Proposed deal would install new owners at Essar Steel Algoma

Essar Steel Algoma is moving for quick closing of a recapitalization arrangement that would transfer 78 per cent of the equity in a restructured Algoma to Deutsche Bank and other term lenders who've kept the company afloat since it filed for insolvency protection 20 months ago.

Under the proposed deal, which Essar Algoma is calling its "best and only viable prospect to continue as a going concern," the remaining 22 per cent of the restructured company would be held by a group of investors who hold more than two-thirds of Algoma's senior secured notes.

In an affidavit sworn in New York CIty on Friday, Algoma's court-appointed financial advisor discloses that nothing has been heard recently from Tom M. Clarke, the Roanoke, Virginia nursing home owner who acquired Essar Steel Minnesota's taconite project at a bankruptcy sale in April and expressed interest in buying the Sault steel mill.

The Deutsche Bank recapitalization deal is conditional on successful negotiations with a number of government agencies and also with United Steelworkers Locals 2251 and 2724.

Interestingly, USW Local 2251 advised its members 11 days ago that it was "working towards creating an asset purchase agreement" with an undisclosed party "to bring forward to the court if necessary."

"Our intent is to negotiate the best agreement possible on behalf of our members and that cannot happen quickly," rank-and-file union members were told. "Ultimately, any decision made on behalf of Local 2251 will be made by the members."

SooToday reported over the weekend that the new owner of Stelco (U.S. venture capital firm Bedrock Industries) is still interested in buying Essar Algoma.

Strawman bids?

Court documents suggest that those overseeing Essar Algoma's restructuring have no idea who the Steelworkers might be talking to, but Bo Yi from the New York office of Evercore Group, Algoma's court-appointed financial advisor, is critical of Local 2251's repeated introductions of dubious bid proposals.

At one point in the affidavit he swore Friday, Yi characterizes the union's proposed alternative deals as strawmen.

"Negotiations with the unions have proved extremely difficult and little progress has been made on that front," Yi said.

"Throughout these CCAA [Companies' Creditors Arrangement Act] proceedings, the unions have repeatedly attempted to bring forward alternative bidders, including bidders who were excluded from the SISP [sale and investor solicitation process] due to repeated failures to satisfy the court-approved terms of the SISP."

"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. - a Tom Cooke entity] or the inevitable next strawman are a distraction to shareholders achieving to the necessary agreements to reach a viable restructuring solution," Yi said.

Tom Clarke's MAGA proposal

In April, Local 2251 signed a support agreement with Cooke's MAGA Steel, which proposed integrating the Sault steel mill into ERP Group, a collection of coal mines assembled by Cooke.

After discussions between Cooke and representatives of Essar Algoma, the term lenders and court-appointed overseers of Algoma's restructuring, concerns were expressed that:

• MAGA had not provided sufficient detail about its proposed transaction
• its purchase price was significantly inadequate
• there were risk issues with MAGA's proposed sources of funding

Under the MAGA proposal, Essar Algoma would have had "limited liquidity to withstand future market volatility," Yi said.

With approval from the court-appointed monitor, Algoma decided to provide no further due diligence material to MAGA or related parties, encouraging them to instead talk to the term lenders or noteholders.

Yi said he's unaware of anyone involved in the Essar restructuring hearing from MAGA since then.

Negotiations with government

While talks with the Steelworkers have been mucilaginous, government discussions have been less sticky.

Yi describes those talks as "constructive" and says the term lenders and noteholders "are close to reaching agreements with the required levels of government on certain significant outstanding issues."

The recapitalization proposal, he says, "remains the best and only viable transaction that will allow Algoma to emerge as a restructured company that can be successful over the long term with the cyclical nature of the steel industry."

The deal calls for a capital injection of up to US$300 million with an additional asset-backed loan facility of at least US$125 million.

It provides for a US$1.2 billion reduction in Essar Algoma' debt, as well as "assumption of significant unsecured obligations relating to Algoma's pension plans and retiree benefits on the basis that the parties reach an acceptable collective bargaining agreement."

Git er done!

Essar Algoma is pushing to get the deal signed, sealed and delivered before September.

It intends to invite Warren Winkler, a former Ontario chief judge and court-appointed mediator in Essar Algoma's insolvency proceedings, back to the table to help tie up the remaining loose ends.

"It is imperative for all stakeholders to work towards achieving the consensual restructuring contemplated by the recapitalization transaction by the fall of 2017, while the steel and capital markets remain favourable and prior to the winter build," Yi says.

Algoma has incurred a lot of expense related to its insolvency proceedings and now needs fresh capital to pay for needed capital expenditures including a blast furnace reline.

"Current market conditions are favourable to completing a restructuring transaction, however there is no certainty of how long that window will last. I understand that there currently is a great deal of liquidity in the capital markets. However, there is always a risk that the capital markets may become less favourable for new financing."

"Steel prices have also been favourable for a number of months but have softened primarily due to subdued demand," Yi says, adding that additional uncertainty exists because the United States is considering expansion of trade protection measures.

And Essar Algoma's biggest competitor, Stelco, emerged from insolvency protection on June 30.

"To remain competitive, [Algoma] must also work towards closing their own restructuring transaction as soon as possible."

One week from today

As a first step toward concluding its restructuring, Algoma will ask the Ontario Superior Court one week from today to extend its debtor-in-possession (DIP) financing to March 21, 2018.

Algoma's original DIP arrangement expired April 30.

The proposed extension into next year is intended to provide interim financing for Algoma's winter build, when the steelmaker traditionally replenishes its raw material inventory stocks after the reopening of the Great Lakes shipping season.

The company decided to stick with Deutsche Bank and other term lenders who've kept the steel mill operating for the past 20 months, after a recent competitive process that attracted four proposals.

Interestingly, one of the DIP bids was from a competitor in the North American steel business.

Algoma was concerned that this bidder might gain access to commercially sensitive information as the company's DIP lender.

Instead, it decided to go with a lender that isn't a direct competitor.

Specifics of the new DIP arrangement have been sealed under court order but this much is known:

• weekly court-ordered "cash sweeps" payable to the DIP lenders will continue. If the steel mill's unrestricted cash exceeds US$25 million at the end of any Friday, it must "sweep" the excess (calculated to the nearest US$100,000) to the DIP lenders. The weekly sweeps will be suspended, however, from Oct. 1, 2017 through Jan. 31, 2018

• from Oct. 1, 2017 through Jan. 31, 2018, Algoma will be allowed to request up to four additional cash advances, each between US$5 million and US$25 million. Total advances must not exceed US$175 million less DIP term loans outstanding as of Oct. 1

• Algoma's operating expenses must stay within 15 percent of its approved budget

• the DIP lenders will receive an extension fee of US$3.9 million when the new arrangement comes into effect