Essar Steel Algoma Inc., considered making its third trip through bankruptcy protection in a quarter-century before reaching a preliminary deal last week with a group of creditors to restructure its debt.
“The company’s current debt obligations of over $1.2-billion and annual interest expense of $113-million are unsustainable,” Algoma’s general counsel, Robert Sandoval, revealed in a court filing that said the steel maker rejected a proposal by one group of creditors that it file for protection under the Companies’ Creditors Arrangement Act (CCAA).
Such a move would have followed court-supervised restructurings in 1991 and 2001, which came before Algoma was bought in 2007 by India-based Essar Global Fund Ltd., in the global steel industry consolidation that led to the purchase of all of Canada’s major steel makers by foreign-based giants.
The court filings said Algoma – once Canada’s third-largest steel maker – plans to reach a final deal with holders of its 9.875 per cent unsecured notes by Sept. 30. The preliminary deal calls for holders of about $385-million worth of debt to receive 32 per cent of the value of their notes in cash and another 55 per cent in new notes.
Instead of using the CCAA to restructure, Algoma has filed a restructuring proposal under the Canada Business Corporations Act (CBCA) and has been granted protection from creditors in the United States under chapter 15 of the U.S. bankruptcy code.
“The CBCA provides for a controlled reorganization procedure designed to enable financially distressed companies to avoid foreclosure or seizure of assets,” Mr. Sandoval said in his filing, which pointed out the process is similar to prepackaged U.S. bankruptcy protection cases.
He warned in the court filing, however, that the company expects to report negative earnings before interest, taxes, depreciation and amortization in 2014, and “will need to achieve a significant deleveraging” to refinance another $345-million of asset backed debt that is scheduled to mature on Sept. 20.
The great steel boom that led to bidding wars for Algoma, Dofasco Inc., Ipsco Inc., and the takeover of Stelco Inc. in the mid-2000s came to a screeching halt in the 2008-09 recession.
Algoma said it lost $396-million and $305-million in the 2010 and 2011 fiscal years respectively, and although pricing for hot-rolled coil has nearly doubled since 2009 and plate prices have soared 50 per cent, the company has been challenged by a host of factors.
The severe winter weather, an expensive iron ore supply contract and increased costs of pension payments have added to the debt woes the company faces.
Thick ice remaining in Lake Superior later than usual delayed shipments of iron ore this spring, which meant Algoma’s steel-making operations could not take full advantage of the rebound in prices.
The cost of that iron ore also contributed to the losses because Algoma was operating under a long-term, exclusive supply agreement with Cliffs Natural Resources Inc., which meant it was paying $143 (U.S.) a ton for iron ore, compared with the market price of $113 a ton. That agreement was renegotiated at a lower cost at the beginning of 2014, the court filings said.
Pension payments will amount to $110-million in the next two years and $60-million in 2016.
The restructuring will not affect pension payments to retirees or affect the company’s 3,000 employees or suppliers, Algoma said in a news release last week.
The preliminary deal with creditors includes a $300-million equity payment by Essar Global Fund and the potential contribution to debt holders of 100 per cent of the equity of New Trinity Coal Inc., a coal mining company also owned by Essar Global Fund.