Mr. Fix-it

By Paul Brent
Photograph: Paul Orenstein

As turnaround cases go, saving Stelco was unique. But for Hap Stephen, corporate Canada’s surgeon, it was all part of the restructuring game he’s mastered after three decades of saving companies

It was the Santa Claus parade in 2005: a line of buses wound its way through the parade route as the traditional kickoff to the 100-year-old event. While the buses did not carry the man in the red suit, they got almost as raucous a welcome as they contained hundreds of celebrity clowns, high-profile Torontonians who paid for the privilege of dressing up and leading the parade. But not all the clowns were leaning out the windows, mugging for the expectant crowds lining the route.

One of them, incongruously huddled over a cellphone, was straining to participate in a crucial Sunday morning conference call with the board of directors of embattled Stelco Inc. The Hamilton steelmaker was struggling to emerge from a marathon bout of bankruptcy protection and Hap Stephen, clown suit and all, was Stelco’s chief restructuring officer.

For more than three decades, Stephen has made a very good living saving companies from themselves. As Canada’s pre-eminent corporate restructuring specialist, he’s brought back to life the likes of retailer Dylex Ltd., Algoma Steel Inc. (twice) and the most recent Stelco.

Stephen’s two-person firm, Stonecrest Capital Inc., pocketed more than $4.1 million in fees asa reward for refloating Stelco, a sum that drew criticism in some labour circles when it was reported last year.

An avid runner with a trim build that belies his 60 years, Stephen needed to be something of a marathon man on his latest big restructuring. Rescuing Stelco turned out to be a lot longer and more complicated than expected. Instead of the anticipated nine-month to one-year turnaround from insolvency to re-emergence from creditor protection, the process took well over two years. Stelco entered Companies’ Creditors Arrangement Act (CCAA) protection in January 2004 and did not re-emerge until March 2006. As chief corporate surgeon, his biggest headache was that the patient kept rising from the deathbed and insisting it was feeling fine.

Stelco sought creditor protection from an Ontario court in 2004 as new low-cost competitors, spiraling energy, raw-material and pension costs made Stelco less competitive. Added to that, it laboured under heavy debts and faced pension liabilities of about $2 billion for its 21,500 active and retired workers.

Stephen will not say it, but corporate Canada’s Mr. Fix-It likely earned every cent of his fees. Saving Stelco was an all-consuming job: not much time off for more than a year and endless cycles of evening and weekend conference calls.

Just months into the court-protected restructuring process, the worst thing possible happened, at least from the perspective of the chief restructuring officer. As worldwide prices for steel doubled, Stelco started making money. “[Steel] prices jumped, the company started to make a little profit, kick off a bit of cash,” says Stephen. “But it wasn’t making any dent whatsoever in the pension liabilities, post-retirement medical liabilities or dealing with the capital it needed to raise for needed major improvements in the plants to get some efficiencies. Everybody got overly optimistic and greedy about how much they could get out of it.”

Besides such inconvenient bouts of profitability, it was a unique turnaround case thanks to the crowded cast of characters: three local chapters of one union on two sides of the border that could not agree on a common approach besides their mutual enmity for the steel company, a provincial government that was ultimately on the hook for a substantial portion of those pension billions should Stelco fail; plus the usual cast of directors, management, bondholders, convertible debtholders and equity owners. “It becomes exponentially more complex every time you add another party to those types of negotiations,” says Stephen.

Dealing with the expectations and demands of the various groups made this restructuring one of the most exasperating in Stephen’s career. Would he do the Stelco job again? “I would have to think pretty hard about it,” he says. With the Stelco pie growing, rather than shrinking as in most court-ordered restructurings, the expanding cast of creditors, unions and government officials were all looking to maximize their share of Stelco’s newfound bounty as world steel prices soared. “Unfortunately in these situations everybody is more concerned about what others are not giving as opposed to what they are [giving].”

Stelco’s rising fortunes proved particularly troublesome with its various unions. Even though executives made it clear the company’s improved financial situation made it unlikely it would ask for pension or salary concessions, hostility and suspicion dogged the process. “The union started to say, ‘Hey, well wait a minute, we want more. We want more into the pension, and we want this.’ ”

While Stephen’s CA training is invaluable when it comes to breaking down balance sheets and assessing corporate cash flows, observers say his unflappable personality and resolute good humour are his best attributes. John Caldwell, president and CEO of SMTC Manufacturing Corp. and a former Stelco director and restructuring specialist who recommended Stephen as chief restructuring officer, describes his colleague as calm under very stressful situations. “Never loses his cool. He has a very quick wit and he is very quick to remember things,” Caldwell says, “and he is just an easy guy to get along with. You’d think in a job like his, it would be easy to make enemies; don’t think he has many, actually.”

