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Essar Algoma boasts highest steel production in almost 30 months

A Toronto judge will be asked today to re-open Essar Algoma's sales and investment solicitation process. But a financial advisor to Deutsche Bank warns that would likely trigger default of the financing that's been keeping the Sault mill running for 15 months.
File photo by Michael Purvis/Village Media shows Ernst and Young's Toronto office at 222 Bay Street. The court-appointed monitor says Essar Algoma is making more steel than it has at any time since September 2014. But not everyone agrees Essar Algoma's financial situation has stabilized

Last month, Essar Steel Algoma Inc. made more than 232,000 tons of steel.

That, according to the court-appointed monitor overseeing Essar Algoma's restructuring, is the Sault steelmaker's highest production in a single month since September 2014, fourteen months before it filed for insolvency protection in November 2015.

"Algoma's financial performance continued to improve, driven by favourable selling prices and increasing shipments," says monitor Brian Denega of the Toronto office of Ernst & Young Inc.  

Earnings before interest, tax, depreciation, amortization and restructuring costs in January 2017 are estimated at $22 million.

That's $7 million higher than the previous month, representing "a proxy of normalized cash flow generated from operations," Denega says in his latest update, released last Friday.

A recent letter to the monitor from corporate parent Essar Global Fund Ltd. stated that Algoma's financial performance has stabilized and "it will be generating positive cash flow for some months to come."

Really? John McKenna, a senior vice president in deals practice at PricewaterhouseCoopers Inc., begs to disagree.

"This statement is incorrect and misleading in many respects," says McKenna, a financial advisor to Deutsche Bank AG, which leads the syndicate of term lenders keeping the Sault steel mill afloat through a debtor-in-possession financing arrangement.

"Due to market prices, ESAI [Essar Steel Algoma Inc.]'s cost structure and other factors, ESAI has in fact not generated a profit before taxes in any month during the entire period of these Companies' Creditors Arrangement Act proceedings," he insists.

Deutsche Bank and the term lenders are still hoping to acquire Essar Steel Algoma through the company's sales and investment solicitation process (SISP), intended to pursue all prospects of selling or refinancing the business, in whole or part, to ensure the steel mill remains a going concern.

In June 2016, Essar Steel Algoma declared a joint submission from the term lenders and KPS Capital Partners to be its preferred bid.

But KPS couldn't cut a deal with Local 2251 of the United Steelworkers and subsequently withdrew from participation.

Deutsche Bank and the term lenders nonetheless indicated they wished to close the transaction on their own.

Seven months later, the deal has not been consummated and Essar Capital Ltd., which manages the financial investments of Essar Global Fund Ltd., will appear in a Toronto courtroom today to ask that the sale process be re-opened to other bidders.

"If the debtor-in-possession lenders are now considering a liquidation, it is incumbent on the monitor to work with Essar Global or other bidders to determine whether alternatives are feasible," says Jeremy Opolsky, a lawyer representing Essar Capital.

"Despite months of allegedly 'constructive dialogue' the bidders have had, it is apparent that there is a very real possibility the proposed deal will not close. Given this possibility, it is critical to allow other potential bidders to access diligence regarding the debtors to ascertain if other bidders, in the future, wish to make a bid," Opolsky says.  

The monitor is quite opposed to any re-opening.

"The sale transaction continues to be the only viable transaction available to Algoma to emerge from these Companies' Creditors Arrangement Act proceedings," Denega says.

United Steelworkers Local 2251, representing Essar Algoma's hourly employees, will also be in court today, seeking clarification on whether it's allowed to talk to Ontario Steel Investments Ltd. about the Essar Global affiliate's interest in acquiring Essar Algoma.

Denega points out that he's been hearing about Ontario Steel's interest, but points out that no bid has been received, essentially implying that the firm is all hat, no cowboy.

"The monitor does not believe there is a need to re-open the SISP at this stage, as any party seriously intending to acquire or restructure Algoma has the continuing opportunity to reach out to the term lenders and the consenting secured noteholders to propose and negotiate a transaction that the term lenders and the consenting secured noteholders are willing to accept and support," he says.

"The monitor encourages any party that is in fact serious about acquiring or restructuring the business of Algoma to engage in such negotiations with the term lenders and the consenting secured noteholders, rather than negotiating through the press, which tends to be not only unproductive but may well be harmful to the process of navigating Algoma successfully through the Companies' Creditors Arrangement Act proceedings by the dissemination of untested allegations and causing unwarranted confusion among the stakeholders, all of which have a deleterious effect on Algoma and its business."

Denega also opposes any talks between Ontario Steel and the Steelworkers, indicating they might interfere in current contract negotiations between Algoma and its unions.

"Transactional discussions between Ontario Steel and the unions, where there is no concrete offer or proposal from Ontario Steel, much less one that has the necessary support of the term lenders and the consenting secured noteholders, will detract from this priority and would therefore be inappropriate and detrimental to Algoma's restructuring process," he says.

On the other hand McKenna, the advisor to Deutsche Bank, warns in an affidavit sworn Monday that "the reopening of the SISP would likely trigger events of default under the debtor-in-possession credit agreement."

McKenna points out that Essar Algoma was recently granted an additional US$35 million in debtor-in-possession financing, in part to pay for its 'winter build,' the traditional fall stockpiling of raw materials to provide enough inventory to operate from January to March when the Great Lakes freeze over.

Over the next two months, Essar Algoma must make US$41 million in debtor-in-possession payments, he says.

"This in effect represents the proceeds derived from the working capital that was funded by the debtor-in-possession lenders for the 'winter build' and is not because Essar Steel Algoma Inc. has suddenly become very profitable," McKenna says.

Meanwhile, United Steelworkers Local 2251 will hold a strike mandate vote on Tuesday, Feb. 28 at the Marconi Hall from 5 a.m. to 8:30 p.m.

Essar Steel Algoma is seeking concessions including:

  • increased ability of the company to contract out
  • a 10 percent reduction in hourly wage scales
  • elimination of the defined benefit pension plan, moving all employees to the defined contribution plan
  • mandatory use of a single source pharmacy for all prescriptions issued in Sault Ste. Marie
  • under the extended health benefit agreement, employees would no longer be allowed to use vacation leave for the first two days of absence
  • reductions in vacation entitlement
  • changes to cost-of-living allowance entitlements
  • no more topping up WSIB recipients to 100 per cent of basic pay
  • semi-private coverage would now count toward the lifetime maximum
  • establish a five-year term for the collective agreement to provide a period of labour stability to address issues including the upcoming blast furnace re-line and other major capital upgrades
  • reduce number of paid union local representatives from six to four