Arrium's Moly-Cop was at risk of destruction by Morgan Stanley action
http://www.copyright link/content/dam/images/g/o/5/r/y/d/image.related.afrArticleLead.620x350.gobg38.png/1461248310259.jpg <img src="/content/dam/images/g/o/5/r/y/d/image.related.afrArticleLead.620x350.gobg38.png/1461248310259.jpg" alt="Mark Mentha, administrator of Arrium, said legal action by Morgan Stanley could have dire consequences." width="620" height="350" class="lazy620x350"/>
Mark Mentha, administrator of Arrium, said legal action by Morgan Stanley could have dire consequences. Luis Ascui
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by
Tim Binsted
Morgan Stanley's legal action against the collapsed Arrium group threatened to force Arrium's highly profitable Moly-Cop business into administration, destroying up to $500 million of value for creditors owed a combined $4 billion.
An affidavit filed by Arrium administrator Mark Mentha of KordaMentha in the Federal Court on April 18 which has been obtained by
The Australian Financial Review details Morgan Stanley's aggressive pursuit of its debts and the potential consequences for the banks, suppliers and thousands of employees owed billions by Arrium.
Morgan Stanley Bank NA filed action in the Delaware Chancery Court last week seeking orders that Arrium and its subsidiary companies must repay a $US75.4 million ($96.5 million) credit facility the US bank provided in 2013.
In response
KordaMentha launched urgent legal action to stymie the bank's move. Morgan Stanley and KordaMentha on Monday struck a deal to stay legal action and the US bank subsequently agreed to join the committee of creditors established at the first creditors' meeting on Tuesday, suggesting the warring parties have made their peace.
The parties are understood to be working together but the matter is still scheduled to be heard next week by Justice Jennifer Davies.
Mr Mentha said on Thursday the dispute had been largely resolved.
Morgan Stanley declined to comment, citing confidentiality agreements.
Threat of insolvency
After Arrium fell into voluntary administration on April 7 Morgan Stanley sent letters to Arrium's initial (but subsequently removed) administrators Grant Thornton demanding immediate payment in full.
Morgan Stanley solicitors Quinn Emanuel ignored phone calls from then Arrium lawyers Herbert Smith Freehills requesting a short-term forbearance before refusing the request.
On April 12, Quinn Emanuel sent another letter to Freehills noting payment had not been received and signalling Morgan Stanley's intent to charge default interest on outstanding payments.
Subsequent letters to Arrium acting treasurer Sarah Pearce on April 12 and April 13 threatened to push Moly-Cop into insolvency.
In total, 94 Arrium entities associated with its steel and iron ore divisions are in voluntary administration. The Moly-Cop entities, which generated $211 million of Arrium's total $371 million group earnings in 2014-15, are not in administration.
Morgan Stanley did not set out to derail the administration, its bilateral loan was made by an offshore part of the bank and its primary engagement was with Moly-Cop entities, but its letters of demand set the hares running among Moly-Cop executives who were concerned about the solvency of their operations and wanted urgent legal advice.
The administrators have allowed Moly-Cop to run on a business-as-usual basis to preserve the economic value of the assets in the event of a sale.
KordaMentha is Moly-Cop's shareholder and can exercise control by changing the businesses' local boards and leadership but if Morgan Stanley were to enforce its claims against Moly-Cop it could force those businesses into local bankruptcies in other countries.
"In the absence of relief being granted by this court limiting Morgan Stanley's power to take steps to enforce its guarantee ... the Moly-Cop entities which received the demands would need to consider their own solvency position and may seek formal bankruptcy protection in their own jurisdictions," Mr Mentha submitted to the court.
"If Morgan Stanley continues to pursue its strategy of seeking immediate payment ... I expect that the other Arrium lenders will not agree to any ongoing standstill arrangements with the result that the entire $2.8 billion unsecured debt owed the lender group and the noteholders will fall due. Should that happen, the Moly-Cop entities will almost certainly fail and enter insolvency proceedings in the various jurisdictions in which they are domiciled."
KordaMentha warned that a "premature, unplanned formal insolvency process" would "seriously jeopardise" the administration.
The insolvency firm said confidential reports, discussions with Grant Thornton and its own work indicate that formal insolvency of Moly-Cop would "negatively impact the realisable value of the Moly-Cop business by an amount in excess of $500 million".
Creditors stand in line
The loss of $500 million in value would rip a huge piece of the pie from creditors standing in line for their part of the $4 billion Arrium owes.
"An uncontrolled failure of the Moly-Cop Entities will severely prejudice our ability to sell or recapitalise the whole of the Arrium group. In turn, this may adversely affect the creditors and stakeholders of the Key Arrium Administration Entities," KordaMentha submitted.
These creditors and stakeholders include the township of Whyalla in South Australia, which depends upon Arrium for 30 per cent of its employment; the State Government of South Australia; Arrium lenders who are owed $2.8 billion; trade creditors owed about $1 billion and employees.
Arrium employs about 8000 people globally. The 6000 Australian employees are owed approximately $627 million.
Around $400 million of the employee entitlements would fall due in the event of termination.
The unsecured finance debt is comprised of $2.2 billion under syndicated facility agreements, $309 million under bilateral facility agreements and $263.5 million under US private placement notes.
KordaMentha estimates that "contingent claims" that may be brought against the Arrium group range from $650 million to $1.2 billion.
The administrator is currently negotiating with US vulture fund GSO to resolve $US100 million of secured finance debt incurred under an interim facility established when GSO struck a $1.2 billion rescue package with Arrium that was rejected by the banks.
The matter is set to be heard by Justice Davies in the Federal Court on April 26.
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