Even after two levels of Canadian government gave Essar Steel Algoma Inc. millions to upgrade its operations, debt markets are skeptical its billionaire Indian owners will put up their own cash to keep it in business.
Less than a year after emerging from a restructuring with help from its parent company, and after two previous bankruptcies, Algoma's debt is trading at levels implying the company, based in Sault Ste. Marie, Ont., may need to repeat the process with steel prices near their lowest since 2009.
What comes out of any possible restructuring will depend a lot on how much more support India's billionaire brothers, Shashikant and Ravikant Ruia, want to give the Canadian business they bought in 2007. The decline in commodity prices worldwide, from oil to steel to iron ore, is bruising several of the brothers' ventures controlled through the sprawling Essar Group.
"By and large their wealth is in the oil and gas and resource area, so it's not as if they are not suffering elsewhere in their business." said Barry Kupferberg, director of research at Trilogy Capital Management, which manages $200-million (U.S.) in New York and held Algoma debt before the last restructuring. "So the amount of liquidity they have to bail out this company, again – maybe they will, maybe they won't."
The pressure on the Canadian unit's debt eased last month after the governments of Canada and Ontario said each would contribute $30-million (Canadian) to the company's plant upgrades to boost the country's beleaguered manufacturing sector. Essar contributes $1.2-billion to Canada's gross domestic product each year, according to government figures.
The respite was short-lived, however, as renewed concerns that China's growth is slowing sent steel prices lower, and yields on Algoma's bonds rose again.
"The levels at which our debt is trading are reflective of the current state of the broader steel industry," Brenda Stenta, a spokeswoman for Algoma, said in an e-mail. "However, we are actually now witnessing an improvement in pricing, and there is an expectation that there will be continued price recovery through to calendar year-end."
Ms. Stenta said Algoma generated positive earnings even when steel prices were at their lowest and is working to trim costs.
Ontario's grant only becomes available after Essar makes investments in its plant and incurs the costs, Michael Gravelle, the province's Minister of Northern Development and Mines, said in an e-mailed statement. The federal portion of the grant, which is repayable, is similarly a reimbursement for incurred costs, according to an e-mailed statement from the Ontario unit of the federal development agency.