FRANKFURT Germany's ThyssenKrupp (TKAG.DE) saw its finances weaken in the latest quarter as the indebted group struggled to find a buyer for its loss-making Steel Americas division.
ThyssenKrupp has been trying for more than year to find a buyer for the mills in Brazil and the U.S. state of Alabama, which have caused losses and sapped capital at Germany's biggest steelmaker for the past few years.
While ThyssenKrupp's third-quarter report on Tuesday showed net debt eased, its equity capital and liquidity shrank further, and its managers said they would approach banks to avoid losing credit lines worth 2.5 billion euros ($3.3 billion) because of the group's deteriorating finances.
ThyssenKrupp now has until the end of September to either improve the ratio of debt to equity capital on its books, or to persuade banks to temporarily waive the loan covenant.
Chief Executive Heinrich Hiesinger said ThyssenKrupp's weakening finances were sounding the alarm in some customers' risk systems but added that management was able to allay their concerns by explaining its strategy.
"There is no impact at all on the order intake side," he told analysts during a conference call after ThyssenKrupp published quarterly financial results.
Hiesinger is shifting the company away from the volatile steel sector to higher-margin businesses such as elevators and factory equipment. But his efforts have been overshadowed by the crisis over Steel Americas.
In the third quarter, Steel Americas posted an operating loss of 162 million euros, contributing to a group net loss of 362 million euros.
ThyssenKrupp began building the Brazilian mill about seven years ago, aiming for low-cost production in Latin America's biggest economy. However, wage inflation, rising iron ore costs and appreciation of the Brazilian currency made output much more expensive than expected, just as U.S. steel demand shrank.
The longer talks to sell Steel Americas last, the more the benefit of any proceeds is eaten up by losses at the business, putting a strain on the company's finances.
ThyssenKrupp has sunk more than 12 billion euros into Steel Americas, about two thirds of which were in Brazil, putting an immense strain on its balance sheet and ramping up pressure to raise fresh capital.
By now, the book value of Steel Americas has shrunk to 3.4 billion euros from more than 7 billion, and analysts expect the business could fetch a price of as little as 2.3 billion.
Brazil's Cia. Siderurgica Nacional (CSN) (CSNA3.SA) has been seen as the most likely buyer of both Steel Americas mills but price and ThyssenKrupp's future involvement are sticking points.
Two people familiar with the matter told Reuters earlier on Tuesday that ThyssenKrupp was considering selling only the U.S. part of Steel Americas business to CSN, which would leave the group the unhappy owner of the Brazilian operation.
ThyssenKrupp backed away from its goal of selling Steel Americas by the end of September, when ThyssenKrupp's financial year ends, pouring cold water on any prospects of a quick sale.
"What is clearly important for us is that we keep track of the interests of the company and not do a fire sale," finance chief Guido Kerkhoff said, adding ThyssenKrupp's financial situation was not adding to pressure to push for a rapid deal.
By the end of June, ThyssenKrupp's gearing ratio - how much debt it has compared to equity - had jumped to 185.7 percent from 148.2 percent. That compares with only 31 percent at ArcelorMittal (ISPA.AS), the world's biggest steelmaker.
If ThyssenKrupp's gearing remains above 150 percent through the end of its fiscal year, banks could cancel a 2.5 billion euro credit line because the group is in breach of loan covenants. At the end of June, it had 7.2 billion euros worth of liquidity, down from 8 billion three months earlier.
ThyssenKrupp tried to allay investor concern over its financial strength, saying that even if banks canceled the credit line, which it said was unlikely to happen, it would still have enough liquidity to cover debt maturities.
($1 = 0.7555 euros)
(Additional reporting by Alexander Huebner, Arno Schuetze, Tom Kaeckenhoff and Guillermo Parra-Bernal; Writing by Ludwig Burger and Maria Sheahan; Editing by Christiaan Hetzner, Thomas Atkins, Anthony Barker)