Steel Mills

Court Decision is Setback for Algoma

June 1, 2017

A surprise court decision on May 30, denied a request by Canadian steel mill Algoma for approval of a DIP extension agreement and the appointment of a restructuring committee.

The current DIP loan expired on April 30, 2017. The agreement would have extended the maturity of the $164 million loan to August 31 with an automatic extension to September 30, if Algoma makes principal prepayments equal to or greater than $35 million between May 1, 2017 and August 31, 2017. The extension through September could have also been approved by a 60 percent vote of the DIP lenders.

Algoma received an alternative proposal but the current lenders were favored by the Court Monitor, chief restructuring advisor, a committee of Algoma noteholders and the DIP lenders. The agreement was opposed by the local USW and retirees.

Justice Frank Newbould expressed concern in his decision that the DIP Lenders could use the short period terms in the proposal to assist their position as a party in the restructuring process. The terms of the proposal end before the winter material buildup occurs and could be used as leverage to exact higher fees for a further extension.

“The current DIP lenders have not shied in the past from extracting heavy fees, even for short extensions of their DIP loan.”

Justice Newbould said using the short term extension as pressure to reach agreement in labor negotiations would be unlikely to work, given past attempts.

“In all the circumstances… I am not prepared to approve the proposed extension of the current DIP loan. I am not at all satisfied that the proposed extension would enhance the prospects of a viable and reasonable outcome,” Newbould ruled. He added that any attempt by the lender to takes steps under their DIP security is stayed.

In the matter of the restructuring committee, Newbould said a restructuring advisor already exists and creation of a committee would overlap the chief restructuring advisor’s duties.

“I do not see how the proposed restructuring committee will alleviate work of management, particularly as Mr. Ghosh, the CEO of Algoma, will be on the committee,” said Newbould. “A restructuring committee will just add another layer of advisors that would be in a position to second-guess the Chief Restructuring Advisor without any responsibilities or powers of a board of directors. It makes little or no sense to create another body of restructuring advisors that will likely create disruption.”

He concluded in his remarks:

“The problems at Algoma with the restructuring are mainly the inability of the Participating Lenders under the Restructuring Support Agreement to come to terms with the USW and local 2251. Why that has occurred is something the Court is not privy to….The resolution lies in the hands of the Participating Lenders, working with management of Algoma, and the USW and its local 2251.”