The Stel Salaried
Pensioners Organization wishes to thank The Hamilton Spectator for permission
to post the following article by Reporter Naomi Powell, published in the December
3, 2005 edition
By Naomi
Powell
The Hamilton Spectator
(Dec 3, 2005)
The deal to save Stelco appeared in
jeopardy last night as the steelmaker took blows from both its lenders and its
stakeholders.
The steelmaker's court-appointed
monitor expressed doubt about the fate of a hard-won restructuring plan and
revealed alarming details about the rate the company is burning through its
credit.
Stelco is in debt to the tune of $217
million to the lenders, which include GE Commercial Finance and CIT Business
Credit Canada Inc.
Concerned about Stelco's ongoing
struggles with its stakeholders, the lenders want an interim receiver appointed
to protect their interests if Justice James Farley refuses to grant another
extension on the company's bankruptcy protection. Stelco will ask Farley on
Monday to extend its protection to Dec. 12. It hopes to have a plan filed and
approved by creditors at a vote on Dec. 9.
"In our view, steps must be taken
to fill any potential vacuum and protect the secured lenders' position should
success not crown your endeavours," Sean Dunphy, a lawyer for the lenders,
wrote in a letter yesterday.
Stelco has drawn $67 million from its
line of credit since September and anticipates spending an additional $74.8
million by Feb. 28.
Analysts said it was unusual for a
company in the midst of bankruptcy protection to lean so heavily on loans.
"There aren't many situations I
can remember that a company's increased its loan by that much while in
bankruptcy protection," said Bruce Leonard, president of the Insolvency
Institute of Canada.
A company in bankruptcy protection is
shielded from any previous debt by the courts. The protection is intended to
give the company time to restructure and figure out how to pay its debts.
Usually, Leonard said, the company is able to fund itself throughout this
period using money earned from ongoing operations.
"This is highly unusual,"
Leonard said. "There's money leaking out somewhere."
Stelco CEO Courtney Pratt said the
company needed the cash for an ongoing upgrade of its Lake Erie hot strip mill,
part of a capital expenditure program.
"A lot of it has gone to (that)
program, and to increased costs, raw materials, natural gas," he said.
"And our earnings haven't been as good so that eats away at it. It's the
ongoing cost of the business."
Also eating into Stelco's pockets is an
$11.3-million break fee to Tricap Management, the restructuring firm
underwriting the company's exit from bankruptcy protection. The fee was
revealed in a report from Stelco's court appointed monitor yesterday.
Stelco entered an agreement with Tricap
several months ago when the firm committed to providing Stelco with $450
million in financing. The break fee was in place in case Stelco backed out or
"if the terms of the agreement originally proposed were not
consummated," Pratt said last night.
"The deal has changed enormously
since we originally put that in place," he said.
Pratt emerged from intense negotiations
on Nov. 23 to announce that Stelco's key stakeholders had agreed on the
monetary elements of a plan. At the time, the chief executive said he was
confident about the plan's chances for success in a creditor vote. Stelco's
creditors must approve any plan before it is launched.
Since then, Stelco has been forced to
postpone several creditor votes, as it haggled over non-monetary items Pratt
would not identify.
Yesterday, hopes for the plan's
survival were uncertain.
"At the time of this report, the
Monitor does not know whether the amended plan would have a reasonable prospect
of success at the meetings scheduled for Dec. 9, 2005," wrote Alex
Morrison, Stelco's court appointed monitor. Morrison said Stelco planned to work
through the weekend in an effort to forge a deal that can be approved by the
company's board of directors and distributed to stakeholders before its court
appearance on Monday.
Asked if the plan would be issued
without the support of key players, which includes unions, the province,
unsecured creditors and Tricap, Pratt said it was possible.
"When you get agreement at a high
level on economic issues (and then) start working on the details, these things
often run into difficulties," he said. "That part isn't really
unusual."
Pratt said an unexpected proposal by
Stelco's convertible noteholders is partly to blame for complicating
negotiations.
The convertible noteholders, who stand
to lose everything under Stelco's current plan, have offered to buy $172 million
of new notes that are convertible to shares. Proceeds from the sale combined
with secured debt and shares from Stelco, the noteholders suggest, would be
enough to fully repay Stelco's bondholders. All other aspects of Stelco's plan,
including a $400-million payment into the $1.3-billion pension shortfall, would
stay in place, said Greg Boland, adviser to Sunrise Partners Ltd., which holds
a portion of the convertible debt.
"It added a new dimension to the
discussions," Pratt said of the proposal. "You have to consider any
kind of proposal like that seriously. It makes it very difficult."
As it stands, Stelco's plan calls for
Tricap Management to offer cash for up to $125 million of these notes, which
will be issued to creditors when the company emerges from protection. But while
Tricap has offered to buy the notes at 37.5 per cent of their face value, the
noteholders say they will pay 55 per cent of the value.
Despite recent turbulence in the talks,
Pratt said he remained optimistic.
"I think we're moving forward. I'm
not despairing at all, but I don't want to pretend that anything is done. It's
difficult."
npowell@thespec.com
905-526-4620