* Australia's Arrium enters administration
* Blames high debt, low steel and iron ore prices
* Not alone in borrowing big during boom (Recasts, adds quotes, context)
By James Regan
SYDNEY, April 7 (Reuters) - Australian iron ore and steel group Arrium Ltd ARI.AX has been placed in administration, underscoring the uphill battle facing smaller companies with high debt competing against larger and more efficient sector giants.
Arrium's decision on Thursday to enter voluntary administration and raise the possibility of a break up or bankruptcy shows how creditors are souring on indebted resources companies in the current tough climate.
Data compiled by Reuters shows at least 10 Australian companies in the materials sector hold debt three times their earnings before interest and tax and amortisation in 2015.
"These are GFC (global financial crisis) levels and not a good sign," said Shaw & Partners analyst Peter O'Connor.
Debt to EBITDA is used to determine the ability of a company to service its debt.
Already facing the prospect of years of low iron ore and steel prices, Arrium endured a backlash from creditors who rejected a $927 million recapitalisation plan signed with Blackstone (NYSE:BX) BX.N private equity group's GSO Capital Partners in February. The plan would have left lenders of A$2.8 billion ($2.14 billion) in unsecured debt with repayments of only 55 Australian cents on the dollar.
Arrium is not the only company struggling with dissatisfied lenders.
Atlas Iron AGO.AX could face insolvency if a debt-for-equity deal is not approved by lenders and shareholders in coming weeks. Even then, the iron ore miner could still find itself unable to keep up its loan payments.
The deal would transfer 70 percent of equity to lenders in exchange for reducing loan debt by 48 percent to $135 million.
If the deal fails, there is a risk that Atlas will breach its debt covenant test by June 30.
According to an independent expert's report prepared for lenders by PPB Advisory and released by Atlas, it is doubtful that Atlas will meet its end-December 2016 covenant, triggering demands for immediate repayment of secured debt.
"It is unlikely that the group would have sufficient liquidity or be able to raise sufficient capital/external finance to repay the secured debt in such a short time," raising the spectre of insolvency, according to the PPB report.
Arrium and Atlas illustrate the struggles of smaller-sized Australian resources companies that used debt to buy second-tier iron ore mines to feed Chinese industrial expansion.
But they found themselves far out-produced by sector giants such as Rio Tinto RIO.AX RIO.L and BHP Billiton BHP.AX BLT.L . Most of these smaller firms were left in the red as Chinese industrial growth slowed and iron ore and steel prices contracted.
($1 = 1.3115 Australian dollars)