Stelco board approves amended plan; notes conversion replaced with cash component

By Caroline Salls

Pittsburgh, Dec. 5 - Stelco Inc.'s board of directors has approved an amended restructuring plan for consideration by its creditors that replaces a proposed unsecured convertible notes conversion with a cash component, according to a company news release.

If the company's stay period is extended to Dec. 12, affected creditors will be asked to vote on the amended plan at the meetings to be resumed Friday.

According to the release, the amended plan reflects the terms of the stakeholder agreement announced by Stelco on Nov. 23 with one major exception. The proposed amended plan does not include what had been 9% unsecured convertible notes converting into 25 million common shares of the company. Under the new plan, the notes are replaced by a proposed cash component, under which affected creditors will receive a share of $137.5 million.

The funding for this is to come from a proposed subscription for common shares from Tricap Management Ltd. and other equity investors. This subscription will be made under a plan sponsor agreement to be entered into by Stelco, Tricap Management and the other subscribers, all of which are acting independently.

The cash component would amount to about 55% of the face value of the expected $250 million issuance of unsecured convertible notes.

Amended plan details

The amended plan is based on:

• The availability of a $600 million asset-based revolving loan facility;

• The availability of a $375 million revolving bridge facility being negotiated with Tricap;

• A $150 million unsecured subordinated 1% note, issued to the Province of Ontario in exchange for a $150 million cash contribution.

If the pension solvency deficiency is fully funded by year 10, then 75% of the note would be forgiven at maturity, with the balance payable in cash or shares; and

• Warrants, with a seven-year maturity, issued to the Province of Ontario to purchase up to 8% of the fully diluted equity (or 2.3 million new common shares) at an exercise price of $11 per new common share.

Existing secured operating lenders will be repaid in full.

Unsecured creditors will receive a share of $275 million in secured floating-rate notes with interest of Libor plus 500 basis points if paid in cash or Libor plus 800 basis points if paid in secured floating-rate notes at the company's option and a 10-year term, payable in cash on maturity.

Unsecured creditors also will receive $137.5 million in cash that will be provided by the equity investors in return for 88% of the equity in the company on a fully diluted basis.

Of that percentage, 40% will be underwritten by Tricap Management, 30% by Sunrise Partners LP and 30% by Appaloosa Management LP.

In addition, unsecured creditors will receive 1.1 million new common shares, representing 4% of the fully diluted common shares of the company.

The Stelco Pension Plans will receive an upfront cash contribution of $400 million and fixed annual cash funding payments of $65 million each year between 2006 and 2010 and $70 million each year between 2011 and 2015.

According to the release, there may be increased payments through annual cash sweep payments, beginning in 2007, based on cash flow and liquidity tests. Any solvency deficiency at the end of 2015 will be funded through the normal five-year pension funding rules.

A six-month grace period on cash funding payments will be provided during the first half of 2006, increasing Stelco's liquidity on emerging from court protection.

The existing shares will be effectively canceled.

Under the proposed plan sponsor agreement, the size of Stelco's board of directors will be fixed at nine members. Tricap Management will have the right to name four of the directors. The other capital providers subscribing for common shares will have the right to nominate one each. The remaining directors will be chosen through a consultative process.

The plan sponsor agreement requires plan implementation to occur no later than March 31. Stelco said it expects to implement the plan early in 2006 and, if possible, before March 31.

Stelco, a Hamilton, Ont.-based steel company, filed for bankruptcy under the Companies Creditors' Arrangement Act on Jan. 29, 2004 in the Ontario Superior Court for Justice.

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