Only eight months after Essar Steel Algoma Inc. renegotiated its debt to survive a slump in steel prices, bond investors and lenders are starting to question whether the efforts were enough.
Essar executed a debt exchange in November, eliminating $200 million in obligations and saving $47 million in annual interest payments. The new bonds and loans are trading at a discount as expectations for a rebound in steel prices fade.
The Sault Ste-Marie, Ontario-based steelmaker’s $375 million loan due in 2019 -- which has top claim to get fully paid out in case of a bankruptcy, has fallen to about 91 cents on the dollar from 102 cents when it was issued as part of the debt swap. Only 100 out of 3,317 dollar-denominated leveraged loans that have secondary market prices tracked by Bloomberg trade at less than 90 cents on the dollar.
“It’s not normal to see restructured debt trade at distressed levels so quickly following a restructuring,” said Barry Kupferberg, director of research at Trilogy Capital Management, which manages $200 million in New York. “The idea of a restructuring is to set up a capital structure that can withstand a wide variety of pricing scenarios. And this would suggest the company has a vulnerable capital structure.”
Kupferberg said this opens the possibility of another restructuring and his firm, which owned Algoma’s debt before and was paid out by the last restructuring, is considering buying the new debt too, now it’s fallen to discounted levels.
Algoma -- which has been in and out of bankruptcy twice before the latest restructuring -- lost money in 11 consecutive quarters, before posting a profit of C$52.9 million ($42.6 million) in the three months ended Sept. 30. The company declined to comment on speculation it will need more liquidity, citing forthcoming quarterly results, which will be released before month end, according to Brenda Stenta, a spokeswoman.
Essar Steel Algoma is part of India’s Essar Group, which has investments in steel, energy, infrastructure and services. Essar’s Indian subsidiary, Essar Steel India Ltd., is seeking to restructure part of its own approximately $6 billion in debt, Bloomberg reported last month.
The steelmaker pitched its recapitalization last year as coming at an auspicious time when costs for iron ore it uses were falling, while the price for its finished steel products was rising. Algoma also secured $466 million in new equity in November’s recapitalization.
Even though iron prices continued to decline since then, slowing demand in China, combined with a glut of producers, has meant prices for steel products have gone the same way, and even stayed down as ore rebounded the past two months.
Worse for Essar Algoma, the effect of lower steel prices is immediate, while the benefit of lower iron prices takes longer to work through its supply chain, said Jarrett Bilous, Standard & Poor’s lead analyst on Essar.
“After they completed their restructuring, prices started their significant and pretty steady decline,” Bilous said by phone from Toronto Tuesday. “The key risk is steel prices remaining near or even below current levels.”
The company’s third-quarter financial statements will be investors’ first look at the company’s balance sheet and cash reserves since November’s debt swap and recapitalization.
S&P rates the company CCC+ with a negative outlook, while Moody’s Investors Service has an equivalent rating with a stable outlook.
Algoma’s $375 million of bonds have fallen to about 88 cents on the dollar in recent weeks after climbing as high as 103 cents on the dollar in November.
The average price for similarly rated single-B U.S. dollar bonds fell below par last December, thought they have since climbed to 101 cents, according to Bank of America Merrill Lynch index data.
Slowing domestic growth in China has sent the world’s biggest steel producer looking for export markets just at a time when a strong U.S. dollar has made imports there more affordable. Those factors have combined to push the price for a ton of hot rolled steel, the commodity product used in cars and appliances, in the U.S. down to a six-year low in April, where it’s roughly stayed since.
“In the end an inefficient, higher-cost steel producer is either going to continue to restructure until they are no longer higher-cost, or they go away,” said Barry Allan, chief investment officer and founder of high-yield investor Marret Asset Management Inc. in Toronto, who held Algoma’s debt seven years ago. Algoma’s “just a serial restructuring candidate,” Allan said.