432,738 45.93
OA 8,606,434,586 21.57 11,006,434,586 17.82
Total 17,517,700,657 43.90 39,371,867,324 63.75
3. Summary of financial statements of the Company
(Unit: Million Baht)
Item 2008 2009 (restated) 2010 Q1/ 2011 Income Statement Total revenues 26,890 14,276 16,165 4,744 Cost of selling 25,066 17,281 14,845 4,370 Gross profit 1,049 -4,967 313 359 Expenses 5,153 3,105 4,580 430 Interest expenses 269 299 412 147
Net profit (loss) -3,598 -6,408 -3,672 -203
Balance Sheets
Current Assets 6,773 1,455 1,966 1,513
Property, plant and equipment-net 22,073 24,530 21,070 20,842
Total non-current assets 23,392 25,209 21,725 21,510
Total assets 30,165 26,664 23,692 23,023
Current liabilities 6,357 8,284 9,257 6,023
Total liabilities 6,752 9,666 10,215 9,699
Shareholders Equity 23,413 16,998 13,477 13,324
Statements of Cash Flows
Item 2008 2009 (restated)
2010 Q1/ 2011
Cash flows from financing activities;
Finance costs paid (762) (186) (174) (60)
Net proceed (repayment) of
short- term loans 516 (1,310) 67
(47)
Repayment of payable from offsetting of
machinery purchased - - (68) (5)
Liabilities under rehabilitation plan (10) - - -
Proceed from warrants issued - - 150 -
Proceeds from ordinary shares issued - 50
Net cash flows from financing activities (256) (1,496) (25) (62)
Effect of exchange rate changed (3)
Net increase (decrease) in cash and
cash equivalents (277) (41) 14 (6)
Cash and cash equivalent at the beginning 361 84 43 57
Cash and cash equivalent at the ending 84 43 57 51
4. Names, addresses and number of creditors to receive newly-issued shares subject to the Debt to Equity Conversion Program
Name Address Amount of Debt*
(Million Baht)
Amount of Debt Converted into Equity
(Million Baht)
1. GSTEEL 88 Paso Tower, 18th Floor, Silom Road, Bangrak, Bangkok
1,069 1,069
2. OA 88 Paso Tower, 18th Floor, Silom Road, Bangrak, Bangkok
576 576
* 1) the evidence of such debts as at 31 December 2010.
5. Other creditors except those mentioned in Item 4 (please show the ten largest other creditors)
Name Amount of Debt
(Million Baht) Type of Creditor
1. STENA METAL INC.* 1,224.89 Trade creditor
2. METAL INTER CO.,LTD* 1,030.67 Trade creditor
3. INTERGATE AG* 610.78 Creditor related to performance
guarantee
4. MASTER STEEL CO., LTD.* 325.31 Advance from customer
5.STEMCOR (S.E.A.) PTE LTD.* 188.75 Trade creditor
6. MILL CON STEEL INDUSTRIES PLC 122.96 Advance from customer
7. JAKKANIN CO.,LTD.* 117.33 Advance from customer
8. VESUVIUS CORPORATION S.A.* 114.00 Trade creditor
9. SCHNITZER STEEL INDUSTRIES, INC.* 109.53 Trade creditor
10. MAX METAL CORPORATION PLC* 101.16 Advance from customer *These parties are not the connected parties under SEC rule on connected parties transaction.
6. Type and number of shares to be issued for debt settlement subject to the Debt to Equity Conversion Program
To allocate 6,854,166,667 newly issued ordinary shares, with a par value of sixty-nine satang per share, to the creditors, GSTEEL in the amount not exceeding 4,454,166,667 newly issued ordinary shares and OA in the amount not exceeding 2,400,000,000 newly issued ordinary shares, in accordance with the Debt to Equity Conversion Program at the price of Baht 0.24 per share, being the price not lower than 90% of the Market Price.
“Market Price” means the weighted average of the Company’s share price trading on the SET, fifteen consecutive business days prior to the date on which the Board of Directors passes the resolution to propose the agenda in offering to sell the Company’s newly issued ordinary shares to the meeting of shareholders for approval, which is the period during February 7, 2011, and February 28, 2011, equaling to Baht 0.26 (Information from SETSMART in www.setsmart.com of the SET).
Such offering price is lower than the par value of the Company’s shares so the Company is required to comply with Section 52 of PLCA, and obtain approval from the meeting of shareholders.
7. Newly-issued share price and criteria of setting the share price