GKN PLC (GKN.LN) said Thursday it will raise GBP423 million through a rights issue to shore up its balance sheet as the automotive slump continued to hammer sales.

The U.K. automotive and aerospace components manufacturer hopes to boost its recently lowered credit rating and reduce its reliance on debt financing through the fully underwritten rights issue at a ratio of six new ordinary shares for every five existing ordinary shares.

At 0809 GMT, GKN shares had recovered from earlier falls of more than 15% to trade down 5 pence, or 4.6%, to 114 pence while the FTSE 250 index traded down 0.7%.

Around GBP300 million of the proceeds of the rights issue will be used to pay off the company's revolving credit facility and the remainder for working capital, finance director Bill Seeger told reporters Thursday.

The company's net debt rose over GBP200 million to GBP928 million in the five months to May 31, following the group's acquisition of former Airbus wing components company Filton, and its credit rating was cut to junk in early 2009 making financing much more expensive.

The company is hoping to return to an investment grade rating by the end of 2010.

The rights issue comes amid dire trading conditions for GKN, which has been hit hard by the slump in automotive demand across the world.

GKN said in a trading update that sales in the five months to May 31 fell 10% year-on-year to GBP1.79 billion, but this included GBP584 million in gains from foreign exchange rate movements and the acquisition last year of Filton.

Excluding these benefits, sales slumped 33%.

The company said its pretax loss in the same period, excluding restructuring and impairment charges, was GBP25 million. Still, after a particularly difficult first two months of the year, the group delivered a pretax profit of GBP8 million between March 1 and May 31.

Despite sharply lower sales, GKN's trading profit points to an improving trend, helped by swingeing cost cutting across the group since last year.

Chief Executive Kevin Smith said he was reasonably optimistic that there would be some improvement in production in the second half, even though it was still unclear what would happen to top-line sales.

GKN will cut a further 900 jobs in 2009, on top of the 2,400 already earmarked earlier this year, all from outside the U.K. The company employs about 36,000 workers worldwide.

The majority of these further job losses will come from GKN's off-highway business, which makes machinery parts for the agricultural, construction and mining sectors.

Sales at this division fell 20% in the first quarter on a constant currency basis, but slumped 45% in April and May compared with last year.

The accelerated restructuring and job losses will increase GKN's GBP190 million cost savings targets by about GBP5 million to GBP10 million, Smith said, while the GBP140 million cost of the program will rise by a similar amount.

The group's automotive business, which has already seen large-scale restructuring and job losses to counteract sharply lower demand, was also hit by the scale-back of production at General Motors Corp. (GMGMQ) and Chrysler LLC.

While May production elsewhere in the world is expected to be similar to April, North America will be hit by the two car giants shutting plants and reducing production, the company said.

Automotive sales were down 43% in the five months to May 31 to GBP963 million on a constant currency basis, although the trend improved slightly in May.

CEO Smith said: "The rights issue that we have announced today will strengthen our capital structure and give us the flexibility to take advantage of new opportunities for development and growth."

The rights issue is fully underwritten by J.P. Morgan Securities, UBS Investment Bank, HSBC Bank and RBS Hoare Govett.

Company Web site: www.gknplc.com

-By Kathy Sandler, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com