SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 14-CV-10629-00CL
DATE: 2014-07-16

IN THE MATTER OF AN APPLICATION UNDER SECTION 192 OF THE CANADA BUSINESS CORPORATIONS ACT, R.S.C. 1985, c. C-44, AS AMENDED

AND IN THE MATTER OF RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE

AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF ESSAR STEEL CANADA INC., ESSAR STEEL ALGOMA INC., ALGOMA HOLDINGS B.V., CANNELTON IRON ORE COMPANY AND ESSAR STEEL ALGOMA INC.

BEFORE: Regional Senior Justice Morawetz

COUNSEL:
A.J. Taylor and K. Esaw, for the Applicants

K. Zych and S. Zweig, for the Secured Noteholders

H. Meredith, for Essar Global Fund Limited

M. De Lellis, for Deutsche Bank Trust Company

L.J. Latham and R.J. Chadwick, for the Ad Hoc Committee of Unsecured Noteholders

HEARD: July 16, 2014

ENDORSEMENT

[1] Essar Steel Algoma Inc. (“Algoma”), one of Canada’s largest integrated steel manufacturers, has undertaken several restructuring activities over the past few years. Algoma now seeks approval of a refinancing of its debt obligations through an arrangement under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, (the “CBCA”). Algoma and Essar Steel Algoma Canada Inc. (“Essar Canada”) and, together with Algoma, Algoma Holdings B.V., Cannelton Iron Ore Company and Essar Steel Algoma Inc. USA, (the “Applicants”), have brought this application under s. 192 of the CBCA.

[2] On the return of this application, the Court will be asked to issue a final order approving a plan of arrangement involving Algoma and Essar Canada (the “Arrangement”) and the plan (the “Plan of Arrangement”).

[3] The principal purpose of the Arrangement is to restructure Algoma’s unsecured notes. The Arrangement is part of a series of transactions (collectively, the “Recapitalization”) that includes a refinancing of Algoma’s ABL Facility, Senior Secured Notes, Avenue Term Loan and Subordinate Secured Loan, as defined below. The Recapitalization will reduce Algoma’s overall debt load by approximately $145 million and reduce interest payments by approximately $40 million per year.

[4] This motion is brought by the Applicants for an order (the “Preliminary Order”), among other things:

a. Authorizing the Applicants to apply to Court for advice and directions to address the calling, holding and conducting of a meeting (the “Noteholder Meeting”) of the holders (the “Unsecured Noteholders”) of the 9 7/8% percent unsecured notes issued by Algoma (the “Unsecured Notes”) to consider the proposed arrangement (the “Comeback Motion”), which motion is expected to be heard on or before August 15, 2014;

b. Seeking advice and directions on the service of this Application and the Preliminary Order;

c. Temporarily restraining certain rights to terminate, accelerate, amend or declare default or take any other enforcement steps under certain agreements to which Algoma or Essar Canada is a party to;

d. Authorizing and empowering Algoma to act as the foreign representative (the “Foreign Representative”) in respect of this Application for the purpose of having it recognized outside Canada; and

e. Authorizing the Foreign Representative to apply for foreign recognition of this application in any jurisdiction outside of Canada, including the United States pursuant to Chapter 15 of the United States Bankruptcy Code, 11 U.S.C. 101-1330, as amended (“Chapter 15”).

[5] Although the motion was heard in the presence of a number of parties, the Applicants advised that, for all practical purposes, the motion should be considered an ex parte motion.

[6] Algoma is a company established under the laws of Ontario. It is an integrated steel producer whose business includes the production, making, sale, and distribution of steel products to customers in North America.

[7] Algoma is a wholly-owned subsidiary of Algoma Holdings B.V. (“Holdings”), a Netherlands incorporated corporation. Algoma’s ultimate parent is Essar Global Limited (“Essar Global”), a Cayman Islands incorporated company. Algoma’s registered office is in Sault Ste. Marie, Ontario.

[8] Algoma has two wholly-owned subsidiaries, Cannelton Iron Ore Company (“Cannelton”) and Essar Steel Algoma Inc. (USA) (“Algoma USA”). Cannelton is a Delaware incorporated company, which currently has no operations and holds no assets, other than some potential tax losses. Algoma USA’s business is the sale of Algoma steel products to customers in the United States. Algoma USA has no significant assets.

[9] Essar Canada, also a wholly-owned subsidiary of Holdings, is a corporation established under the laws of Canada, with a registered head office in Sault Ste. Marie, Ontario.

[10] Algoma has experienced operational, pension related, and financing challenges over the past several years, which Algoma advises have negatively impacted its financial performance. Counsel advises that Algoma has successfully addressed its operational and pension issues, leaving only its financing challenges unresolved.

