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September 20, 2005

Shareholder rights stomped, Tues., Sept. 20, 2005, 2:06 PM

The Globe & Mail has reported a couple hours ago that the Stelco union, the Ontario government, and management are collaborating on a plan to be submitted to the bankruptcy judge on Thursday. As part of this plan, all existing equity in the company is being written off. The shareholders will be getting another screw job from this so-called Restructuring Officer Hap Stephens, and his pal Judge James Farley.

First the Globe story, and then more comments from me.

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By GREG KEENAN, Globe and Mail Update
Tuesday, September 20, 2005 Posted at 11:35 AM EDT

"A union-sponsored refinancing rejected by Stelco Inc. in the spring is expected to serve as the backbone of a restructuring plan worth more than $1-billion, the legally insolvent steel maker confirmed Tuesday.

Under the restructuring agreement, the Ontario government will lend Stelco $100-million to contribute to its underfunded pension plans, while the company is to contribute another $300-million in a deal reached after intense negotiations between the United Steelworkers union.

The plan is backed by the government, lawyers told Mr. Justice James Farley of the Ontario Superior court which is overseeing the restructuring of Stelco under the Companies' Creditors Arrangement Act.

The plan moves us closer to the goal of emerging successfully from court protection as a viable steel producer at Lake Erie and in Hamilton," said Stelco chief executive Courtney Pratt in a statement. We're looking forward to constructive discussions with our bondholders and others towards obtaining their support."

The company said existing Stelco shares will be effectively cancelled. The stock plummeted 57 cents or 79 per cent to 15 cents in Toronto.

The plan could represent the final chapter in a 20-month saga that has been marked by startling twists and turns—exemplified most by the appointment of two shareholder representatives to the company's board earlier this year, their dismissal by Mr. Justice James Farley of the Ontario Superior court, their return after Judge Farley was overruled by an appeal court and their sudden resignation last month.

The deal comes after several periods of truce between the two key antagonists—five of six USW locals and the international office of the union—blew apart.

During the most recent ceasefire, however, negotiators were operating under a stern warning from Judge Farley that this week represented a real and functional" deadline to submit a plan that had broad support among stakeholders.

The restructuring plan is contingent upon Brascan Corp. providing up to $450-million in new financing for Stelco, and union approval, Stelco said.

Stelco is expected to pay down the approximately $800-million that remains on its pension solvency deficiency over the next 10 years.

There are no concessions required of workers at Stelco operations in Hamilton and Nanticoke, Ont.

The Ontario government will contribute financially after refusing for several months to help bail out the Stelco pension fund by having its Pension Benefit Guarantee Fund take on some of the company's pension liabilities.

The company was granted protection under the CCAA in Jan. 29 (2004), citing a looming liquidity crisis and a $1.3-billion pension shortfall.

As it was granted court protection, steel prices were soaring because of strong demand from the booming Chinese economy. The looming liquidity crisis evaporated and was replaced by record profits.

At one point during the restructuring, Stelco put its core operations in Hamilton and Nanticoke up for sale, only to reject several bids for them a few months later.

The plan put forward today will be addressed during a court hearing scheduled for Thursday."

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Here is the problem as I see it, although anybody who reads the excellent reporting by Canada's national business newspaper, can probably see the same thing.

The Stelco shareholders are supposed to be served and protected by the Ontario Securities Commission, but the OSC is a division of the Ontario Government, and managed by the Minister of Finance. Strike-one against the shareholders. We need an ombudsman, and damn it, we're going to get one.

Then, although there are much worse under-funded pension problems in other Ontario corporations that the government has never commented upon (which I reported the list at Trader Wizard), the Ontario government was permitted to state that the under-funded pension liability of Stelco was unacceptable, requiring their immediate action. So, government, for some reason, is picking on Stelco. Strike-two against the shareholders.

Stelco management took a profitable company out of the control of the shareholders by petitioning itself into bankruptcy because of what they feared would happen in the future of the steel industry in spite of no petition by creditors. Instead, the industry got stronger, and Stelco has flourished. But in going into bankruptcy, management were able to have a company that has reached multi-generation record profits in the 20 months since, (despite the burdens of the costly backroom politics, I might add), to not have to be valued on going-concern principles. In other words, all the future earnings power and potential that the shareholders have invested in, has been declared worthless. Strike-three against the shareholders.

Now under the new plan, the Ontario government and Stelco are required to pay $400 million into the under-funded pension liability, from what I understand. As to the Ontario government's $100 million portion, they have no money. It is the taxpayers' money. There is no precedent or mandate by government to spend taxpayer money in this fashion, i.e., to pay off a corporate pension liability. I mean, if they are permitted to do this, why stop at Stelco? Why not get the government involved in the internal management of all the business corporations in its jurisdiction, many of which have worse problems in this regard than Stelco? This is mind-boggling.

Next, the company is agreeing to pay $300 million into the pension plan. But apparently these managers personally don't have the scratch, and 20 months ago they already went to a judge (Farley) and stated their intentions to screw the shareholders they were supposed to be working for, by petitioning the company into bankruptcy, without cause, and without providing any opportunity for shareholders to contribute more capital via a rights offering. So now they are going all the way. Management is now stealing the $300 million from the present shareholders, and also working a side-deal with a company by the name of Brascan, famous, or infamous as the case may be, for its financial engineering of deals like this. So Stelco shareholders, who know they are holding shares today in a profitable company in a solid industry, which is a highly desired one by peer companies around the world, are getting screwed. And, just to turn the knife all the way, management is asking the court to permit them to write-off all the present common shares. The shareholders get Zero. Zip. Zilch. And, you bet your final dollar, management intends to get a part of the new common shares in place of the ones that shareholders will have taken from them in this very profitable going-concern.

This is a disgrace. I mean, line me up against the wall and shoot me. Don't even blindfold me.

Life isn't supposed to be like this. It makes me want to puke. And I'm not even a shareholder.

Brascan did another trick many years ago, and I personally would never touch them with any sized pole. Through bad management, they went belly up. The problem was at the time that Brascan's senior officers, in order to skim a large portion of the shareholder profits for themselves, entered into loan agreements with major Canadian banks to buy a large portion of those shares. In corporate bankruptcy those shares became worthless, and the banks wanted the loans paid. So the white shoes who control this country politically and financially, including the courts and the Canadian securities regulators " all being members of the same clubs and neighbourhoods " decided to work out a deal where supposedly valuable life insurance policies on those corporate officers were allowed to be purchased by the banks to somehow cover the loan losses. So, Brascan shareholders got wiped out, but management didn't.

Are you starting to get a picture of how this country is run? Banana Republic, you ask? Worse, I already referred to their white shoes.

Enough for Stelco, and Canada. I now have to get ready for the FOMC announcement.

But, if you are a Stelco shareholder and are thinking class-action lawsuit, send me your e-mail. I know people.

Posted by Posted by Bill Cara on September 20, 2005 02:04:57 PM | Category: Canada

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