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Deal keeping Essar Algoma's head above water is in technical default

The company's insolvency protection and the financing that's been floating its boat since November, 2015 both expire Sunday. Meanwhile, a Virginia 'billionaire' has been named successful bidder for a sister project abandoned by Essar Global: the Essar Steel Minnesota taconite project
Mediation between Essar Algoma and its unions, retirees and the term lenders who want to buy the Sault steel mill was suspended on March 30 by mediator Warren K. Winkler, former chief justice of Ontario. The mediation may be resumed at Winkler's direction

Essar Steel Algoma will be back in court Friday, putting its affairs in order as two critical deadlines loom this weekend.

Both the company's protection from its creditors and the financing that's been floating its boat for the past 17 months expire this Sunday, Apr. 30.

Essar Algoma needs approval of the court to extend its insolvency protection.

As for its debtor-in-possession financing, it needs to quickly negotiate an extension with its existing term lenders, or strike a new deal with new lenders.

Fortunately, a new lending source has expressed interest in helping out if an agreement can't be reached with the original lenders.

The debtor-in-possession (DIP) financing deal that's allowed Essar Steel Algoma to operate since it sought protection from creditors on Nov. 9, 2015 is now in technical default, according to just-filed court documents.

Essar Algoma's lawyers advised the court this week that its DIP arrangement went into technical default last Friday, because a court order prohibiting a no-board report prevented the steelmaker from revising its union agreements to achieve a required cost savings of US$22.2 million by that date.

Essar Algoma is reviewing an initial proposal for an extension of the debtor-in-possession agreement.

The company says it has also received a proposal from a second lender who is conducting due diligence.

On Friday, the Sault steel mill's lawyers will ask Ontario's Court of Justice for a ninth extension of Essar Algoma's insolvency protection, until Jun. 30.

That application is expected to be supported by the court-appointed monitor overseeing Algoma's restructuring.

The current restructuring deal for Essar Steel Algoma is conditional on agreements with a number of government entities as well as United Steelworkers Local 2251 (representing hourly workers) and Local 2724 (representing salaried employees).

Negotiations with the two union locals reached an impasse in early December and the Superior Court ordered them into mediation before Warren K. Winkler, former Chief Justice of Ontario.

Court-ordered mediation involving Essar Algoma, the United Steelworkers, retirees and term lenders who want to buy the company started on March 23 and was suspended by Winkler on March 30 for the time being.

Winkler is able to bring the parties together for further mediation sessions.

Extending Essar Algoma's insolvency protection to June 30 will allow the company to continue daily operations in the Sault as restructuring efforts continue.

"I believe that [Algoma has] acted and continue[s] to act in good faith and with due diligence. I do not believe that any creditor will suffer any material prejudice if the stay period is extended to June 30," said John Strek of CDG Group, the court-appointed chief restructuring advisor, in an affidavit sworn Monday.

"The cash flows will show that no further DIP [debtor-in-possession] advances are required to fund operations during the proposed extension, however, the applicants still require an extension of the DIP or a replacement DIP because they cannot repay their current DIP obligations and could face a challenge to the continued use of their cash," Strek said.

Essar Minnesota

Meanwhile, media outlets in Minnesota are reporting that a Virginia "billionaire" is the successful bidder for a sister project abandoned by Essar Global: the massive Essar Steel Minnesota taconite project in Nashwauk near the other end of Lake Superior.

The Duluth News-Tribune disclosed last night that Chippewa Capital Partners LLC submitted the only formal bid at a bankruptcy auction yesterday in the federal courthouse in Wilmington, Delaware.

A confirmation hearing is scheduled on May 22 to approve the $550-million bid.

Cliffs Natural Resources was expected to bid for the half-finished property but didn't attend the auction.

The Star-Tribune in Minneapolis St. Paul is reporting that Chippewa Capital Partners is comprised of Virginia health-care "billionaire" Tom Clarke, backed by steelmaker Liberty House and an unnamed private equity firm.

"Clarke is vowing to add a major new element to the project — an iron plant that would turn taconite concentrate produced at the site into hot briquette iron. That iron would be used in electric arc mini-mill steel mills, the first-ever push into that growing steelmaking market for Minnesota taconite iron ore," the newspaper said.

Clarke is planning to close the Minnesota deal by mid-summer.

The Star-Tribune is also reporting that Clarke is shopping for a steel mill.

Back in Sault Ste. Marie, SooToday has been tracking other developments in recent weeks related to Essar Steel Algoma's search for a new owner or investor.

Our legal counsel advise that disclosure of that material may be prohibited by a gag order imposed by Superior Court Judge Frank Newbould.