SSPO
Membership Meeting
October
11, 2005
Hamilton
Convention Centre
The meeting was chaired by Paul Wendling of SSPO, who
introduced our speaker and counsel, Murray Gold, of Koskie Minsky. Murray made the following presentation after
which there was a Question and Answer session in which Murray was assisted by
our Financial Advisor, Gus Tertigas of RSM Richter.
1. Protection
of Existing Benefits - Under the Initial CCAA Order, Stelco was authorized
to unilaterally reduce or terminate retiree health benefits. The Salaried
Retirees brought a motion to change the Order so that such reductions could
only be made with the prior approval of the Court; Stelco agreed that it would
not unilaterally reduce retiree benefits without first returning to Court for
the hearing of our motion.
2. Protection
of Retirees at Subsidiaries - The Salaried Retirees brought a motion to
determine that Stelco and its subsidiaries (especially Stelwire, Stelpipe,
Welland Pipe and CHT Steel) would be considered as a "single
employer" such that no group of retirees could be isolated and dealt with
separately from the others. We have been successful - as part of its agreement
with the Province, Stelco has agreed to take responsibility for retiree benefits
at each of its subsidiaries where a purchaser does not assume such
responsibility.
3. Revocation
of Section 5.1 - Under section 5.1, Stelco Pension Plans have deteriorated
from fully funded to a collective solvency deficiency in excess of $1.3
billion. The Salaried Retirees wrote the Premier, met with Jim Arnett (the
Premier's designated Steel Industry advisor) as well as with a number of
Liberal members of the Legislative Assembly, to press for Stelco's resumption
of solvency funding. We have been successful in persuading the Provincial
Government to replace section 5.1 with a requirement that Stelco fund its
solvency deficiencies.
4. Keiper
and Woollcombe - The Salaried
Retirees were the first to draw to the stakeholders' attention the risks
attendant to the appointment of Messrs. Keiper and Woollcombe to Stelco's Board
of Directors. Ultimately, these two directors resigned from the Board, shortly
after which the current restructuring agreements were reached between Stelco
and the Province, Stelco and the USW and Stelco and Tricap.
5. Negotiations
Protocol - Until recently, Stelco's Board had been trying to formulate its
own plan without including the Province in its considerations. The Salaried
Retirees urged Stelco to begin their restructuring discussions with the
Province - since it controls the legal environment for pension funding - and
then to formulate a plan together with the other stakeholders. Ultimately, this
is what Stelco did, resulting in the current proposed arrangements.
1. In
evaluating a restructuring proposal, two questions are important:
(a) Will
the Company be Viable? - How much debt will it have? How much liquidity
(cash and credit)? Will it have too much debt/little liquidity to weather a
downturn? Will it have adequate resources for its needed capital expenditures?
Will it be a high or low cost producer?
(b) What
Happens if Stelco Becomes Insolvent Again? - In this insolvency, all of
Stelco's creditors are unsecured, and so rank equally in the event of a liquidation.
However, this restructuring is creating new secured financing - what would the
impact of this secured financing (which ranks ahead of unsecured creditors) be
in a subsequent insolvency?
2. Under any plan, Stelco would emerge
with a $600 million asset backed line of credit, secured against its inventory
and receivables.
3. Under
Stelco's agreements with the Province, Tricap and the USW, Stelco would emerge
with the following additional financing:
(a) $100 million from the Province of
Ontario; interest rate of 1%; interest payable either in cash or in common
shares; 75% of the loan obligation is forgiven if, by December 31, 2015,
Stelco's existing solvency deficiencies have been fully paid;
(b) $350 million secured loan from Tricap;
matures in seven years, interest payable in cash at a variable rate equal to
the thirty day bankers acceptance rate plus 675 basis points for the first
seven years, and an increased rate thereafter;
(c) $75 - $100 million standby commitment
from Tricap to purchase secured convertible notes due 2015.
4. In
order to access the Province's $100 million loan, Stelco must make a $400
million pay-down to its main Pension Plans (two salaried and two bargaining
unit), make normal course pension payments to the Plans (in 2005) and then pay
$60 million into the Plans per year for five years and $70 million per year for the following five years.
5. In order to access the Provincial and
Tricap loans, Stelco’s liquidity must be at least $625 million.
6. Under the Stelco Plan, existing
unsecured debt (worth approximately $666 million) is exchanged for:
(a) $225 million of new secured convertible
notes; 9.5% interest rate payable in cash or new common shares at Stelco's
option, convertible to equity upon maturity;
(b) $300 million in new convertible unsecured
notes, interest rate at 5% payable in cash or new convertible 5% notes, and
convertible into common shares once the Local 1005 collective bargaining
agreement is in effect or the share per price is at $15.00 or higher for twenty
days;
(c) 1.1 million new common shares;
(d) Rights to purchase $75 million in
additional new secured convertible notes.
