Stelco restructuring: High drama, Canadian style

Stelco restructuring: High drama, Canadian style

In the latest plot twist to its restructuring saga, Ontario-based steel company Stelco Inc. has called for an independent arbitrator to sort out its mess. Stelco has proposed raising money from, among other things: CA$250 million from 8-year senior junk bonds CA$150 million in newly raised equity Selling off some non-core subsidiaries for CA$175 million An additional CA$67 million from a CA$600 million asset-backed loan All in all, Stelco has pledged to bring CA$642 million to the table by September 30, 2005, freeing them from creditor protection. Of course, questions of how they will spend that money and the time frame in which it would be spent continue to dog the company. At heart is the issue of Stelco’s monolithic CA$1.3 billion pension deficit. Stelco wants to pay down its debt and its associated interest, and to do that it has offered forth a plan that would, among other things, freeze pension funds for 10 years. Consequently, employees would not have the right to negotiate any increase to pension benefits before January 1, 2016. However, the Ontario government struck down Stelco’s latest restructuring bid, saying that the company is not adequately addressing the aforementioned pension deficit. What the province is specifically looking for from the legally insolvent company, is a more significant down payment and a sensible schedule to pay off the remaining balance over time. Stelco is pushing a balanced everybody-gets-something approach. It is reminiscent of the frugal family desperately trying to get out of debt with a two-tiered plan of paying off the creditors while socking a little bit away for retirement. The company has proposed putting a substantial CA$175 down payment towards the pension deficit and following thereafter with CA$107 million yearly payments for 10 years. It also wants to take CA$150 million to pay off debentures and all interest due on its debt. The union is not having any of it and wants something more sizable put towards the pension deficit. Further compounding Stelco restructuring troubles is the amount of careful scrutiny the Canadian government is giving the steelmaker. Last year the company earned CA$65 million on a bumper crop of record high steel prices. In the first quarter of 2005, it earned CA$49 million. With such dizzyingly successful earnings, Stelco is having a difficult time finding a sympathetic ear. Furthermore, Canada’s pension law stipulates that the debt must be paid off in five years; this time it appears Stelco is running lean on exemptions. Meanwhile the United Steelworkers of America (USWA) has proposed that Tricap Management Ltd. perform a full due diligence audit of Stelco. The proposal has found favor among Stelco’s employee group stakeholders and the Ontario government. In a nutshell, such a proposal would require the company to make a CA$500 million down payment on the pension deficit with the Ontario government then picking up the rest of the liability. Stelco has dismissed the proposal outright (even though they agreed to Tricap as a union financial advisor and that Tricap be granted unfettered access to all of Stelco’s information) and has elected to bring in an independent mediator to try to sift through the rubble. Stelco has found itself in a mess since 1996 when it was granted an exemption to the Pension Benefits Act. This exemption allowed it to skip regular payments to a special contingency fund that allows pensioners to get paid if the company were to go bankrupt. Stelco’s pension deficit subsequently ballooned, and in January 2004 the Ontario government had seen enough and ordered Stelco to immediately start paying the debt off as soon as it emerged from bankruptcy protection. However, Stelco has seemingly subverted any effort to portray itself as serious by requesting an independent mediator in the same breath as its restructuring offer. Already, opinions are clattering around that the company’s offer appears to be little more than a bargaining tool meant to buy time. Beyond the potent bureaucratic mix of big corporations, big unions, and big government one thing is certain: CA$1.3 billion is quite a chunk of change, and Stelco must choose its next step wisely.