Shareholders questioned case for insolvency

SHARES

During a conference call, Hap Stephen, Stelco’s chief restructuring officer, said including shareholders in a new equity offering was rejected because “there was not enough value to go around.”

The news hammered Stelco’s shares, which plunged 44¢, or 62%, to 27¢ on the Toronto Stock Exchange yesterday. The stock traded as high as $4.17 in March, more than year after Stelco sought creditor protection.

Shareholders are talking about a possible class- action lawsuit and one institutional investor has already said his firm planned to launch a suit if Stelco’s shares were cancelled, according to sources familiar with the matter.

“It’s 95% certain there’ll be a lawsuit,” said one source. “ There’s too much money on the table. And if there is a class action, there will be a lot of ammunition.”

Critics, including Stelco’s union, lambasted the steelmaker for seeking creditor protection in January, 2004, saying the company wasn’t insolvent.

Hot steel markets later sent Stelco’s profit soaring, prompting the judge overseeing its restructuring to suggest company shares may still hold value.

“ Stelco is the Guy Paul Morin of Canadian bankruptcy law,” said Doug Pollitt, analyst at broker Pollitt & Co. in Toronto, referring to the man wrongfully convicted in the 1984 murder of Christine Jessop.

Said another shareholder source: “We always knew the haircut was getting bigger and bigger, but figured there would be something [ for shareholders]. But there is nothing, zero.”

Stelco’s employee groups tentatively praised the decision. Meanwhile, three-quarters of the $100million note issued to Ontario, in exchange for its contribution, will be forgiven if Stelco pays back its pension shortfall in 10 years. The government can recoup some of that through warrants exchangeable for up to 8% of Stelco’s new equity — assuming those shares double in value. Stelco, in turn, agreed to pay $ 400- million into its pension plan with fixed annual pension payments that start at $60-million and rise to $70-million in the latter part of the payback period.

It is rare for the provincial government to kick in money during a corporate restructuring, although Ontario assumed certain pension liabilities after Algoma Steel Inc.’ s 2001 bankruptcy. Government negotiators had threatened to make Stelco pay back its deficit in as little as five years after rejecting its first plan, which called for a $ 200million up- front pension contribution, half the current number.

About $525-million worth of notes convertible into equity will also be issued while Stelco said it expects to generate $ 155- million by selling a handful of subsidiaries. In all, the deal will give Stelco $630million in net liquidity, the company said. Under the plan, Tricap Management Ltd., Brascan Corp.’ s restructuring fund, will provide up to $450-million in new financing through a credit line and rights offering. Tricap has the option to buy up $ 25- million of that $ 75- million rights deal, plus any portion not purchased by creditors.

Financial Post

pbrieger@nationalpost.com