94 DoCAs Arrium’s only option: Korda Mentha

Having absorbed the enormity of the shambles that is Arrium Mining and Materials (Arrium), voluntary administrators (VAs) Korda Mentha are proposing that the sale of the steel maker and iron ore miner be facilitated through no less than 94 Deeds of Company Arrangement (DoCAs).

To this end the VAs have applied to the Federal Court for orders and directions to facilitate putting the proposal to creditors.

In his supporting affidavit filed on October 21 Korda Mentha partner Bryan Webster explains how Arrium’s size and complex corporate structure – whereby liabilities contaminate multiple entities via deeds of cross guarantee – makes the businesses difficult to sell.

“When we first sought an extension of the convening period we did not fully appreciate the difficulties we would encounter in seeking to establish a clean and functional process to sell or realise the Whyalla and East Coast Steel Business,” he said.

“…. after a more detailed analysis we formed the view that it may not be practical to sell those businesses or their assets because of their size, location and the number of supplier contracts and customer contracts that would need to be assigned to a new purchaser of them.”

Webster said the Arrium Group has approximately 30,000 customers and 10,000 suppliers and that based on Korda Mentha’s experience, “we estimate that the transfer of the numerous customer and supplier agreements may take in excess of six months to complete and may create uncertainty, which is unattractive to a potential bidder.”

He also pointed to the limitations applying to voluntary administrators as further reason why the court should endorse the orders sought, which deal with procedural matters relating to voting and the consolidated report to creditors.

“We cannot undertake the sale of the Arrium Sales Entities as Voluntary Administrators because we may be unable to move assets into and out of the entities and we do not have a power to extinguish, novate or release debts,” Webster said.

“We concluded that the only way to maximise the value of the Arrium Sales Entities was to enter into DoCAs that provided the flexibility and powers to meet the requirements of the bidders.

“The DoCA structure is designed to provide the flexibility to bidders to acquire particular Arrium Group businesses, including by allowing assets, employees and liabilities to be moved between the Arrium Group Administration Companies and empowering the administrators to extinguish creditors’ debts and claims or novate them.”

Judgment on the application is due today and no doubt VAs Mark Mentha, Cassandra Matthews, Martin Madden and Webster will be sweating all goes to plan. Tomorrow a trial is due to commence in relation to the pre-appointment finance provided to Arrium by GSO Capital Finance, which was discharged by a hastily arranged $100 million secured finance facility from the big four banks, who are collectively on the hook for almost $1 billion unsecured.

Further reading: Comment: Flock Of DoCAs To Enable Arrium Deal