[11] Algoma’s main financing obligations are as follows:

a. A U.S. $350 million credit facility (the “ABL Facility”) pursuant to a credit agreement dated September 20, 2012 (the “ABL Agreement”);

b. U.S. $400 million in Senior Secured Notes bearing an interest rate of 9.375% (the “Senior Secured Notes”);

c. A Senior Secured Term Facility in the principal amount of U.S. $25 million, pursuant to a credit agreement dated December 6, 2013 (the “Avenue Credit Agreement”), with Avenue II acting as document agent for the lenders, (the “Avenue Term Loan”);

d. A $30 million loan agreement dated May 6, 2013 (the “Subordinated Secured Loan Agreement”), and together with the ABL Facility, the Senior Secured Notes and the Avenue Term Loan, (the “Secured Debt”); and

e. U.S.$450 million in unsecured notes bearing interest at a rate of 9.875% pursuant to an indenture agreement between Algoma’s predecessor (now Algoma) and Wilmington Trust Company, as Trustee, which notes were due on January 15, 2015.

[12] Algoma has concluded that it has to reduce its debt financing costs in order to survive.

[13] Algoma has conducted a comprehensive market process in an effort to reduce its Secured Debt. To date, Algoma has received draft commitment letters providing for the refinancing of the Secured Debt and is working with the issuers of those letters to reach a formal commitment.

[14] Concurrently, with the process for arranging the refinancing of the Secured Debt, Algoma engaged in negotiations regarding restructuring the Unsecured Notes, commencing in May 2014, with an ad hoc group of noteholders of over 70% of the Unsecured Notes (the “Ad Hoc Committee of Unsecured Noteholders”).

[15] On June 16, 2014, Algoma elected to use the 30-day grace period for the interest payment due on the Unsecured Notes.

[16] Since electing to use that grace period, Algoma has been managing its public relations to maintain customer, vendor, and employee support for its refinancing and restructuring efforts.

[17] Algoma is also engaged with advisors to an ad hoc group of noteholders of over 50% of Senior Secured Notes (the “Senior Noteholder Group”).

[18] As a result of Algoma’s discussions with the Ad Hoc Committee of Unsecured Noteholders and Essar Global, a consensual restructuring agreement was agreed to and documented in a term sheet (the “Term Sheet”).

[19] Counsel to Algoma advises that Algoma, in conjunction with the Ad Hoc Committee of Unsecured Noteholders and Essar Global, will now work to prepare the necessary documentation to implement the Arrangement.

[20] The Arrangement contemplates two principal steps. First is the amalgamation of Algoma and Essar Canada (the “Amalgamation”). The amalgamated companies will continue as Essar Canada, a CBCA incorporated company. All of Algoma’s debt, including (among other things) the Unsecured Notes, will be assumed by Essar Canada following the Amalgamation.

[21] Second, the Arrangement contemplates that the Unsecured Notes will be exchanged for, and Unsecured Noteholders will receive, in the aggregate:

a. Cash equal to 32.5% of the original principal amount of the unsecured notes, plus all accrued and unpaid interest thereon at the non-default rate throughout the closing of the Arrangement (the total outstanding amount being defined as the “Claim”); and

b. New notes in the principal amount of 55% of the Claim, which will be sanctioned by a lien on all of the assets of the amalgamated company and its subsidiaries ranking immediately junior to the new Senior Secured Debt.

[22] Counsel advises that the Unsecured Noteholders will vote at a special meeting called to consider the Arrangement.

[23] Counsel further advised that the Arrangement will not affect the rights of unsecured trade creditors, employees or pensioners.

[24] The Recapitalization includes a series of interrelated steps leading to a change in capital structure of the Applicants, including the refinancing of the ABL Facility, the Avenue Term Loan, the Senior Secured Notes and the Subordinated Secured Loan on the effective date of the Arrangement. The Recapitalization is a condition precedent to the Arrangement.

[25] On the application for approval of the Arrangement under section 192 of the CBCA, the Applicants must satisfy the Court that:

a. The statutory requirements have been fulfilled;

b. The Arrangement is put forward in good faith; and

c. The Arrangement is fair and reasonable.

[26] On interim motions, courts have generally limited their analysis to:

a. The Applicants’ compliance with the statutory requirements of the CBCA; and

b. The Applicants’ good faith in putting forward the Arrangement.

(see: Re 8440522 Canada Inc., 2013 ONSC 2509 (Commercial List) (“Mobilicity”) at para. 41 and Re 45133541 Canada Inc., 2009 QCCS 6444 (“Abitibi”)).

Statutory Requirements under the CBCA

[27] The CBCA requires the Applicants to establish, at this stage, that:

a. The Arrangement constitutes an “arrangement” within the meaning of subsection 192(1) of the CBCA;

b. The Applicants are not “insolvent” within the meaning of subsection 192(2) of the CBCA; and

c. The Applicants have given the Director appointed under section 260 of the CBCA (the “CBCA Director”) notice of the within Application. The CBCA Director is entitled to appear and be heard in person or by counsel.

