Essar Steel Algoma $625 million two-part deal’s marketing extended

By Paul Deckelman

New York, Oct. 30 – Essar Steel Algoma Inc.’s planned $625 million two-part offering of secured notes remained on hold Thursday, with sources citing a reported extension of the marketing campaign for the issue, giving prospective investors another day to consider whether to buy the deal.

Order books on the deal were originally scheduled to close on Wednesday afternoon.

A junk trader said he heard the marketing was still going on Thursday, while a second said that “they’re tweaking the covenants” in hopes of getting enough investor support for the deal.

As of press time on Thursday evening, there had been no public announcement or other indication that the deal had yet priced.

The deal is being brought to market via left bookrunning manager Deutsche Bank, joint bookrunners Goldman Sachs and Jefferies LLC plus co-managers Imperial Capital and Canaccord Genuity Corp.

The company, a Sault Ste. Marie, Ont.-based maker of hot- and cold-rolled steel products, began a roadshow last week for that Rule 144A/Regulation S deal, which consists of $350 million of five-year senior secured notes and $275 million of seven-year junior secured notes.

Market sources said that the five-year tranche was being talked at a discount to yield in the 8% area, while the seven-year tranche was being talked at a discount to yield around 10˝%.

The company was also in the process of doing a $350 million bank loan deal, with the proceeds from the bonds and loan transactions to be used to refinance debt and for general corporate purposes.

Refinancing effort advances

The refinancing effort was approved last month by the Ontario Superior Court of Justice.

During the summer, the company – which earlier this year acknowledged that its debt load was unsustainable – rejected demands by some of its creditors that it seek a full reorganization by filing for protection under Canada’s bankruptcy code, the Companies’ Creditors Arrangement Act. It instead filed its restructuring proposal with Ontario courts in mid-July under the Canada Business Corporations Act.

At the same time, it sought and received protection under Chapter 15 of the U.S. Bankruptcy Code – a relatively less-used provision of the code that provides foreign-domiciled companies protection from creditors in the United States while they attempt to restructure their finances in another country, in this case Canada.

In its filings, the company listed liabilities of more than $1 billion.

Under the terms of the arrangement approved in Ontario, Essar Steel Algoma will give cash payments amounting to 82% of the principal amount and unpaid accrued interest to the holders of its $384.7 million of outstanding 9 7/8% senior unsecured notes due 2015.

Holders of 92% of those notes signed off on the company’s plan of arrangement, which included an initial cash payment to those noteholders equal to 32.5% of their unpaid principal and interest. The company also agreed to make a second payment to them, under which it would have the option of giving them either 55% of their principal and interest in the form of new junior secured notes or a “cash-out” option to pay them 49.5% of principal and interest in cash, which the company ultimately elected.

The company meantime launched a tender offer earlier this month for its $400 million of outstanding 9 3/8% senior secured notes due 2015 and a related consent solicitation, offering holders tendering by the early tender deadline, 5 p.m. ET on Thursday, total consideration of $1,006 per $1,000 principal amount of notes tendered, including a $10 per $1,000 early tender payment. Those tendering subsequently but before the offer deadline on Nov. 14 would receive $996 per $1,000 as tender consideration.

The court-approved arrangement also calls for the infusion of up to $300 million of equity into the company.

Essar Global Fund Ltd., an arm of Essar Steel Algoma’s corporate parent, the Mumbai, India-based Essar Group energy and steel conglomerate, and the fund’s affiliates will provide more than $400 million of support to Algoma through the infusion of new cash equity, conversion of existing obligations into preferred equity and the purchase of the Port of Algoma.

The refinancing is expected to result in a $240 million reduction of Essar Steel Algoma’s more than $1 billion of gross debt, which besides the two note issues due in 2015 also includes borrowings from several credit facilities.

Pro forma for the transactions, the Canadian steel unit’s liquidity is expected to increase to between $90 million and $100 million.

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