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Largest shareholder in Sault Star parent company wants to buy our steel mill

A sworn affidavit in the Essar Steel Algoma insolvency case claims that Bain Capital, the Boston-based investment house built by Mitt Romney, is one of the unnamed term lenders seeking to acquire the Sault steelmaker. The largest shareholder in Sault Star's parent company Postmedia is another.
Bain Capital was launched and built by Mitt Romney, the Republican Party's nominee for president of the United States in the 2012 election. Romney is shown in the Oval Office with President Barack Obama on November 29, 2012. Official White House photograph by Pete Souza.

Who are they, these investment companies that want to buy Essar Steel Algoma?

When KPS Capital Partners withdrew 12 days ago from the consortium trying to buy Sault Ste. Marie's largest private-sector employer, term lenders involved in that joint bid were said to be still committed to making a standalone offer.

Identities of prospective bidders for the Sault steelmaker have generally been kept under wraps because Essar Global Fund Ltd. (the Cayman Islands-based parent company of Essar Steel Algoma) has been angling for months to buy back the Sault steel operations.

Confidentiality is needed to avoid "a potential conflict or the appearance of a conflict," said Brian Denega, the court-appointed monitor who is overseeing Essar Algoma's restructuring process.

But buried deep in the many thousands of pages of court filings in Essar Algoma's insolvency proceedings, is an affidavit that may shed light on the possible future owners of our local steel mill. 

"I understand that the principal term lenders are Sankaty Advisors, Bain Capital, GoldenTree Asset Management, Oak Hill Capital Partners and other U.S.-based equity funds and investment managers," says an affidavit sworn on July 11 by Avram Z. Friedman.

Friedman is a distressed-securities specialist at Madison Avenue-based hedge fund Davidson Kempner Capital Management LP, which holds senior secured notes issued by Essar Steel Algoma.

He fronts an ad hoc committee that represents about 70 percent of Essar Algoma's senior secured notes, valued at US$375 million.

Friedman is sharply critical of the conduct of the term lenders, accusing them of unduly influencing the court-supervised restructuring process in their own self-interest.

The following are capsule descriptions of the four term lenders mentioned by Friedman as being interested in Essar Steel Algoma:

  • GoldenTree Asset Management LP is based on New York City's posh Park Avenue. The firm describes itself as one of the largest independent asset managers specializing in corporate and structured credit. GoldenTree's 225 employees manage some $25 billion in assets. Its holdings include 52 per cent of Postmedia Network Canada Corp., owner of the Sault Star, Sault This Week, Elliot Lake Standard, Sudbury Star, Timmins Daily Press, Timmins Times, North Bay Nugget, Barrie Examiner and many other Canadian newspapers. Earlier this year, media reports suggested GoldenTree was trying to sell its stake in Canada's biggest newspaper chain.
  • Oak Hill Capital Partners, located in Menlo Park, California, has invested more than $8.5 billion since 1986 in 80 private equity transactions including The Container Store, Dave and Buster's restaurants, Berlin Packaging and Bell & Howell (Proquest). Microsoft Corp.'s Bill Gates and Nike Inc.'s Phil Knight have both invested in Oak Hill Capital Partners.
  • Boston's Sankaty Advisors rebranded earlier this year as Bain Capital Credit, an affiliate of Boston-based global investment firm Bain Capital, founded in 1984 by Mitt Romney and two partners. Romney was initially the firm's president, managing partner, chief executive and sole shareholder. Although he left the firm to run the 2002 Salt Lake City Winter Olympics and then campaigned as Republican nominee for president of the United States, the corporate culture Romney ingrained at Bain Capital became an issue in the 2012 election. "Bain Capital is notorious for its failure to plow profits back into its businesses," wrote Josh Kosman in his 2009 book, The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy. Matt Taibbi at Rolling Stone described Romney's Bain Capital years as follows: "A man makes a $250 million fortune loading up companies with debt and then extracting million-dollar fees from those same companies, in exchange for the generous service of telling them who needs to be fired in order to finance the debt payments he saddled them with in the first place." Today, Bain Capital is much bigger than it was when Romney left. It now boasts 950 employees and has more than $75 billion under management. An article last year in the Boston Globe described how Bain is now a very different company, with an emphasis on 'social-impact' investing.

Under the original joint bid by the term lenders and KPS, KPS would have owned 71 percent of the new Algoma, while the term lenders would have owned 29 percent.

The deal's fine print would have allowed the term lenders to cash in their 29 percent interest for up to US$111 million.

If they wished, term lenders were also allowed to increase their equity share by an additional 11 percent, allowing them a 40 percent of the new company.

But Steelworkers Local 2251 (Essar Steel Algoma's largest union) refused to play ball with KPS, which quickly decided to get out of the game.

Avram Z. Friedman's affidavit was sworn on July 11, three days before KPS withdrew from the consortium with the term lenders who helped keep the steel mill running before it filed on November 9, 2015 for protection from its creditors.

Friedman nonetheless had lots to say about the term lenders who still want to buy Essar Steel Algoma.

The problem, he says, is that the term lenders are playing three roles in the Algoma drama:

  • They are continuing to be term lenders.
  • They were accepted early in the Essar Steel Algoma insolvency proceedings as debtor-in-possession lenders.
  • They are also bidders for the company.

Friedman points out that both as term lenders and debtor-in-possession lenders, the term lenders had access to all of the early-stage offers for Essar Steel Algoma, before making their own bid.

"The term lenders had knowledge of the number, value, structure and material terms of all other competing bids and therefore had an unfair competitive advantage over all other Phase 2 bidders," he says.

"It appears that the monitor agreed to the demands of the term lenders and provided them with access to all Phase 1 bids, despite the known concerns that this could affect the fairness and competitiveness of the process."

Friedman believes the court made a fundamental error "in permitting a bidder and a bidder/ creditor group (i.e. the term lenders) to work together without the supervision or oversight of the monitor, to structure a transaction that is harmful to the interests of other stakeholders."

"[Essar Steel Algoma] and the monitor appear to have failed to use the process to gain leverage and maintain a competitive tension, and instead allowed one bidder/creditor group to team up with the only other bidder to advance their own agenda to the prejudice of the other stakeholders."

Friedman accuses the term lenders of repeatedly using their position as debtor-in-possession lenders to advance their own agenda without considering the interests of other stakeholders.

He says the term lenders have refused to allow Essar Steel Algoma to pay the expenses of other stakeholders in the insolvency proceedings but have ensured that all their own professional fees and expenses have been paid.

"Rothschild, the term lenders' financial advisor, will also become entitled to a significant success fee, to be paid by [Essar Steel Algoma], if the sale transaction is implemented," Friedman said in his affidavit.

Bain Capital, GoldenTree Asset Management, Oak Hill Capital Partners were all contacted by SooToday/Village Media late Sunday night to allow them to contribute to the preparation of this article. 

None of them responded by time of writing early Tuesday.

Other firms are known to be interested in bidding for Essar Steel Algoma, including the parent company, Essar Global.

The Sault steelmaker's protection from its creditors under Companies' Creditors Arrangement Act expires on September 16.