7. Assuming a collective agreement with
Local 1005, Stelco will have, under this plan, $225 million (plus fees) in secured
debt to the bondholders (BH), up to $350 million in secured debt to Tricap, and
up to $600 million in secured debt under the Asset-Based Loan. It is unlikely
that Stelco will draw on the entire $350 million loan form Tricap, or that it
will draw much from its $600 million ABL. It will be able to pay common shares
instead of cash as interest on its secured loan to the BH and its unsecured
loan to the Province, and new unsecured notes instead of cash as interest on
its unsecured note to the BH. If all goes well, then the $225 million in
secured debt to the BH will be converted to equity, and if the pension debt is
retired by 2015, the $100 million Provincial loan will be largely (75%)
forgiven, with the balance converted to common shares.
8. On a cash-flow basis, Stelco's ability
to pay all of its interest (except on the Tricap loan) in new common shares or
new unsecured notes relieves it of a potentially burdensome interest expense.
III. NEXT STEPS
1. The BH are currently opposed to the
Plan. They want less cash into the Pension Plans up front ($200 million versus
$400 million) and more cash in subsequent years ($10 million more per year for
the next ten years). They want more secured debt for themselves $350 million
versus $225 million), and they want less of the debt to be convertible into
equity than under the Stelco Plans, and to be convertible only if tougher
conditions are met. They generally want higher interest rates than Stelco
proposes to pay, and they want interest paid in cash, rather than in common
shares and new unsecured notes.
2. Overall, the BH want to be much
better protected in the event that Stelco fails a second time, and also want
much higher cash interest payments than Stelco has proposed to pay. The BH
assume the Province and the USW will go along with their demands; this is
unlikely.
3. There is also a dispute between the BH
and the company as to how Stelco's Board of Directors will be selected. Tricap
requires, as a condition of its $350 million loan, that Stelco's Board be
acceptable to it, while the BH want to control the Board themselves. Control of
the Board may be important since it is the Board that determines whether
interest payments are made in cash, or in common shares or new unsecured notes.
4. Under the CCAA, creditors who are
'affected' by the restructuring (i.e. suffer a loss) are entitled to vote on
the Plan. The BH have said they will vote against it. If they do, the Plan may
be revised, or Stelco may move into bankruptcy with difficult and
employment/environment consequences. Bankruptcy is governed by a different
statute - the Bankruptcy and Insolvency Act. Reforms to it may be required.
1. The current solvency deficiency for
Stelco's four main Plans is probably between $1.3 and $1.5 billion. A $400
million pay down should eliminate about 30% of the deficiency. However,
payments over the next ten years are fixed at $60 million per year for the
first five years, and $70 million per year for the five years after that, with
an additional "cash-sweep" beginning in 2008. These payments include
the costs of current service accruing in those years, as well the cost of
paying down the existing deficiencies. Any new benefits must be funded with
additional payments in accordance with normal pension funding rules. Without
the cash-sweep contribution, these payments are lower than would be required
under normal Pension Benefits Act
("PBA") rules, even with the section 5.1 election in place.
2. Because the payments are fixed, the
pension plans are at risk if pension costs are higher than expected, or the
investment return on pension assets is less than 7% after expenses. In either case, normal pension funding rules
would require additional contributions to make up for the additional costs or
poor investment returns; however, under this payment agreement, Stelco’s
payments are fixed for the next ten years and do not increase if pension costs
are higher than expected or asset returns are lower than assumed.
3 The Provincial Government’s promise to
forgive 75% of its $100 million loan to Stelco in 2015 if the solvency deficit
is fully funded will, however, act as an incentive for the company to fund its
pension deficiencies by that date.
Q The total contribution to the pension
plans required by the proposed restructuring plan do not seem to add up to the
solvency deficiency of about $1.3 to 1.5 billion. Is this correct?
A It is correct. The planned payments add up to $1.05 billion
and do not take into account the service charges. There are two additional
factors:
·
Workers whose age
plus service add up to 55 or more are entitled under Ontario law to what is
called the “grow-in” benefit. This
means that if there is a plant shut-down before they are eligible to retire they
can continue to accrue service and credit as though they were still
working. This is very costly for the
company. However, when the workers
become entitled to the benefit the grow-in payments disappear. In Stelco’s plans the value of the grow-in
benefit is very significant but as the workers age the grow-in disappears and
the solvency deficiency will shrink.
·
In addition to the
$1.05 billion payment to the plans there is something called the “cash
sweep”. This is an amount that is put
into the pension plans after 2008 if there is “free cash flow” (a defined term under the agreement) in
excess of a certain level. Above that
level 20% will be paid into the pensions.
