Essar Steel Algoma Inc. has sought court protection from creditors in the U.S. and Canada amid a prolonged contract fight with ore supplier Cliffs Natural Resources Inc.
Canadian steelmaker Essar has been hit with demands for damages from Cliffs due to alleged violations of a supply contract for iron ore. Essar has countersued, accusing Cliffs of violating the contract.
Essar this week asked judges in both the U.S. and Canada to order long-term supplier Cliffs, based in Cleveland, to resume supplying iron to it. In court papers, the Canadian company said Cliffs is one of a few companies that can provide the supply volume it needs, and it may be the only supplier that can supply ore to Essar through the winter months.
The company will turn first to Justice Frank Newbould in Canada for aid in getting Cliffs to resume ore deliveries, Ray Schrock, lawyer for Essar, told Judge Brendan Shannon on Tuesday at a hearing in the U.S. Bankruptcy Court in Wilmington, Del.
Justice Newbould is overseeing the steelmaker’s Canadian restructuring case, and on Monday granted interim approval to borrowing that means the company can continue operations while reorganizing.
Reopening the supply lines is “absolutely critical,” Mr. Schrock said. If the Canadian judge defers action, Essar will move ahead with litigation in the U.S. bankruptcy court to force Cliffs to deliver ore, he said.
Cliffs, through a spokeswoman, declined to comment, citing a policy of not commenting on litigation.
Short-term arrangements the steelmaker made with other suppliers won’t be enough to support operations, the company’s general counsel, J. Robert Sandoval said in a court filing. Essar wants the U.S. court to rule the supply contract that Cliffs says was validly terminated is still live and enforceable.
In a statement, Essar said it filed for protection under Canadian insolvency law to “strengthen its financial health and solidify its long-term business prospects.” The filing marks the second recent restructuring for the steelmaker, which is owned by Essar Global Fund Limited, a multinational Cayman Islands entity with investments in a broad spectrum of businesses.
Weighed down by more than $1 billion in debt, Essar has struggled with falling prices for its steel, as well as customer upset due to the highly public fight with Cliffs.
An employer of nearly 3,000 people, most located in Sault Ste. Marie, Ontario, Essar has had to cut back production and lay off about 100 people due to the problems with Cliffs, court papers say.
Kalyan Ghosh, Essar’s president and chief executive officer, said daily operations would continue unimpeded. The company has signed up $200 million in bankruptcy financing. Mr. Ghosh cited “record-low steel markets, a barrage of imports, and the untimely and wrongful termination of our long-term iron ore supply contract” as the reasons Essar sought protection under the Companies’ Creditors Arrangement Act in the Ontario Superior Court of Justice.
The steelmaker’s debts include $42.5 million owed on a revolving loan, approximately $371 million on a term loan, approximately $375 million on 9.5% senior secured notes, and $280 million on junior secured notes, court papers say. Leading creditors competed for the right to finance Essar’s bankruptcy, but the company chose a loan from a group of existing lenders led by Deutsche Bank A.G. over rival offers.
Essar filed a chapter 15 bankruptcy case in the U.S., to shield its U.S. assets from creditor action while it works through its problems in Canada, the main forum for the restructuring. Along with the chapter 15 petition, it filed a lawsuit against Cliffs in the U.S. court in Wilmington, seeking a court order to force Cliffs to resume the supply of iron ore.
Source: http://www.wsj.com/