The Stel Salaried Pensioners Organization wishes to
thank The Hamilton Spectator for permission to post the following article by
Reporter Chinta Puxley, published in the October 8, 2005 edition
By Chinta
Puxley
The Hamilton Spectator
(Oct 8, 2005)
Stelco has teetered on the brink of
collapse so many times in the last 20 months, it's almost become routine.
In less than two years since the
steelmaker sought bankruptcy protection, there have been marathon negotiations,
countless court dates, bankruptcy protection extensions and enough lawyers to
populate a small country.
Add to that a scant bankruptcy act that
leaves those lawyers lots of wiggle room and you have a situation that would
confuse even the most brilliant legal or economic mind.
So what's the situation all about and
what does it mean? Here's a look at the essential elements of the latest in the
steelmaker's fight to get out of bankruptcy.
What is the Companies' Creditors
Arrangement Act?
The CCAA is the bankruptcy protection
legislation which allows Stelco to put off paying its creditors until it has
reorganized.
Unlike its predecessor -- the
Bankruptcy and Insolvency Act -- this depression-era legislation is short on
strict deadlines and structure.
Why did Stelco seek that protection in
the first place?
Stelco CEO Courtney Pratt said the
company had no choice.
The board of directors said the
steelmaker was poised to run out of cash within months. It had lost $168 million
in the first nine months of 2003, had a $545-million, long-term debt and was
$1.3 billion short of what it needed to cover pension obligations.
Since then, booming steel prices have
made unprecedented profits, prompting unions to argue the company wasn't really
insolvent in the first place.
Why has the company needed so many
bankruptcy protection extensions?
It's not uncommon for companies to get
bankruptcy protection extensions but Stelco's 11 extensions have set something
of a record.
Steel expert Peter Warrian said this
restructuring has been painfully drawn out because of the large number of
stakeholders who need to agree. Plus, the University of Toronto professor said,
rising steel prices and soaring profits made the situation seem much less dire,
sapping any willingness to compromise.
Stelco is poised to request its 12th
and, hopefully last, extension Dec. 2.
What has the company been doing these
last 20 months?
Besides requesting bankruptcy
protection extensions, the company and its unions have been hard at work --
taking turns bickering, negotiating and shopping around for the best financing
deal.
The steelmaker's unions spent the first
few months of bankruptcy protection fighting Stelco's insolvency claim in
court. When that was rejected, they started negotiating a new collective
agreement for Lake Erie workers.
At the same time, both sides searched
for a financing deal. After a number of bids, Stelco and its unions settled on
the Tricap deal.
What is the Tricap deal?
Under the deal, the province chips in
$100 million towards the pension shortfall while Tricap gives Stelco a
$350-million renewable loan secured to the steelmaker's assets. Tricap also
insures Stelco's attempt to get another $75 million through the sale of secured
notes -- IOUs which can be converted into stock.
The deal gives unsecured creditors $225
million in secured notes and $300 million in the form of unsecured notes which
can be converted into shares.
In return, Stelco will give Tricap $1.6
million for expenses and pay a $10.75 million "commitment fee" which
Tricap keeps if the deal falls through.
Who supports the deal?
Stelco is on board, as are the
company's salaried retirees and the unions representing AltaSteel and Lake Erie
workers.
Who wants to see the deal killed?
Stelco's largest union, Local 1005
which has boycotted the restructuring negotiations, says the deal poses
"enormous risks" and doesn't address the core problems facing the
company.
But the bondholders are the deal's most
powerful opponents. Bondholders, the steelmaker's largest group of unsecured
creditors, are hoping to get a better deal which pays them in hard cash rather
than in Stelco stocks.
Who are the bondholders and why do they
have so much power?
Bondholders are a mysterious and
anonymous group of investors. Sometimes called "vulture capitalists,"
they often buy up cheap bonds from nervous investors when a company is in
trouble.