Stephen’s affability and reputation as a no-nonsense straight shooter did not allow him to rise above suspicion and hostility from Stelco’s unions. Angry at perceived mismanagement of the steel giant — neighbouring Dofasco was prospering while Stelco was limping under CCAA — the unions’ hostility was often directed at the restructuring architect. “The labour-management relations were pretty poisoned,” says Judge James Farley of Ontario Superior Court of Justice, who presided over Stelco’s fate for the “two years, two months, and two days” that it was under his court’s protection. “The courts have hammered away that officers of the court have to be objective and neutral and Hap was that, but I’m not sure the union saw him that way.”

With Stelco now making money as it was crying poor, Stephen’s job changed. There was little or no chance of Stelco succeeding if it did not make painful cuts and unit selloffs typically involved in court-ordered restructurings. “Hap had to shift gears from what I’ll call a traditional operation restructuring, which would have costs taken out and union concessions, to the opposite, which was how do you carve up an ever-increasing pie as opposed to a decreasing one,” says Caldwell. “Therein lies the real complexity and the real frustration of the Stelco file.”

But Stelco was proving frustrating for all parties. Though it had backed off demands for union concessions, the suddenly prof-itable steelmaker could not just exit from the court-sponsored protection of the CCAA. By declaring insolvency and seeking relief from creditors, it had put aside more than $550 million in stayed obligations, which would come due if Stelco emerged from protection.

With rising steel prices, feuding unions, ever-increasing demands and no real sense of urgency, Stephen found an ally in Justice Farley to try to end Stelco’s circus act. With 15 years on the bench handling the court-supervised restructurings of the likes of Algoma, Laidlaw and Air Canada, Farley was not only a legend in legal circles for his contribution to restructuring law but for his acerbic wit and periodic dressing down of the lawyers before him. Stelco was the last major case before Farley and it was delaying his planned retirement and appointments with the golf course. “With global warming, there’s a great concern about the disappearance of glaciers, but I think we can report to the world that glaciers are alive and well at Stelco,” Farley said in court near the end of Stelco’s CCAA process.

“I’m an unabashed fan of Farley,” says Courtney Pratt, Stelco’s CEO during the CCAA restructuring. “Because we started to make money, there were no natural dead-lines to get things done. One of Farley’s huge contributions was creating deadlineswhen there were none and getting people to the table and getting them to come to final decisions. “In the end, more than two years and $100 million worth of lawyers, advisers and consulting fees, the 97-year-old steelmaker emerged from court protection with fewer plants, 1,500 fewer workers, new management and a new ownership group. The one clear loser from the Stelco restructuring was its shareholders, who saw their holdings wiped out. That fate had been predicted by management at the start of the restructuring process, though it did not stop speculators from buying and selling shares, just as investors did in the case of Air Canada.

The unhappy ride for shareholders means Stephen has his share of detractors. “The process was abused,” said Murray Pollitt of Pollitt & Co., a Toronto-based stockbroker who represented some of the major Stelco shareholders and unsuccessfully opposed the restructuring. “As a Canadian, I was appalled that [the wipeout of shareholders] can take place. Stelco should never have been put into CCAA protection; CCAA was not designed to transfer wealth from one group to another, which is effectively what has happened.”

“There was an abuse of process,” Pollitt says. “That my clients lost all their money is irrelevant in [Stelco’s and Stephen’s] view.”

Stelco’s workout was less ambitious when compared with what US steel companies have managed under Chapter 11 restructurings. There were no massive layoffs or plant closures. Stelco did not cut union wages or the pension, retaining its $1.3-billion pension legacy. The Ontario government has lent the company $150 million at an annual interest rate of 1% until 2015. It will forgive 75% of the loan if Stelco wipes out its pension deficit by then.

Under the court-approved plan, Stelco made a $400-million payment in 2006 into its pension deficit and is required to make annual payments over a decade. Stelco cannotmake dividend payments until its deficit is eliminated, and a large part of its aging operations still require upgrading. Pratt, replaced as CEO by International Steel Group Inc. executive Rodney Mott, remains as chairman, and Stelco’s fate is now controlled by Tricap Management Ltd., a restructuring fund run by Toronto-based Brookfield Asset Management, which owns approximately one-third of the steelmaker’s new shares. Two other investment firms together hold another third of Stelco’s equity.

Even Stephen, the man at the center of the reorganization, is less than thrilled with the newly forged company. “Was it restructured to the degree that I think it should be? No,” he says simply. “Hopefully, they have got enough capital and stability and time and markets hold that they can carry on and turn it into a successful company.”

