A Toronto judge will be asked next Tuesday to extend Essar Steel Algoma's debtor-in-possession financing until Aug. 30, 2017, with an automatic extension to Sept. 29, 2017 if certain repayments are made.
If approved, it will be the fourth extension of the lending arrangement that's kept the Sault steelmaker afloat since it first applied for insolvency protection in Nov., 2015.
The most recent version of the arrangement expired 17 days ago, on Apr. 30.
The new deal was achieved after what court documents describe as an "extensive DIP marketing process" that identified one other interested lender.
Essar Steel Algoma, the court-appointed monitor and chief restructuring officer are all supporting a proposed extension with a syndicate of original term lenders led by Deutsche Bank.
The rejected proposal had fees approximately 4.5 times greater than those offered by the original syndicate, court documents show.
"The fourth DIP amendment will allow [Essar Steel Algoma] to operate in the ordinary course and provide the necessary time for Algoma and its stakeholders to engage in constructive, meaningful negotiations to develop a comprehensive restructuring solution," Essar Steel Algoma says in its application to the court.
The proposed arrangement continues Essar Algoma's obligation to "sweep" any unrestricted cash exceeding US$25 million at the end of each week to the DIP lenders.
But there's a new clause suspending the weekly cash sweeps if at any time Algoma makes cumulative prepayments of US$40 million.
The proposal requires Algoma to make mandatory prepayments at the end of each month of at least:
- US$5 million in May
- US$10 million in June
- US$10 million in July
- US $5 million in August
- Nothing in September
If the new deal is approved, Essar will pay an extension fee of US$1.6 million to the lending syndicate, with an additional $500,000 payable if the arrangement is extended to Sept. 29, 2017.
In another proposed new clause, Algoma would promise not to exceed its monthly budgeted inventory levels for iron ore and coal by more than 15 per cent.
Earlier clauses obligating Algoma to make US$22.2 million in annualized cost savings and to maintain a minimum liquidity level have been removed from the new proposal.
"[Essar Steel Algoma's] proceedings are at a critical stage," the company says in its application to the court.
"To date, while considerable progress has been made with some key stakeholders, the consenting creditors and other key stakeholders have not successfully negotiated the necessary agreements to achieve a comprehensive going-concern restructuring solution."
"The consenting creditors’ negotiations with the various governmental entities have been constructive and are advancing. However, negotiations with the unions have been difficult and progress has been slow. Steel prices have been favourable for a number of months but there is no certainty as to how long those prices will continue."
"The annual winter build will require additional financing and the most likely source of financing is from the eventual owner of Algoma’s reorganized business."
"It is imperative for all parties involved in Algoma’s restructuring that negotiations progress and a consensual and sustainable restructuring be achieved. To that end, the fourth DIP amendment provides the necessary runway for Algoma, the consenting creditors and Algoma’s other stakeholders, including the unions, to engage in constructive, meaningful negotiations to achieve the settlements that are necessary to implement the recapitalization transaction," the company says.
The end object, Essar Algoma says, is to hammer out a final recapitalization transaction that will:
- significantly reduce its debt by approximately $1.2 billion
- provide substantial new financing in excess of $425 million to fund operations and insolvency exit costs
- provide sufficient liquidity to fund capital expenditures considered necessary over the next five years
- preserve meaningful jobs in Sault Ste. Marie
- reduce Algoma's cost structure, improving its financial performance and flexibility
- ensure that customers have confidence that Algoma’s future is stable, and that they should place their business with Algoma
Also next Tuesday, Essar Steel Algoma will ask the court to approve a new restructuring committee "to act as the independent guiding mind of Algoma," overseeing and directing the company's restructuring efforts.
"A restructuring committee of individuals experienced in turnaround situations may also be of assistance in instilling confidence amongst the Algoma’s key stakeholders and achieving consensus among such parties," the company says.
The proposed restructuring committee would be comprised of:
"Mr. Schultz and Mr. Pratt stood out from the field of talented candidates in terms of their past experiences which could be beneficial to Algoma’s restructuring," Essar Algoma argues in its application to the court.
The United Steelworkers and Local 2724 don't support the proposed restructuring committee and refused to provide potential candidates or to participate in the selection process.
Essar Algoma's board of directors has been effectively disengaged from making informed decisions about the company.
Important decisions about Algoma's restructuring and business operations are currently made by Essar Algoma management with input from the chief restructuring advisor and the court-appointed monitor.