They then use their influence during
the restructuring process to increase the value of their bonds and make a
profit. Their influence, in this case, is considerable. Because they make up
the majority of the steelmaker's unsecured creditors, they have a deciding vote
on any financing deal and could effectively kill it.
The unsecured creditors are scheduled
to vote on the Tricap deal Nov. 15.
How does their vote Nov. 15 work?
Every dollar owed equals one vote on
Nov. 15. Since $660 million is owed, there will be 660 million votes cast. The
bondholders -- with the most money invested in Stelco -- will cast the majority
of those votes.
Each of the five companies under the
Stelco umbrella will be voted on separately. The votes will be counted by the
end of the day. A location for the vote has yet to be determined.
What happens if they vote it down?
It won't be the first time. Bondholders
voted down an endorsed deal in the restructuring of Algoma Steel. They were
ordered into a hotel with the company, not to emerge until they had a deal.
Several days later, they had one.
But if the bondholders vote down the
Tricap deal, it will die. Pratt said it would then be up to Farley whether to
liquidate the company or have it emerge from bankruptcy without a plan --
neither of which, he said, are good for the company.
What happens if they vote in favour?
Even then, Stelco wouldn't be out of
the woods. The deal then goes back to Farley's courtroom. That's when Farley
will hear objections to the deal, possibly from shareholders, and decide
whether to approve it or not.
In the end, whether Stelco emerges
intact or is liquidated rests in his hands.
Could bondholders kill the deal before
November?
They are doing their utmost to do
exactly that. Bondholders launched a court appeal Thursday, objecting to
Farley's tentative approval of the Tricap deal. If the appeal is successful, it
will essentially kill the Tricap deal.
What happens to shares and shareholders
under this deal?
Stelco shares won't be worth the paper
they're written on if this deal is done. Since they are at the bottom of the
bankruptcy food chain, they are going to be left with nothing to show for their
investment. They could launch a long and expensive lawsuit to recover some of
their money but experts say it's a fight they will likely lose.
What role do the unions play?
Unions have a lot of leverage in this
restructuring. That's because workers at Lake Erie and AltaSteel both had
strike mandates and the renegotiation of their collective agreements became
tied to the restructuring process.
Local 1005 is not in the same boat --
because they have a valid collective agreement, they are not in a legal strike
position.
While the Lake Erie and AltaSteel
locals have a new collective agreement, their members won't vote on their new
collective agreement until after bondholders have voted on the Tricap deal.
That essentially gives union members a
final say on the restructuring plan, so Stelco will have to keep their
interests in mind as it negotiates with the bondholders.
What happens the day after Stelco
emerges from bankruptcy?
If all goes well, come Jan. 1 it will
be business as usual at the steel mills.
But Pratt said Stelco will emerge from
bankruptcy a completely different company, free from creditors since it will
have paid them all off by the time the bankruptcy protection is lifted. It will
have a new board of directors and a new financial plan while its management
will remain intact.
How long does it take for a company to
get back on its feet?
There can be profit after bankruptcy.
Algoma Steel just had its most
profitable year in more than a century in business. But it had to go through
two major restructurings -- one in 1991 and another in 2001 -- and lay off 600
workers before it hit its stride this year.
It's anyone's guess how long it will
take for Stelco to post a profit once it emerges from bankruptcy, but the
steelmaker has been making fistfuls of money throughout its bankruptcy
protection thanks to a spike in steel prices.
What happens to Hamilton if Stelco
doesn't survive?
Hamilton doesn't have its reputation as
Steeltown riding just on the survival of Stelco. There are at least 16,000 jobs
in Hamilton related to the steelmaking and processing industry. Then there are
at least 500 Hamilton companies who deal with the steel industry.
City hall is equally concerned about
Stelco's fate. The city's coffers get $10.5 million in taxes from the steelmaker,
plus $4.5 million toward education.
cpuxley@thespec.com
905-526-3468