But
at the end of the day the numbers may not work and there is no guarantee that
the $1.3 to 1.5 billion will be paid.
We have asked the company, the Monitor and the government for their
calculations showing us exactly how all these numbers are going to add up to
$1.3 to 1.5 billion but we do not have them yet.
Q Has SSPO taken any action to correct
improper assumptions used in calculating the pension fund requirements?
A Early on we complained that Stelco had
underestimated the cost of the pensions, i.e. that the mortality assumption
underestimated the life expectancy of pensioners. Stelco has not changed that assumption so this is one of the
risks they have not addressed in their pension funding plan. In the normal course, if pensioners live
longer than expected a higher contribution to the plans would be
triggered. In the current case the
contributions are fixed by the restructuring plan.
Q If, in the future, Stelco does not
have enough money to make the required payments into the pension plans, what
happens?
A If Stelco does not have enough money to
contribute the required $60 or $70 million per year we have another
crisis. In that case Stelco may go to
the Provincial government and seek relief but the $60 or $70 million payments
have been fixed by the financial analysts as reasonable and affordable. Earlier Stelco plans required much higher
contributions in the $100 million area.
Q Is the $1.3 to $1.5 billion shortfall
for pensions only or for pensions and health benefits?
A It is the solvency underfunding for
pensions only.
Q Is there a formula for how the $400
million to the pension plans is distributed?
A There will need to be a formula but one
does not currently exist. The
Provincial government will be involved in the allocation of the $400 million.
Q What is the current level of funding in
the salaried pension plans and would the pensions be reduced by the percentage
underfunding in the event of a Stelco liquidation?
A The funding level is somewhat less than
80%. In the event of a Stelco
liquidation the Provincial guarantee fund would kick in and would guarantee a certain
portion of the pension and only the underfunding above that level would be at
risk. You should not worry about this
unlikely eventuality.
Q Will the salaried pensioners have some
sort of representation on Stelco’s pension committee?
A No.
Stelco’s pension plan is run by Stelco, as is virtually every other
company’s pension plan in Ontario.
There are some organizations, public and private, where the union has
gained seats on the board governing the pension plan but it has not happened in
the industrial sector. For salaried
employees who do not have a collective bargaining avenue it is virtually
impossible. However, SSPO is talking to
SASSEA about the formation of a Pension Advisory Committee and this will be
discussed by Paul Wendling later.
Q Why do we not know the level of funding
in the Stelco plans after 2003?
A We do know but confidentiality
agreements prevent us from making the information public. While the stock market did well after 2003,
long term interest rates fell and this had an adverse effect on the price of
annuities that would be purchased if the pension plans were wound up.
Q With the proposed plan, to what degree
would the bondholders control the company, the composition of the Board and the
senior officers?
A Initially the unsecured creditors will
control 100% of the company but we don’t know what the future ownership will
look like. We expect that there will be
an argument between Tricap and the bondholders as to who controls the Board of
Directors, which will effect whether the interest paid to the bondholders is in
shares or cash. The fight to control
Stelco’s Board will be between the bondholders on one side and pretty much
everyone else on the other.
Q What is the situation for the retiree
health benefits?
A There are no proposed changes to the
retiree health plan. The Ontario law
tends to ensure that the non-pension benefits given to employees are vested on
retirement and cannot be taken away.
Q What will Stelco’s pension obligations
be after 10 years?
A Stelco will then have to abide by the
same rules as everybody else which are solvency funding in 5 years and
going-concern funding in 15 years.
Q What is the situation for pensioners of
a subsidiary if the subsidiary is sold off and then goes bankrupt?
A We are assuming, based on past
discussions, that if Stelwire, for example, is sold, Stelco will retain the
retiree liabilities. That is the
precedent set by the sale of Stelpipe.
This issue was of concern to us and that is why we brought a motion to
have all subsidiary employers declared common employers.
Q Is there a possibility of the
Provincial or Federal government stepping in to force the bondholders to an
agreement? Also, why has the Federal
government not been more active in supporting the Provincial government?
A You have put your finger on the key
issue that the fate of a lot of people hangs on a vote of a few bond funds who
are in this for a quick buck. But that
is the way the system is currently structured.
If the bondholders want more than is there, the next step will be to ask
the Federal government to change the bankruptcy laws so that they would no
longer have that kind of power.
Paul
Wendling wrapped up the meeting by mentioning discussions taking place between
SASSEA and SSPO on the formation of a Pension Advisory Committee. The terms of reference for this committee
are being formulated by our lawyers.
This committee would monitor the administration of our pension plans so
that any significant events could be communicated to the members and we could
make recommendations to the pension board.