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Focus On - Reconstructing the Stelco restructuring

|Written By By Beth Marlin

This special Law Times Business of Law focus section will examine the many facets of Stelco Inc.'s long and complex restructuring, including a look at the judge who is overseeing the whole deal, the lawyers involved, and the issues at stake.

One lawyer says Stelco's restructuring was 'about as painful' as such a process could possibly be.
One lawyer says Stelco's restructuring was 'about as painful' as such a process could possibly be.

Lawyers involved in Stelco Inc.'s restructuring have taken the art of brinkmanship to new heights, striking an 11th-hour deal on the eve of Nov. 24, the absolute final deadline set by Ontario Superior Court Justice James Farley.

Though vacationing in Florida at the time, Farley had threatened to return to Toronto prematurely and take matters into his own hands — potentially tipping the beleagured company into bankruptcy or forcing a sell-off of its assets as a going concern — if the fractious parties were unable or unwilling to reach an accord on their own.

In fact, the Hamilton, Ont.-based steelmaker's painfully long restructuring process, which began when it was granted court protection from creditors under the Companies' Creditors Arrangement Act on Jan. 29, 2004, seemed bound for certain failure.

Although a plan of arrangement introduced in October had received the blessing of all other stakeholders, including the United Steelworkers of America and local union membership, the Ontario government, restructuring financier Brascan's Tricap Management Ltd., and others, the bondholders had stood their ground, promising to thwart the deal in a vote to be held at 4 p.m. on Nov. 24.

Because the deal needs the approval of creditors holding at least two-thirds of the outstanding $660-million debt to pass, the bondholders, who are owed about $328 million with interest, had veto power over the plan, which offered them about 66 cents on the dollar.

Behind the scenes, however, something else was clearly brewing. The 4 p.m. vote at Stelco's Nov. 24 creditors' meeting was repeatedly postponed until 8 p.m., when the handshaking on an newly sweetened restructuring plan began.

At the last minute, the Ontario and federal governments had pledged an additional $80 million to Stelco, upping the comfort level of bondholders enough to win their co-operation in an amended deal that positions Brascan's Tricap Management Inc. as the potential owner of 52.5 per cent of Stelco's common shares if it converts commercial paper received in exchange for a $125-million cash infusion.

The new restructuring plan was significantly bolstered by the Ontario government's upping of its earlier pledge of $100 million to $150 million toward pension plan protections and other operations, as well as the federal government's $30-million contribution toward Stelco's cost-saving energy conversion project.

Another piece of the puzzle was the company's deal to sell its Stelwire subsidiary as well as two Quebec-based subsidiaries to Mittal Canada Inc., a subsidiary of the world's biggest steelmaker, Mittal Steel Co. NV. The United Steelworkers had earlier opposed selling off Stelco subsidiaries, but later relented, agreeing the subsidiaries would benefit from new owners.

If approved later this month, Stelco will likely be able to withdraw from court protection early in the New Year, with the help of new financing arrangements, according to CEO Courtney Pratt.

McCarthy Tétrault lawyer Michael Barrack, who represents Stelco Inc., declined to comment on the behind-the-scenes man-oeuvres, citing client confidentiality. However, he said he believes a deal would have been struck even if the federal and provincial governments had not come through.

"The federal money was a help, but the parties all would have tried diligently to get there," Barrack said. "All of the parties have been working in their own way against changing events to try to get here and I'm confident that the parties would have tried to work with what was available in any event."

David Jacobs, a lawyer with Watson Jacobs McCreary, who represented locals 8782 and 5328 of the United Steelworkers of America, called the deal "a historic achievement for the parties."

Still, while the deal is expected to pass the stakeholder vote, not everyone is happy with the plan, which would cancel all existing Stelco shares and issue new equity.

On Nov. 25, the day after the plan was announced, a group of Stelco shareholders filed information with the court that contradicted the

economic assumptions underlying the new plan, saying Stelco had low-balled its forecast of 2006 steel prices, and can, in fact, expect annual revenue of $400 million more than estimated. While the shareholders can't vote on the plan, their lawyer, Peter Jervis of Lerners LLP, said he'll be asking Farley to reject the plan in favour of a remedy that respects the shareholders' rights, which are often trumped in restructurings.

On Dec. 1, debtholders submitted a proposal that would give them 100-per-cent recovery.

The judge is unlikely to overrule the hard-won agreement at the end of a rollercoaster ride of a process significantly complicated by the fact that steel prices skyrocketed within the first year after the company entered CCAA protection. Asked by the bondholders to step down from the case and allow another judge to decide whether to allow the restrructuring plan to go ahead, Farley has refused, although he says the group my make a motion

asking him to recuse himself.

Stelco, which had bled more than $500 million in 2003 and another $36 million in the first quarter of 2004, found itself in the happily awkward position of raking in the profits. In insisting on filing a motion to have the company removed from CCAA protection, then union Local 1005 lawyer David Jacobs found himself pitted in a confrontation with Farley that he didn't win, leading to time-consuming and unsuccessful appeals at the Ontario Court of Appeal and ending at the Supreme Court of Canada in December 2004.

One lawyer for another stakeholder says the union's bid to have Stelco withdrawn from insolvency protection was "the biggest timewaster" of the 22-month process.

Despite the rising steel prices and numerous suitors, including Deutsche Bank with its stalking-horse $900-million refinancing offer, and takeover proposals from Russia's OAO Severstal and U.S. Steel Corp., the more attractive offers were scared off, say some lawyers, by the provincial government's ann-ouncement of plans to amend pension plan legislation in a way that seemed to specifically target Stelco's funding shortfall.

Then steel prices began to fall again, making chances of a bail-out that compensated stakeholders seem slim.

Even Geoge Adams' legendary mediation skills could not save the day, with the former judge throwing up his hands in defeat a year after Farley appointed him conciliator between the

parties in June 2004.

Fed up with the stakeholders' failure to agree on a restructuring plan, Farley delivered his seemingly final ultimatum: reach a deal by Nov. 24 or he would take matters into his own hands, liquidating the company if necessary or selling off the assets individually.

Would the parties have settled if the federal and provincial governments hadn't upped the ante? For the observant, there were early signs this would happen. A few weeks prior, Hamilton East MP Tony Valeri delivered a speech in which he pointedly reminded his Hamil-ton audience that the federal government had stepped in to help Algoma Steel.

"I've never believed the company was going to be liquidated. The question was how painful would [the restructuring] be?" says Andrew Kent, a lawyer with McMillan Binch Mendelsohn and counsel for the informal independent converts committee, a group of debtholders.

The answer to Kent's rhetorical question? "About as painful as it can be."

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