If Stelco was a semi-successful process, Stephen would put Algoma at the head of the list of less-qualified. The Sault Ste. Marie,Ont.-based steelmaker re-emerged from creditor protection in 2002 after eight months under CCAA, an eye blink compared with Stelco. Stephen’s payout from Algoma, reported in proxy circular documents, amounted to $585,000 in the form of $65,000 as an initial fee and $65,000 paid each month plus a final $1-million success fee to Stonecrest Capital. “The way our compensation is, it is obviously very heavily weighted to success, so the longer it takes the worse [it is],” says Stephen.

After more than three decades and dozens of restructurings under his belt with their attendant payouts, Stephen may well be one of the country’s best-paid CAs. He could afford to retire any time, but “I’d get bored,” he says, admitting he’s addict-ed to the excitement of the dealmaking and wrangling that comes with the restructur-ing game. “I couldn’t play golf all the time.I enjoy it, but I’m not very good at it.” Stephen recently joined the exclusive Toronto Golf Club: “I wasn’t able to blackball him,” jokes Farley, a fellow club member.

Born in Halifax at the end of the Second World War, where his father was in the Navy and died when Stephen was nine-months old, he was raised by his mother in Windsor, Ont. Accounting was not his first career choice: he wanted to be an engineer but was put off by the studying it would entail. Instead, he pursued his CA designation. “I won the gold medal when I got my CA,” he says, which is the only time he makes a claim that can be characterized as remotely boastful. After getting his CA in 1970, he packed up and went to France where he worked primarily on mergers and acquisitions. A few years later, the family moved back to Canada and Stephen took a job at Clarkson Gordon (which later became Ernst & Young). He soon became part of the firm’s insolvency practice, a role he says suits his personality because of its problem-solving and future orientation, rather than auditing, which is more focused on a firm’s past.

“I would have to say it is not for everybody,” Stephen says of insolvency work. “You’ve got to roll with the punches because you are going to get a lot of abuse. I think the other thing that is difficult for CAs who are in the auditing or the tax area is that for them to make a mistake is soul destroying. In this field, you are going to make a lot of mistakes because you are going to be forced to make decisions with little time to consider them [and make] recommendations or take actions when you don’t have all the facts and you’re under a time pressure.”

“A lot of people found it very difficult,” he says. So his advice to anyone looking to get into restructuring? “You are going to screw up, so understand that you are going to make some big mistakes and you are going to have to live with them.”

Stephen’s other area of restructuring has been retailing: he headed Dylex Ltd.’s 1995 CCAA restructuring, serving as the court-appointed monitor while at Ernst & Young. He was also part of two restructurings at T. Eaton Co. Ltd. The first was in 1997, when he was named monitor of the family owned department store chain while it was under CCAA court protection. At first glance, the Eaton’s reorganization of $450 million owed to banks, landlords and supplier creditors and some asset sales was an unqualified success: creditors received 100% recovery, the pension surplus was accessed and was shared by employees and retirees, and the proud Eaton family retained control of the company.

Stephen left Ernst & Young in 1997, wherehe had been president of the restructuring arm since 1985, to join the reinvigorated Eaton’s as chief financial officer. It was to be his first corporate management post.

“They seduced me with things like part ownership of the company,” says Stephen. An initial public offering soon followed, raising $166 million, which quickly proved to be too little to keep the retailer going. “The lesson I learned was you don’t win a discount price war with someone who is six times bigger,” referring to HBC’s Bay chain. The two embarked on a bitter and lengthy price war, with Sears Canada Inc. involved to a lesser degree. (HBC had additional incentive, given its former CEO, George Kosich, had come out of retirement to head Eaton’s and poached two senior HBC executives.)

Just a year later, Eaton’s ran out of money.It sought creditor protection and many of its operations were sold to Sears and the rest liquidated. Until hours before Eaton’s sought protection, its CFO believed there was a solution. Eaton’s had been working on a deal to sell the company to US-based Federated Department Stores Inc., only to have the US retailer pull out at the last minute.

“People do not realize we had a deal that was on the verge of being signed before the company had to file,” Stephen says.

Perhaps it’s just post-Stelco syndrome, but Stephen hopes to focus Stonecrest more on the investment side of the business, advising potential investors looking at distressed companies and giving guidance to creditor groups during restructurings, as opposed to the large, public restructurings he has been doing, although the firm will continue to handle these restructurings.

He is also putting his money where his mouth is: “We would invest in some things that people would think are pretty odd.”

But if Stephen is successful in his quest of moving from chief restructuring officer, his absence will be noted. “He really is unique in the marketplace,” says Caldwell. “If Hap were to retire, is there a logical successor in the market that would step into his role? No, not right now.”

Paul Brent is a Toronto-based freelance writer