Stelco: Ontario Provides Example of General Welfare Principle In Bankruptcy Reorganization
by Paul Gallagher
Nov. 28, 2005 (EIRNS)The final agreement of all parties in ending the bankruptcy of Canada's national steel company Stelco, announced on Nov. 28, reorganizes the company in such a way as to protect the general welfare as called for in Ontario provincial legislation, and sets a standard for what Congress and the Pension Benefit Guarantee Corporation (PBGC) could do with bankruptcy reorganization. The outcome is in direct contrast to use of bankruptcy courts to dismember companies and eliminate employee contracts in the United States.
After two years in bankruptcy (brought on by a very large pension-plan deficit), Stelco will be reorganized with no cuts in wages or benefits imposed. The company is being taken over by a division of Brascan. Crucially, the Province of Ontario is making a $150 million, very soft loan to Stelco, raised from $100 million in earlier negotiations. Ontario also acted legislatively, in 2004, to require annual pension contributions from firms with defined-benefit pension plans. Acting on this, the Ottawa bankruptcy court is requiring the reorganized Stelco to make an immediate down payment of $400 million into its pension plans' $1.3 billion funding deficit. After six months' grace period, it must make at least $5.4 million/month pension contributions; after 2010, at least $5.9 million/month. The pension plan is to be fully funded by 2015.
The firm's bond creditors, after considerable earlier resistance, finally appear to have accepted 70-75 cents on the dollar of debt they hold. The shareholders of Stelco stock are getting nothing at all.
USWA unions representing the 11,000 Stelco employees were part of the negotiations and agreement, which is expected to be finalized by the company's board on Dec. 2, allowing it to exit bankruptcy on Jan. 1, 2006.
If the PBGC adopted the strategy of Ontario in a case like this, it would choose to "loan"actually contribute$150 million; and it would thus avoid having about $1 billion in pension obligations dumped on it.