Essar Steel Minnesota LLC files for Chapter 11

September 2016 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

In a bid to preserve its $2bn investment in a state-of-the-art steel plant, Essar Steel Minnesota LLC (ESML) and its immediate parent, ESML Holdings, Inc., have filed for Chapter 11 protection.

According to the court filing in the District of Delaware, ESML’s assets and liabilities are estimated to be worth between $1bn and $10bn. The filing in Delaware is part of an effort by ESML to complete its 7 MTPA iron ore mining and pellet making facility which is under construction in northern Minnesota (the aforementioned $2bn steel plant).

However, the project has been suspended since the end of last year, when ESML found that it was unable to secure the additional funding needed to finish construction and commence production. ESML’s financial difficulties then prompted Minnesota governor Mark Dayton to cancel ESML’s leases to mine iron after it missed a deadline to complete the construction of its taconite pellet production facility.

“The company (ESML) has been told that the State would not extend those leases beyond 1 July 2016 unless it paid the full amounts it owed to Minnesota contractors and showed that it had the ability to carry its current construction project through to completion,” said Mr Dayton. “The company has not done so, and has provided no reliable assurances that it will be able to do so in the foreseeable future.”

Following the action taken by Mr Dayton, ESML took the decision to file for Chapter 11.

Prior to the filing, ESML entered into a non-binding letter of intent (LOI) with SPL Advisors LLC which set the terms under which SPL would invest or arrange as much as $250m of new equity capital in exchange for an ownership stake in ESML of at least 80 percent. It is believed that the investment would be conditioned upon a successful restructuring of ESML’s existing high-cost debt and obtaining new debt financing in an estimated amount of $650m.

As part of the restructuring process, ESML has appointed a new CEO in the form of Matthew Stock, an industry veteran who replaces previous CEO, Madhu Vuppuluri, with immediate effect.

“SPL sees this as a tremendous opportunity for all parties,” said John-Michael Lind, a principal at SPL. “We are committed to providing the capital and strategic leadership needed to complete this historic project for northeastern Minnesota.”

In light of the Chapter 11 filing, ESML and SPL Advisors are continuing to work on terms pursuant to which the interim loan package would be converted into a DIP financing that would provide ESML with the liquidity needed to fund ongoing operations while in Chapter 11.

“While we would have preferred to complete the company’s restructuring without utilising Chapter 11, we believe that SPL is the right party to carry this project through to completion and remain committed to doing everything possible to complete the process with SPL coming on as the new controlling shareholder of ESML with as little additional expense and delay as possible,” said Prashant Ruia of Essar Global Funds, the current parent of ESML and a member of ESML’s board.

Mr Ruia continued: “In that regard, we are optimistic that the financial transactions envisioned by the SPL LOI can be fully negotiated by year-end. Despite our current differences, we remain grateful to the State of Minnesota for all it has done to support our investment here during difficult times in the steel industry and we remain confident that our shared objectives will ultimately bring us to an amicable and mutually beneficial outcome.”

While ESML’s Chapter 11 proceedings continue, governor Dayton has confirmed that Lourenco Goncalves, chief executive of mining company Cliffs Natural Resources, has expressed a desire to complete the steel plant project begun by ESML.

Fraser Tennant