KKR Stalks Essar Steel as Default Looms: Canada Credit

KKR & Co. and at least two other investors have purchased debt of Essar Steel Algoma Inc. as the company heads for a possible restructuring later this month, according to two people with knowledge of the situation.

Algoma skipped a June 15 interest payment on its $384.7 million of 9.875 percent bonds due June 2015, a move that will trigger a default in 30 days if left unpaid. KKR, Bain Capital LLC’s debt-investing group Sankaty Advisors LLC and Loomis Sayles & Co. have taken positions in those securities, said the people, who asked not to be identified, citing lack of authorization to speak publicly.

The steel manufacturer, which Standard & Poor’s signaled was at “high risk” of a distressed-debt swap on its more-than $1 billion of obligations, has lost money in nine consecutive quarters as it’s struggled amid industry overcapacity and competition from cheap imports. While Essar Global Ltd., its Mumbai-based parent, helped the unit survive over the last year, it didn’t provide support ahead of last month’s coupon payment.

“The parent company is having questions over whether they want to continue to inject cash,” Andrew Feltus, director of high yield who helps oversee $38 billion in fixed-income assets at Pioneer Investment Management Inc. in Boston, said in a June 30 telephone interview. Pioneer sold its holdings of Algoma’s unsecured debt and still has a position in the unit’s $400 million of 9.375 percent first-lien bonds due in March, he said.

Confidential Negotiations

The 9.875 percent unsecured notes were quoted at 65.4 cents on the dollar yesterday to yield 64.6 percent, according to prices compiled by Bloomberg. That’s down from 72.3 cents on March 5.

Algoma has entered into confidential negotiations with holders of both sets of notes in an effort to refinance or to rework the capital structure of the company, according to a June 16 statement from the company. A distressed-debt swap is when a company exchanges news securities for old in an attempt to reduce debt.

Brenda Stenta, a spokeswoman for Sault Ste. Marie, Ontario-based Algoma, declined to comment. Spokespeople at Bain, KKR and Loomis Sayles all declined to comment.

KKR, Sankaty and Loomis hired advisers Lazard Ltd. and Paul Weiss Rifkind Wharton & Garrison LLP to negotiate with Algoma on their behalf, according to three people with knowledge of the talks. Toronto-based law firm Goodmans LLP is advising the unsecured bondholder group, according to the firm’s spokeswoman Lindsay Everitt.

Global Glut

Clare Pickett, a spokeswoman for Lazard, and Lisa Green, a spokeswoman for Paul Weiss, declined to comment.

Algoma lost $38.6 million in the three months ended Dec. 31, the latest reported miss in a string of losses that started in the third quarter of 2012, Bloomberg data show.

The price of iron ore, the basis for the principal ingredient in steel, delivered to China fell for six straight months and reached $93.80 per dry metric ton on June 30, close to its lowest level since September 2012, as rising supplies from Australia and Brazil spur a global glut. Goldman Sachs Group Inc. said in May that the global seaborne iron ore surplus will probably be bigger than forecast next year as steel production slows in China.

The North American steel industry has suffered from global overcapacity since the financial crisis. Pittsburgh-based U.S. Steel, the country’s largest producer of the metal by volume, said Oct. 30 it will permanently close parts of plants in the U.S. and Canada as it tries to reduce costs after four unprofitable quarters.

‘Challenged Industry’

“This is a company that’s still in a somewhat challenged industry,” Carol Cowan, a senior credit officer at Moody’s Investors Service, said in a telephone interview. “Prices have been very volatile. They’re still struggling to recover from the downturn in 2008.”

Moody’s rates Algoma Caa1 while S&P grades it CCC-, which indicates the company is vulnerable to nonpayment and may not be able to meet its financial obligations. S&P analysts think the missed interest payment may lead to a “significant refinancing or a general default,” according to a June 26 rating report.

“They don’t have the ability to restructure business costs when prices weaken,” Barry Allan, chief investment officer and founder of high-yield investor Marret Asset Management Inc. in Toronto, said in a telephone interview.

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