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SS Steel plans to issue bonds as bank debt pile-up becomes ominous

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SS Steel, a publicly-traded steel manufacturer, has planned to issue seven-year convertible bonds to collect Tk 5 billion through private placement to alleviate its finance cost burden by paying off bank loans.

The board has reached the decision as a pile-up of debts left the company unable to make handsome profits and declare decent dividends to its shareholders despite an increase in sales revenue, said an official of the company, requesting not to be named.

The bond proceeds will also be partially used for BMRE (Balancing, Modernisation, Rehabilitation, and Expansion) of the existing projects, he added.

The company's bank loans amounted to Tk 6.76 billion until December 2023, up from Tk 6.35 billion in June 2023, as it had taken out fresh loans following the withdrawal of the 9 per cent lending rate cap in June last year.

Accordingly, the steelmaker's finance cost rose 28 per cent year-on-year to Tk 507 million in the six months through December 2023.

Since the interest rate cap was replaced by a reference rate called SMART (six-month moving average rate of Treasury bills), the lending rate has been going up.

The maximum lending rate rose to 13.55 per cent for April based on SMART rate of 10.55 per cent and an interest margin of 3 per cent.

The current macroeconomic scenario suggests that the lending rate is likely to climb further as the reference rate is going to be revised from time to time.

The bond that will be issued by SS Steel will be unsecured, convertible or redeemable coupon bearing.

The bond issuance is subject to approval from the Bangladesh Securities and Exchange Commission (BSEC). The details of the debt security will be published after the regulatory approval, said the company official.

A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares.

Meanwhile, the securities regulator has expressed concerns about the escalating liabilities of SS Steel in recent years. It has sought a brief on how the borrowed funds have been utilised over the last three years.

Although SS Steel has been showing revenue growth over the last four fiscal years, its profit has been on the decline for the last three financial years.

The BSEC has therefore sought a justification of the revenue increase in line with the capacity and the increase in debt burden.

In FY23, sales of SS Steel almost doubled to Tk 14.86 billion while profit slumped 98 per cent year-on-year to Tk 17.68 million. It declared a mere 2 per cent cash dividend for general shareholders.

What is more worrisome is that SS Steel's net operating cash flow stood at Tk 3.86 billion in the negative as of December 2023, thanks to high borrowing cost.

The company official, who spoke with The FE, said the steelmaker had acquired two companies after the stock market listing in 2019 and that pushed up the company's debt.

In August 2020, the company acquired Chattogram-based Saleh Steel Industries, investing Tk 1.58 billion. Saleh Steel, established in 1995, has an annual production capacity of about 84,000 tonnes of mild steel (MS) rods and coils.

In April 2022, SS Steel acquired a stake as high as 99 per cent in Al-Falah Steel and Re-Rolling Mills, a Narayanganj-based company, at a cost of Tk 1.60 billion. Its annual production capacity is around 64,800 tonnes of steel.

As part of its business expansion, SS Steel also acquired fixed assets from two non-listed steelmakers -- Super Steel and Peninsula Steel Mills, located at Sitakunda in Chattogram at an expense of Tk 1.30 billion in November last year.

The fixed assets include 164 decimal of land, steel structure shed, capital machinery, and utility connections.

SS Steel, located in Tongi on the outskirts of the capital, manufactures MS deformed bars of various grades, MS billet, and ingot. It also produces MS billets from scrap materials.

Meanwhile, the steelmaker's stock price plunged 4.32 per cent to Tk 13.30 per share on Monday.

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