NEW YORK -- Kaiser Aluminum, owners of VALCO, battered by a heavy load of debt and low aluminum prices, is likely to file for bankruptcy protection this week, according to sources familiar with the situation.
Even if Kaiser files for bankruptcy it is expected to operate its smelters in Ghana and in the United Kingdom.
Kaiser is unlikely to be have enough cash to pay about $174 million in principal to its bond owners when this comes due on Friday, the sources said.
This is likely to leave North America's third largest aluminum producer with little alternative but to seek Chapter 11 protection in a U.S. bankruptcy court to help it stave off creditors while it seeks to restructure, they added.
The only possible savior would be a last-minute agreement from bond holders to restructure the debt payments. But on Monday the chance of this happening by end of the week appeared remote, the sources said.
The company, which declined to comment, was also unlikely to be able to raise fresh loans from the debt market. One analyst said, "Name me one person who would loan Kaiser $300 million when these guys can't even pay interest."
Talk of an impending bankruptcy comes at a time when the aluminum industry is being crippled by the recession, which has helped drive aluminum prices down. As a relatively high-cost producer saddled with debt weighted toward early repayment, Kaiser has been one the hardest hit.
"They are in terrible position, Their financial situation does not look good and they are not a low cost producer," said Lester Chin, an independent industry consultant.
Alarm bells on Kaiser have been ringing for a while but came to a head on Jan 30 when it said it was defaulting on a $25.5 million interest payment. The company has sought a 30-day grace period to pay the interest.
However, Kaiser has to either cough up $174 million by this Friday to its bond holders, file for Chapter 11 or face the ignominy of being driven into involuntary bankruptcy by its creditors.
By avoiding involuntary bankruptcy Kaiser would be able keep significant control over the proceedings.
The company is currently saddled with about a billion dollars in debts, out of which banks are owed $350 million while the rest is owed to bond holders. Kaiser is expected to pay $400 million due in February 2003, and $225 million due in October 2006.
While its shares are currently trading at just 50 cents after losing about two-thirds of their value in 2002, its bonds, due for payment in 2006 were trading at 70 cents on the dollar.
IN TROUBLE SINCE LATE 1970s
Founded after World War II by tycoon Henry Kaiser, the company first stepped into trouble in the late seventies when it tried to diversify into chemicals. The move was disastrous, gobbling up cash and raising the company's debt levels.
The company also made the mistake of not shutting down high-cost smelters early enough, said analysts.
Kaiser's Mead smelter in the Pacific Northwest has been lying idle since December 2000. If Kaiser files for Chapter 11 it would be able to delay restarting the smelter until 2003 and hence save on employee costs.
Even if Kaiser files for bankruptcy it is expected to operate its smelters in Ghana and in the United Kingdom. It would also continue to operate its alumina refineries in Australia The company has hired investment bank Lazard to help it restructure and some analysts believe Kaiser would be able to come out of its current mess with a proper plan. The worst scenario is a break-up leading to sale of smelter assets to other aluminum rivals.
Once bankruptcy is filed, Kaiser is expected either to restructure the debts into one new piece of debt with friendlier terms or to convert the debt into ownership in the company.
To finance its debt, Kaiser in the late 1980s and early 1990s was forced to sell off profitable assets. Unfortunately, it sold at the bottom of the cycle. MAXXAM Inc., a holding company run by Texas financier Charles Hurwitz, bought into the company in the late 1980s and has a 63 percent stake.
