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Ormet files for Ch. 11, agrees to sale

Keywords: Tags  Ormet, bankruptcy protection, Chapter 11, Michael Tanchuk, Wayzata Investment Partners, Smelter Acquisition, USW, David McCall power


CHICAGO — Ormet Corp. has filed for Chapter 11 bankruptcy protection, citing high legacy and power costs and low aluminum prices.

The Hannibal, Ohio-based primary aluminum producer also said it had entered an agreement to be acquired by a company owned by private equity firm Wayzata (Minn.) Investment Partners LLC as it looks to restructure and re-emerge from bankruptcy with a better cost structure.

"This is an organized step to reduce our costs ... so it is a good thing for Ormet and a positive thing for employees, long term—but not easy," Ormet president and chief executive officer Michael F. Tanchuk told AMM Feb. 26.

Ormet has assets of $406.8 million and total liabilities of $416 million, according to documents filed Feb. 25 in U.S. bankruptcy court in Delaware.

"Ormet has done everything possible during very difficult financial times to pay its debt and legacy obligations," Tanchuk said in a statement Feb. 25. "However, with a low metal price and higher power costs, we no longer have the financial liquidity to continue to do this."

The company has been working hard at lowering its costs and has been successful in many cases, Tanchuk told AMM. "But there are some aspects of our costs, like our legacy liabilities ... that we have to deal with in court," he added.

The bankruptcy filing, announced late Feb. 25, comes at the same time that Ormet agreed to enter a deal to be acquired by Smelter Acquisition LLC, which is owned by Wayzata.

Affiliates of Wayzata own at least 5 percent of Ormet, according to court documents.

The deal is subject to court approval and faces the possibility of a higher bidder emerging during the bankruptcy process, Ormet said. In addition, the agreement hinges on other conditions, including amendments to Ormet’s electric power and collective bargaining agreements, the company said.

Ormet has received $90 million in debtor-in-possession (DIP) financing, including $30 million in term financing from Wayzata and a $60-million facility from Wells Fargo.

With that financing, suppliers should be paid for all goods and services, and customers should continue to receive product, the company said.

Ormet’s legacy costs would not be assumed by a buyer, the company said, noting that the purchase price it might fetch isn’t expected to be enough "to provide any recovery to the company’s shareholders."

Ormet’s shares closed at 4.5 cents apiece in over the counter trading Feb. 26, down 90 percent from the previous day’s close at 45 cents per share.

The company listed its total number of credits at between 1,000 and 5,000, according to court documents. The top three unsecured creditors are the Ormet Pension Plan, owed $143 million; the Ormet Hannibal Hourly Voluntary Employees Beneficiary Association plan ($48.4 million); and utility American Electric Power Co. Inc., Columbus, Ohio ($33.3 million).

Other unsecured creditors include Chalco Henan International Trading Co. Ltd., Zhengzhou, China, owed $4.65 million; Jinan Aohai Carbon Products Co. Ltd., Jinan City, China, owed $1.55 million; and Hydro Aluminum International SA, Lausanne, Switzerland, owed $560,000, according to court documents.

The United Steelworkers union said it had been in contact with Ormet about the Chapter 11 filing beforehand but wasn’t able to discuss it earlier because of confidentiality concerns, according to a Feb. 25 notice to union members signed by USW District 1 director David McCall. District 1 represents union members in Ohio.

The USW expects the current bankruptcy process to be different from a previous one in 2004 that saw an attempt to implement a contract with "huge" wage and benefit reductions and resulted in a 20-month strike, McCall said.

"The proposed buyer has agreed to assume our existing CBA (collective bargaining agreement), with certain changes," he said, noting that the union did not expect changes to wages, health care, vacation or seniority policies.

Ormet has sought court approval to continue to pay employees wages, salaries and benefits, it said.

Rising power costs have been an ongoing problem for Ormet. "When we see raises in our (power) rates, our costs go up significantly because (consuming power) is such a big part of what we do," Tanchuk told AMM.

Ormet was granted a deferral on about $27 million in power bills in October (amm.com, Oct. 17).

The company hopes to emerge from the process in a better position to take advantage of what should be a bright future for aluminum, according to Tanchuk.

"I think (aluminum prices) are at the bottom," he said. "I’ve been in the aluminum business for a long time, and it’s the best time in my career for aluminum. The growth side of it, the consumption side of it, is tremendous—especially in transportation."

That means prices will likely rise going forward, although exactly when that happens will depend on when sentiment about growth in the sector changes, Tanchuk said. "It could take time. ... But it can also happen very quickly because there is some huge volatility in this market," he said.

But for now prices are down, with the cash primary aluminum contract on the London Metal Exchange ending the official session at $1,971 per tonne Feb. 26, down a little more than 5 percent from $2,075.50 per tonne Feb. 19.


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