Liberty sold some Ostrava emissions allowances in 2020

Liberty Steel's Ostrava plant in the Czech Republic sold around 1mn carbon emissions allowances in the first quarter of last year, according to sources with knowledge of the situation.

The sales process started in the fourth quarter of 2019, before Covid-19 took hold, as Liberty Steel Europe looked to generate cash to repay creditors, including Greensill. The sales would have required discussion and approval from Greensill, which had charges over some allowances, although not those of Ostrava.

Ostrava has also been under pressure not to transfer any surplus allowances to Liberty's Galati plant in Romania, although sources close to the company suggest this has already happened.

Unions oppose any transfer and point out that proceeds from emissions allowance sales are ring-fenced for modernisation of the Ostrava site. "Allowances in the amount of over 5mn pieces at a price of around €40/t are currently the last capital left for the Ostrava steelworks after less than two years of operation in the Liberty Steel Group. In addition, the use of emissions allowances for the modernisation of the smelter is part of the Liberty Group's agreement with our organisation, concluded at the time of purchase, which is also referred to in the memorandum of understanding between Liberty and the ministry of industry and trade of the Czech Republic," union OS KOVO said. Liberty's eastern European plants have gone from being debt-free when purchased from ArcelorMittal to a debt level of €2.8bn, the union said. In documents obtained by Argus last month, Liberty restructuring advisors said Liberty Steel Eastern Europe — encompassing Galati and Ostrava — had an equity value of minus $1.6bn.

Liberty initially sold a substantial portion of its Galati allowances in a repurchase deal last year, but unwound the buy leg to avoid paying margin as prices slipped, and did not have the cash or necessary credit lines to re-establish the purchase going forward. Employees involved in the sale repeatedly recommended buying back credits once the price approached a low of €15-16/t, as they expected the price to increase. The Galati sales were originally completed at around €23/t, well below the current prompt price of over €44/t, at which the company would need to buy back. Typically in repurchase agreements, which Liberty originally entered into for Galati, the premium for the repurchase price is essentially the interest charged by the lender. Based on the price that Liberty sold at — and might need to repurchase at after exiting the repo trade, if it has not done so already — it is paying an interest rate of over 90pc.

British Steel went into liquidation under its previous owner Greybull Capital after selling its emissions allowances and not having the money to repurchase them.

Sanjeev Gupta, the head of Liberty, and the then new Gupta Family Group Alliance chief financial officer V Ashok followed up personally almost daily with those involved in the sale of allowances, according to a senior Simec executive who was helping co-ordinate the cross-asset utilisation of emissions allowances. Gupta tasked Lalit Pratap, chief financial officer for Europe, with designing a strategy for capitalising on the allowances, according to messages seen by Argus.

"In common with other large industrial companies, Liberty Steel Group businesses trade carbon credits as part of the usual course of business," a spokesperson for Liberty parent GFG Alliance said. "That includes transactions to buy and to sell credits according to their business requirements and according to the market price. We do not comment on our sites' current balances for commercial reasons, but expect them all to surrender the correct number of credits to the EU registry at the end of April."

Czech union OS KOVO is also trying to find the whereabouts of €77mn in state-backed Covid-19 loans, which it says the mill is paying interest on but has not received.

"According to the management of the Liberty Steel Group, these funds are in the account of the Greensill institution, which is insolvent and has receivables from the Liberty Group in the order of billions of euros," the union said.

By Colin Richardson