China Eximbank provides a $1.3 billion USD loan to Sinosteel Corporation to acquire a controlling stake in Midwest Corporation

Project narrative

In December 2007, Chinese state-owned company Sinosteel Corporation announced a $1.05 billion USD bid for Australian iron mining company Midwest Corporation. Then, on February 20, 2008, Midwest announced that Sinosteel's offer was unsatisfactory because its perceived undervaluing of Midwest. Midwest denied Sinosteel access to its books for Sinosteel's due diligence inquiries, because Sinosteel refused to sign a confidentiality agreement. Then, on March 14, 2008, Sinosteel Ocean Capital Pty Limited (Chinese: 中钢大洋投资有限公司) — a special purpose vehicle and wholly owned subsidiary of Sinosteel Corporation — began a hostile takeover bid — the first ever by a Chinese company in Australia — offering $5.28 USD ($5.60 AUD) per share for all the issued shares of Midwest Corporation — the 80.1% percent of Midwest it did not already owe, or a total of $905 million USD. At the time of the announcement of the hostile takeover, Sinosteel held a 19.89% equity stake in Midwest. It sought at least 50.1% to have a successful acquisition. Sinosteel's hostile takeover was approved by Australia's Foreign Investment and Review Board (FIRB). To support the cash consideration of this acquisition, China Eximbank issued a binding commitment letter to Sinosteel in which China Eximbank agreed to enter into a formal agreement to provide a term loan facility — with no facility limit — to Sinosteel Corporation to fund the acquisition. Drawdown would be subject to conditions including approval for the takeover from China's National Development and Reform Commission (NDCR), no event of default, and the credit documentation being finalized and executed. Events of default included Sinosteel failing to repay any sum when due, Sinosteel making false or misleading representations or warranties, Sinosteel defaulting materailly under any other contract to which it is a party, the material deterioration of Sinosteel's operation or financial status, a merger, division, or other reorganization of Sinosteel Corporation or security providers is proposed or occurs and a restructuring measure of the debt is not agreed to, Sinosteel or any security provider being declared bankrupt or insolvent, shutdown, or dissolved, or Sinosteel breaching other material provision. This loan was secured by (i.e. collateralized against) an equitable mortgage in favor of China Eximbank over any Midwest owned by Sinosteel Corporation or its subsidiaries. The terms would be valid until September 28, 2008. The Midwest board of directors recommended that its shareholders reject the $5.60 AUD per share offer, citing its confidence that Sinosteel could make a better offer based on the $200 million AUD it spent on the 19.89% and the unlimited term loan facility supporting Sinosteel from China Eximbank. Then, on April 29, 2008, Sinosteel improved its offer from $5.60 AUD to $6.38 AUD per share for a total consideration of $1.36 billion AUD ($1.27 billion USD). As a result of the improved offer, the Midwest Board of Directors approved the offer and turned the hostile bid into a friendly bid. This new offer would close on June 5, 2008, subject to the condition that Sinosteel won an 50.1% stake in Midwest. The $6.38 AUD increased offer was only available to Midwest shareholders once Sinosteel got past the 50.1% share threshold. On June 3, 2008, Sinosteel announced that it had increased its equity in Midwest from 19.89% to 28.37%. Then, on June 5, 2008, Sinosteel announced that it owned 33.8% of Midwest. In the months thereafter, Sinosteel bought up more shares; on July 11, 2008, it announced that it had acquired a controlling 50.97%. Sinosteel was competing against Murchison Metals Limited, an Australia-listed company backed by Japan's Mitsubishi, to take over Midwest. In October 2007, it had an all-scrip proposal offering one Murchison share for every 1.08 Midwest shares. Sinosteel was brought in by Midwest to act as a 'white knight' to hold off the Murchison bid, benefiting Sinosteel by protecting its joint venture with Midwest. In June 2008, Murchison's bid had involved into a rival all-share reverse merger proposal for one Murchison share for 0.575 Midwest shares. Sinosteel alleged that Harbinger Capital, an American hedge fund and the largest shareholder of Murchison, which was purchasing Midwest shares during Sinosteel's acquisition, was in violation of Australia's Foreign Acquisitions and Takeovers Act (FATA since Harbinger and Murchison were foreign companies and thus collectively not allowed to own more than 15% of an Australian company without prior approval of Australia's Foreign Investment Review Board, and that Murchison and Harbinger were colluding to in respect to their Midwest shareholding. On June 23, 2008, the Australian Government's Takeovers Panel ruled that Harbinger had failed to comply with FATA, putting Sinostel at an unfair disadvantage, and decree that Harbinger would not be allowed to exercise voting power with the acquired shares. Murchison withdrew its merger proposal on July 7, 2008. The takeover offer made by Sinosteel Ocean Capital Pty Limited for all the shares in Midwest Corporation Limited closed at 5 pm (AWST) on September 15, 2008, with Sinosteel having acquiring a 98.52% stake; Sinosteel planned to compulsorily acquire the remaining Midwest shares and seek to de-list Midwest from the Australian Securities Exchange. China Eximbank issued an approximately $1.3 billion USD to Sinosteel to support the acquisition. This merger & acquisition drew some discomfort in Australia, for national security concerns, as it came after several other Chinese acquisitions in the natural resources sector; even so, the transaction received FIRB's approval.