Magnetation files for Chapter 11 bankruptcy

July 2015 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

On 5 May, Magnetation LLC filed for Chapter 11 bankruptcy protection after reaching an agreement with the company’s large noteholders to “restructure the company’s balance sheet and provide liquidity to support long-term operations”. The company, based in Grand Rapids, Minnesota, owed its senior bondholders $425m.

Magnetation LLC, which is a joint venture between Magnetation Inc and AK Steel Corp, has fallen victim to the recent significant and unprecedented slump in global iron ore prices, as well as the heavy debt burden incurred via the expansion of its iron ore recovery plants. In its bankruptcy documentation, the company listed assets of around $500m, including three iron ore plants, a rail load-out facility and the proprietary technology and associated intellectual property involved in its trademark ‘magnetation process’, the company’s system which enables it to harvest iron ore concentrate from previously unsalvageable remnants of mineral rock. However, the firm also listed debt obligations of around $1bn, including a prepetition revolving credit agreement, senior secured notes, a tax increment financing agreement and a prepetition term loan. 2014 was a particularly difficult year for the company – in the fiscal year ending 31 December, Magnetation reported revenue of $96.2m but a net loss of about $16m, according to court documents.

Accordingly, the company and four of its subsidiaries voluntarily entered bankruptcy protection in the Bankruptcy Court in the District of Minnesota. The company has agreed, in principal, the terms of its reorganisation with its noteholders; however, the reorganisation is still pending the approval of the bankruptcy court. If implemented, the company’s restructuring scheme will see Magnetation secure $135m in debtor-in-possession (DIP) financing with which it will carry out its financial restructuring. The reorganisation will provide the company with $63.7m of incremental liquidity. The company has confirmed that all senior secured noteholders are eligible to participate pro rata in the DIP financing, pursuant to procedures filed with the Court. Magnetation’s DIP facility is derived from an agreement with more than 70 percent of the holders of its 11 percent senior secured notes, which are due in 2018.

“We are pleased to have reached an agreement with our noteholders on the terms of a balance sheet restructuring through a chapter 11 reorganisation,” said Magnetation chief executive Larry Lehtinen. “The significant decrease in global iron ore prices along with our existing capital structure has created a challenging business environment in the short term. The reorganisation process will create a more competitive and successful Company. We remain firmly committed to serving our customers and to being a good employer by maintaining safe, productive operations as we undertake this process. We appreciate the ongoing dedication of our employees, whose hard work is critical to the success and future of our Company.”

The company, despite the Chapter 11 filing, intends to continue to pay employee wages and provide healthcare and other benefits without interruption. Equally, the company’s suppliers and vendors will be paid in full under normal terms for all goods and services provided after 5 May. Furthermore, the company also expects its mining and pelletising operations, as well as customer shipments, to continue throughout the restructuring process.

Prior to the Chapter 11 filing, the company, which was formed in 2001, had been making efforts to restructure. At the time of writing, Magnetation employs around 361 workers, 335 at the company’s headquarters, and various other properties. In early 2015, the company announced the closure of its first and least competitive plant, Plant 1. The closure of the facility resulted in 41 layoffs, though many of those made redundant have subsequently been re-employed elsewhere by the firm.

Richard Summerfield