The Stel Salaried
Pensioners Organization wishes to thank The Hamilton Spectator for permission
to post the following article by Reporter Steve Buist published in the December
20, 2004 edition
|
Dec. 20, 2004. 01:09 AM |
|
Bankruptcy protection not a
one-time deal |
|
By Steve Buist |
|
Here's a thought. This is Stelco's first kick at restructuring under the cover of bankruptcy protection, but perhaps not the last. "If history is any indication, there's a good likelihood it will happen again," said Richard McLaren, a University of Western Ontario professor who specializes in corporate insolvency issues. About 48 North American steel companies, including 13 in Canada, have filed for bankruptcy protection since 1998. At least six were forced to file for protection more than once, and a couple filed more than twice. Algoma Steel in Sault Ste. Marie has filed for protection under the Companies' Creditors Arrangement Act -- CCAA -- twice since 1991. "The recidivism rate is extremely high with CCAA companies," said McLaren. "There's such pressure to pay trade creditors and bondholders and other debt, you make the quick decisions about how you're going to solve those problems, but you don't really deal with the long-term problems." To prevent a recurrence of CCAA protection, one steel analyst said, Stelco must figure out the right mix of cost cutting and capital injection. "If they don't get the restructuring correct - if the levels of investment aren't sufficient, the cash reserves aren't sufficient, if a labour agreement isn't consummated with a higher degree of flexibility - they could potentially find themselves in the same position again," said John Novak of CIBC World Markets in Toronto. Part of the equation rests in Stelco's hands, said company president and CEO Courtney Pratt, assuming the steelmaker can properly lower costs and raise enough capital for improvement projects. "We do not want to be back here again in two years," he said. "This is agonizing for everybody in the company and to the community." But part of the equation is a wild card -- the price of steel, which has risen dramatically throughout 2004. "A rising tide floats all boats," said Novak. "The fact that every steel mill in North America is making money shouldn't come as a surprise, so saying that we've had a major paradigm shift is dangerous." Yet steel is a commodity and commodity prices are cyclical. "If steel prices went into the sewer in six months, we would be in a difficult situation again," said Pratt, "but nobody right now is predicting that is going to happen. "If we get two years of strong steel prices, the money to make investments, and hopefully more money into the pension plan, this company will be absolutely rock solid. But if all of a sudden the world changed ..." Pratt left his sentence unfinished. UCLA professor Lynn LoPucki has tracked bankruptcy outcomes for large U.S. corporations and his numbers show that about three in 10 companies that emerge from bankruptcy protection will file a second time. In fact, some academics argue, restructuring laws might actually be bad for all steelmakers by perpetuating a vicious circle. One weak player sheds its debt and emerges from bankruptcy leaner and meaner. That puts pressure on the next weak player, which sheds its debt and emerges stronger, and so on. "The continued operation of steel companies that are chronic money losers poses a threat to the profitable firms," Dan Ikenson, trade policy analyst at Washington's Cato Institute, noted in a 2002 paper called Steel Trap. One key factor that could influence a second trip into bankruptcy protection is whether Stelco emerges from this exercise as a stand-alone company or as part of a larger steel company. sbuist@thespec.com 905-526-3226 |