Weirton Steel begins note exchange offer, obtains new credit facility

By Peter Heap

New York, Nov. 1 - Weirton Steel Corp. announced an exchange offer for its outstanding senior notes and said it obtained a new $200 million credit facility - but warned that if the exchange offer is not successful it will not pay interest on the senior notes for at least a year.

The developments Thursday are part of the Weirton, W.Va. steel company's five-point restructuring plan. This includes: reducing operating costs, including employment costs for union and management employees; improving near-term liquidity through vendor financing; increasing borrowing availability under a new bank credit facility; restructuring long-term debt; and repositioning the business to focus on tin mill and other higher margin value-added sheet products.

In the debt exchange, Weirton Steel is offering $85.4 million principal amount of new 10% senior secured discount notes due 2008 in exchange for all of its outstanding 11 3/8% senior notes due 2004 and all its 10¾% senior notes due 2005. There is a total of $244 million of the old securities outstanding.

The new notes will be secured by a mortgage and first priority security interest on the company's hot strip mill, which Weirton called an "integral" part of its operations. An independent appraisal valued the mill at $191 million to $236 million. The company pointed out that the current notes are unsecured and that in bankruptcy the company would face $2 billion of unsecured claims, "a substantial amount" of which could have priority status over the notes. That, Weirton said in a filing with the Securities and Exchange Commission, would result in noteholders receiving "little or none" of the principal amount.

Holders of the existing notes will be offered $350 principal amount of the new notes for each $1,000 principal amount of outstanding notes. Of that amount, $50 will be paid if the notes are tendered before the consent solicitation expires.

The new notes will be issued at a price of $822.70 per $1,000 principal, according to the registration statement with the SEC. Cash interest will start to accrue on Jan. 1, 2004 and will be paid semi-annually beginning July 1, 2004.

Accrued interest on the old notes will be eliminated.

Weirton said the exchange will start as soon as possible after the registration with the SEC becomes effective. As part of the offer, the company is also soliciting consents to amend the current note indentures, including eliminating cross defaults and restrictive covenants. Lehman Brothers is the dealer manager.

Completion is conditional on 95% of the notes being tendered.

Weirton said the exchange will extend debt maturities and reduce debt service requirements, particularly over the next two years.

In addition, the company has also asked the City of Weirton to offer to exchange all its outstanding

8 5/8% pollution control revenue refunding bonds (Weirton Steel Corp. Project) Series 1989 due 2014 for new 9% pollution control revenue refunding bonds (Weirton Steel Corp. Project) Series 2001 due 2014. These new bonds will also be secured by a mortgage and first security interest in the hot strip mill.

Weirton warned that if it does successfully complete the exchange offers it will not make scheduled cash interest payments for at least a year on any outstanding notes or the pollution control bonds as part of the voluntary financing restructuring plan presented to its senior bank lenders and reflected in its credit facility.

After the year, interest payments will be made, provided that these payments are included in the reserve under the senior credit facility.

If the exchange is completed, Weirton said the new credit facility allows cash payments as long as these are reserved for against availability under the facility. This reserve reduces the amount available to Weirton to $6 million in any six-month period, assuming all the debt securities are tendered. If only part is tendered, the company can pay up to $4 million of interest a year, subject to a reservation against availability.

Weirton's new credit facility is for $200 million via agent Fleet Capital Corp. and Foothill Capital

Corp. as syndication agent. The CIT Group/Business Credit, Inc. and GMAC Business Credit LLC were co-documentation agents and Transamerica Business Capital Corp. acted as a lender. Fleet Securities,

Inc. acted as arranger.

The company will draw on the new facility to refinance its existing inventory and accounts receivable facilities. Weirton believes it will be able to borrow more effectively against inventory and accounts receivable and achieve an extra $35 million of availability.

The revolving loan, which matures March 31, 2004, is secured by inventory, accounts receivable and Weirton's No. 9 tandem mill.

Weirton said plans to reduce operating costs will save $51 million a year when fully implemented in 2002. Reductions will be achieved through new collective bargaining agreements, a workforce reduction of

550 employees, reductions in employee benefit costs and other operating cost savings.

Weirton also said it has negotiated arrangements with over 60 vendors in the form of purchase credits, improved pricing or other concessions to achieve one-time cash benefits of at least $30 million.

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