Steel Mills

CCAA Protection for Essar Steel Algoma Triggered by Cliffs Dispute

November 10, 2015

Essar Steel Algoma announced Monday that it has entered Companies Creditors Arrangement Act (CCAA) protection. It is the third time Algoma will seek restructuring under CCAA—the first time in 1991 and again in 2001. In November 2014 Algoma completed a recapitalization and refinancing plan supported by Essar Global Fund Ltd.

Essar Algoma has struggled to meet debts and be competitive in the current challenging steel market. In FY 2015 and Q1 2016, Algoma reported consolidated net losses of CDN $20.7 million and CDN $80.7 million, respectively. The company has total funded debt obligations of USD $1.06 billion (CDN 1.4 billion).

Essar Steel Algoma said in its statement it has secured USD $200 million (CDN $265 million) debtor-in-possession (DIP) financing from Deutsche Bank AG to provide liquidity during the restructuring period. Algoma expects to withdraw CDN $163 million from the DIP between now and the end of January.

“We have taken aggressive measures that succeeded in curtailing costs and significantly enhancing productivity, ranking Essar Steel Algoma among the top quartile for low cost producers in North America.” said Kalyan Ghosh, president and chief executive officer of Essar Steel Algoma. “Despite these efforts we have been forced to take action today to ensure the continued success of our business given the record low steel markets, a barrage of imports, and the untimely and wrongful termination of our long-term iron ore supply contract. I want to assure our customers, vendors and employees that we fully expect this restructuring not to disrupt daily operations,” said Ghosh.

The dispute with Cliffs Natural Resources over iron ore contracts, and the eventual cancellation of those contracts, has left Algoma with a shortage of ore to cover production over the winter months. Essar Algoma entered into agreements with US Steel and Iron Ore Company of Canada to supply about two thirds of its raw material needs. Failure to source more iron ore could result in a shutdown of the blast furnace which would cause “significant damage and disruption” to the business and “hard costs” associated with the potential restarting of the Algoma mill, wrote the court monitor in his report.

According to the monitor, “In view of how critical the supply of iron ore is to Algoma’s operations and its viability, the supply relationship with Cliffs is very significant to Algoma’s proposed restructuring.” The monitor added that “a going-forward solution ensuring an economic and secure supply from Cliffs is an important priority in these CCAA proceedings.”

The Court has appointed Ernst & Young Inc. to act as Monitor. Evercore Group L.L.C., Weil Gotshal & Manges LLP and Stikeman Elliott LLP will represent the company as financial advisor and outside US and Canadian legal counsel, respectively.

Help from Essar Global is not likely this time around for Algoma. Essar Steel in India is also struggling financially and is seeking investors to raise capital and reduce debt. Essar Steel cites falling steel prices and increased exports from China as headwinds to the global steel industry.