When Nakornthai Strip Mill Public Company Limited announced in March that it had raised some $505.6m in the US high yield debt market to complete and operate its new steel mill in Chonburi, market watchers were stunned.
McDonald & Company Securities Inc and Gleacher NatWest, working for NSM, had pulled off what is little short of a miracle deal for a cash strapped private sector Thai corporate during the regional financial crisis. It is also a deal that clearly demonstrates the key issues the Thai private sector must face in their efforts to recapitalise for the years ahead (for full details, see Euroweek 541 and 542).
"The key to this deal," says David Wheeler, director and head of global emerging markets in Gleacher NatWest's high yield bond group, "was that the former controlling shareholder, Khun Sawasdi Horrungruang, was prepared to give up absolute control of NSM to win fresh capital from international investors."
McDonald & Company Securities Inc had been hired in mid-1997 by NSM as lead adviser on refinancing the company. NSM had, during the boom years, raised finance for its new 1.35m tonne steel mill from local Thai banks - 70% in US dollars and 30% in Thai baht.
But, as with most of the Thai corporate sector, the maturities had been too short, the total funds raised insufficient and the company was then caught by viciously rising interest rates as Thailand's financial sector crashed. As well as anxious bankers, NSM had accumulated some very nervous trade creditors.
McDonald & Co had been brought into the deal on the recommendation of Keith Bussey, CEO of US company Steel Dynamics Inc, who had been contacted by John Schultes, a steel mill expert who had earlier been hired as CEO at NSM.
Says Wheeler: "Bussey suggested that Dave Stickler at McDonald & Co should take a look at the deal because they had arranged financing for steel plant start-ups in the US. We had worked well with McDonald on high yield issues before and it all came together from that point."
When McDonald & Co and Gleacher NatWest started work on the deal the true extent of the Thai and Asian crisis had not emerged. An advisory project for NSM's refinancing that was supposed to take a few months ended up taking more than nine months.
Says Wheeler: "It was a deal against all odds - it would have been tough to do if the company was in the west but we had to contend with the Thai crisis and then the Asian crisis as well."
Key to the deal was handling the Thai banks. NSM and its advisers managed to win their approval to extend maturities and to reduce their total exposure from around $400m to some $350m.
Lead Thai institution was IFCT, with leading banks such as Thai Farmers Bank, Siam City Bank and First Bangkok City Bank. The banks also agreed that more than $450m of the $505m high yield issue would rank pari passu with the Thai bank debt.
A major concern during the bond issuance process was of the enforceability of the mortgage, should NSM later experience troubles. That issue has since been addressed by the new Thai Bankruptcy Act although no precedents are yet available for the passage of such a procedure through the Thai courts.
Although this is not a future flows transaction, core to the success of the placement were the eight year offtake agreements with two major German steel companies, Preussag and Klockner.
"International investors taking Asian risk will always try to focus on companies that have strong international customers. Without that element the NSM deal would never have flown," says one analyst.
The deal would not have been possible as a plain vanilla high yield issue. The reality of the deal structure is that foreign investors would only support the deal because NSM's owners agreed to sell some 30% of NSM to new investors. This sale was done directly, through the sale of new shares, and indirectly, through warrants attached to the bonds.
NSM also agreed for board control to be ceded to the new investors and for the management to be contracted out to a special purpose management company led by Steel Dynamics. Aside from the warrant holders, other leading new NSM shareholders include Enron and McDonald & Co.
"The owners of NSM have been smart - they have accepted that part of something strong is worth more than the whole of a company that is in trouble," says a local analyst.
Adds Wheeler: "Until more Asian company owners take brave steps like NSM then the private sector will continue to suffer from a severe liquidity shortage." EW