Essar Algoma had its debtor-in-possession financing approved last week.Kenneth Armstrong
Essar Steel Algoma Inc. has encountered concerns about its debtor-in-possession financing from an unexpected quarter – the Ontario Superior Court judge who granted the company protection from its creditors last week.
Some of the terms of the financing (known as DIP) remove the discretion of the court to properly oversee the restructuring, Justice Frank Newbould said Monday.
Justice Newbould approved Essar Algoma's protection under the Companies' Creditors Arrangement Act last week, but made his concerns evident at a hearing on whether to extend that protection and approve all the terms of a $200-million DIP loan that is designed to keep the steelmaker operating for the next 10 months.
Justice Newbould approved the financing late Monday but required changes so that the court's ability to maintain control over the restructuring is preserved.
Some of the milestones established in the DIP financing agreement "are written in stone" if the financing deal was approved as it stood, he told lawyers earlier Monday.
"It's a fait accompli," Justice Newbould said. "The DIP will call the shots. We may as well all go home."
Lawyers for Algoma, the lenders and Ernst & Young, the court-appointed monitor, disputed that comment, saying the terms of the loan were arrived at after a competitive bidding process and are typical of DIP financing agreements in other creditor protection cases.
One of the key milestones that must be met in order for the DIP lenders to continue financing the company is the timeline for what Essar Algoma calls a "sales and investment solicitation process." The process must be established by Feb. 1, 2016, with a sales transaction or restructuring plan to be completed by Aug. 31, 2016.
A sales process would put two key sets of steel industry assets in Canada on the market in the middle of a crisis that has caused steelmakers around the world to close mills and lay off employees. U.S. Steel Canada Inc. is expected to offer itself up for sale after its parent United States Steel Corp. cut it loose last month after 13 months in CCAA protection and a sales process that failed.
There must be a sales plan or restructuring deal in place by next fall when Essar Algoma needs to stockpile iron ore and coal to get it through next winter, said John MacDonald, a lawyer for the syndicate of DIP lenders, which is led by Deutsche Bank AG.
"If we are still here next year at this time, it's over," Mr. MacDonald said.
But the company also needs financing immediately, Essar Algoma chief financial officer Rajat Marwah said in a filing with the court Monday. Mr. Marwah said he is worried the steelmaker's "customers will be unwilling to deal with Algoma if there is any question about whether Algoma will be able to obtain additional financing under the DIP facility."
Essar Algoma needs to draw $20-million next week to meet payroll commitments, order raw materials and provide funds to deal with unforeseen circumstances, the court-appointed monitor, Brian Denega, said in his report on the company's first week operating under CCAA protection.
Separately, the ad hoc committee of Essar Algoma note holders urged Justice Newbould to approve only a temporary extension of CCAA protection until Nov. 27 so all stakeholders could have a more thorough examination of the company's plans.
"The ad hoc committee is concerned that certain matters being sought with limited notice at this stage of the proceedings, including with respect to a sale process, distribution matters and creditor rights and entitlements, are premature and have the potential to shape the direction of this case from its very outset," the group said.