No imminent end to Essar Algoma's insolvency proceedings, Horsman warns

Essar Steel Algoma isn't expected to emerge from insolvency protection anytime soon, Al Horsman, the City of Sault Ste. Marie's chief administrative officer, is warning.

"Recent developments do not tend to an imminent exit from the CCAA [Companies' Creditors Arrangement Act]," Horsman said, successfully pleading for $50,000 more for the legal team fighting to collect almost $32 million in unpaid property taxes owed by the Sault steelmaker.

That raises the city's legal bill in Essar Algoma's insolvency proceedings to $425,000.

"The city is at a critical juncture," Horsman said in a report to Mayor Christian Provenzano and city councillors.

"Reserve balances have maintained the cash flow and city operations for the last 19 months of the restructuring," the CAO said.

"The city's reserves cannot continue to carry the balance owing, which is equivalent to 25 per cent of the annual tax levy, going forward."

"At this critical phase it will be imperative that the city's restructuring lawyers provide expertise and guidance on the nonpayment of [Essar Algoma's] property taxes."

"As well they need to continue to monitor the proceedings and steps taken by other stakeholders, all of which is expected, often with short notice, to become more intense and active."

"The city's lawyers and staff need to be prepared to file court materials on short notice, seeking clarification or providing its response to any filings that may impede its priority status," Horsman told City Council.

MAGA Steel Corp.

Yesterday, SooToday reported Superior Court Justice Glenn A. Hainey's decision to extend Algoma's debtor-in-possession financing to Mar. 21, 2018, a move intended to carry the steelmaker through its annual winter build.

Meanwhile, United Steelworkers Local 2724, representing salaried employees at Essar Steel Algoma, has served notice it wants MAGA Steel Corp. taken more seriously as a potential owner of the Sault's steelmaking operations.

A notice of motion filed with the court calls for Essar Algoma to grant MAGA and its financial backers access to the steel mill's books and corporate records, its senior management and its physical plant, to facilitate due diligence.

The notice comes as Algoma's court-appointed financial advisor insists that nothing has been heard recently from Tom M. Clarke, the Roanoke, Virginia nursing home owner known to have initiated the MAGA bid.

The Steelworkers' notice describes USW Local 2724 as MAGA's beneficial owner, a legal term signifying that one party has been assigned specific rights such as use and title to a property actually owned by another.

The MAGA proposal

A firm created specifically for the purpose of acquiring Algoma's assets, MAGA says it has financial backing from TMC Strategic Opportunity Fund, DSA Group DMSS and KeyBanc Capital Markets Inc., any one of which is said to have the wherewithal to consummate an acquisition of Essar Algoma.

"If the MAGA purchase offer is accepted and implemented, ownership and control of MAGA will pass to the parties providing the equity financing for the transaction," lawyers representing the Steelworkers say in their notice of motion.

MAGA's bid, supported by the USW and its Locals 2251 and 2724 as well as retirees, proposes the following:

• repaying the existing debtor-in-possession lender and asset-backed loan facility
• financing the wind-up of Essar Algoma's insolvency proceedings
• assumption of liabilities related to Port of Algoma
• assumption of liabilities related to pensions and OPEB (other post-employment benefits)
• new collective agreements
• an amount for Algoma's assumed accounts payable and accrued expenses
• assumption of environmental liabilities
• restoration of funding to stakeholders including the City of Sault Ste. Marie

Specific costs associated with each of these obligations have been blacked out on court records accessed by SooToday.

The Steelworkers argue, however, that the proposed deal provides fair value for Algoma's assets, restoring "operations and stability to Algoma by allowing the business to emerge from these proceedings as part of an integrated enterprise through which it can acquire metallurgical coal, coke and iron ore on favourable terms."

'Toxic' labour relations

Essar Algoma prefers a deal with term lenders including GoldenTree Asset Management, Bain Capital and Archview Investment Group, represented by Deutsche Bank as agent.

"The time spent on the lenders' bid is having a very negative effect on Algoma and its stakeholders," the Steelworkers argue. "Labour relations have become toxic at a company that has not experienced a lock-out or strike in over 25 years."

Last week, SooToday quoted a sworn statement from Algoma's court-appointed financial advisor that was harshly critical of Local 2251's repeated introductions of alternative bid proposals.

At one point in his sworn affidavit, Bo Yi from the New York office of Evercore Group characterized the union's proposed deals as strawmen.

"Algoma cannot afford to miss this window of opportunity to emerge from the CCAA proceedings. Attempts at pursuing proposed transactions with OSI [Ontario Steel Investments Ltd. – a subsidiary of Essar Global Fund Ltd.]  MAGA [Steel Corp.] or the inevitable next strawman are a distraction to shareholders achieving to the necessary agreements to reach a viable restructuring solution," Yi said.

Local 2251 responds to Essar Algoma's financial advisor

Our article prompted an angry memorandum from Local 2251 to its membership:

"Today’s Sootoday.com has an article titled 'Proposed deal would install new owners at Essar Steel Algoma.'  This article purports to quote comments in an affidavit filed with the court. If in fact the purported quotes are accurately quoted, then the statements contained in the affidavit are misleading and inaccurate. The comments regarding the behaviour of the union are uncalled for and are biased statements made by the financial advisor to the applicant." 

"In point of fact, it is my belief that the purpose is to attempt to persuade the court that the union is being unreasonable. Quite frankly, that position is completely inaccurate. At all times this negotiating committee has attempted to negotiate with various parties who maintained unreasonable positions. To suggest that the lack of a deal is due to the actions of our local is ludicrous."

Local 2251 maintains that its negotiations with the term lenders were terminated by provincial mediator Warren Winkler.

In the view of Local 2251, those negotiations remain adjourned.

Message to union locals from term lenders

But in a letter sent Sunday to Essar Algoma, Marc Wasserman, a lawyer representing the term lenders, insisted they are quite interested in the wellbeing of the steel mill's workforce. Here are some excerpts:

"The lenders are of the view that the time has come for the applicants and their stakeholders, including those opposing the DIP [debtor-in-possession] approval motion, to focus their efforts on attempting to achieve consensus on a restructuring which will enable the company to emerge from these CCAA proceedings as rapidly and efficiently as possible in the near term."

 

"The lenders continue to support the company, as they have done both prior to these CCAA proceedings in their capacity as pre-petition term lenders and throughout these CCAA proceedings as DIP lenders under the DIP credit agreement."

 

"To that end, the lenders are wholly supportive of the efforts of the applicants and the monitor to further engage with stakeholders during the consultation period with a view to completing the recapitalization transaction and exiting from these CCAA proceedings by September."

 

"The health and safety of Algoma's workforce is an important issue to the lenders and we are interested in constructive ideas regarding any operational inefficiencies at Algoma."

 

"We welcome the opportunity through the consultation period to continue to meaningfully engage with other stakeholders, including the union locals, to further address and advance those issues."

The Steelworkers say MAGA has a reasonable chance of closing a deal for Essar Algoma and they want the court to hold a case conference on August 18 to review progress on MAGA's bid.