[28] Section 192 of the CBCA states, in relevant part:

192(1) In this section “arrangement” includes …

(a) an amalgamation of a body corporate with a corporation that results in an amalgamated corporation subject to this Act;

(f) an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate.

[29] “Corporation” is defined in subsection 2(1) of the CBCA to mean “a body corporate incorporated or continued under this Act and not discontinued under this Act”. Subsection 2(1) of the CBCA also provides that a “body corporate” … includes a company or other body corporate wherever or howsoever incorporated”.

[30] Essar Canada is incorporated pursuant to the CBCA and as such is both a corporation and a body corporate within the meaning of the CBCA. Algoma is incorporated pursuant to the OBCA, and as such is a body corporate within the meaning of the CBCA. Cannelton and Algoma USA are Delaware corporations and each is a body corporate within the meaning of the CBCA.

[31] I am satisfied that the Arrangement contemplates the amalgamation of Algoma and Essar Canada into a corporation governed by the CBCA and accordingly, the amalgamation falls within the scope of s. 192(1)(c) of the CBCA.

[32] Upon the amalgamation of Algoma and Essar Canada, Essar Canada will exchange the Unsecured Notes for a combination of cash and new securities. I accept counsel’s submission that this exchange of securities for cash and other securities falls within the scope of s. 192(1)(f) of the CBCA.

[33] I also accepts counsel’s submission that Canadian courts have permitted corporations to compromise their debt as part of a plan of arrangement undertaken pursuant to section 192 of the CBCA. See In Re Frontera Copper Corp., 2010 ONSC 3325 and Re 8440522 Canada Inc. (Re), see Mobilicity, supra.

[34] Further, I accept the submission that the use of plans of arrangement to effect changes in a corporation’s debt structure has been recognized by the CBCA Director.

[35] Having considered the foregoing, I am satisfied that the Arrangement satisfies the requirements under section 192(3) of the CBCA that there be a “fundamental change in the nature of an arrangement”.

[36] Section 192(3) of the CBCA requires that a corporation be solvent to undertake a CBCA plan of arrangement.

[37] Counsel to the Applicants submits that the courts have frequently found that the solvency requirements is satisfied when at least one of the following is true:

a. At least one of the applicant companies is solvent; and

b. The Applicant company or companies will be solvent after the plan of arrangement is implemented, even though it is not solvent at the time that an interim order was sought.

(see: Re St. Lawrence & Hudson Railway Co. (1998) CarswellOnt 3867, Mobilicity, supra and Abitibi, supra)

[38] In my view, both of these requirements are satisfied in the application.

[39] Moreover, the Applicants and each of its members will be solvent after the Arrangement is implemented.

[40] Section 192(3) of the CBCA requires that it not be “practicable” for the corporation to effect a fundamental change in the nature of an arrangement under any other provision of the CBCA. Counsel submits that this issue is addressed in Mobilicity where Wilton-Siegel J. stated:

The impracticability test is interpreted broadly and considered from a practical business point of view. Courts have confirmed that the threshold of impracticability is relatively low. What is required is that the proposed arrangement be difficult to put into practice under other provisions of the CBCA.

[41] In my view, having reviewed the record, I conclude it is impracticable for the steps and transactions contemplated in the Arrangement to be completed outside of a plan of arrangement under section 192 of the CBCA. There is simply no other convenient method under the CBCA for the Applicants to coordinate and execute the wholesale, instant and irrevocable exchange of all the Unsecured Notes for cash and new securities.

[42] In this case, the Applicants have given the required notice of this application to the CBCA Director. Counsel to the Applicants has advised that “the staff of the [CBCA] Director has determined that the [CBCA] Director does not have standing to review or take a position on this application as there is no Arrangement to be reviewed at this time”.

[43] I am also satisfied that the Applicants motion has been brought in good faith.

[44] Turning now to the form of preliminary order, the Applicants seek relief that will give the Applicants the time and stability necessary to finish negotiating and drafting, with affected Stakeholders, the definitive documentation required to implement the proposed Arrangement and Recapitalization.

[45] Section 192(4) of the CBCA authorizes the court to “make any interim or final order it thinks fit”. In Mobilicity and Abitibi, the Ontario Superior Court and the Quebec Superior Court (respectively) found they had the power under section 192(4) to impose a stay in connection with a proposed arrangement. This point was recently reaffirmed in Mobilicity.

Stay

[46] The Applicants seek a Stay Provision is that will have the effect of prohibiting, among others, the lenders from terminating, accelerating, amending, declaring in default or taking any other enforcement steps against the Applicants due to the commencement of these proceedings.

[47] Similar stay provisions have been approved by courts in Ontario and elsewhere in Canada. The aim of such clauses is to maintain the status quo while the proposed arrangements are considered and implemented. Counsel confirmed that the stay is not intended to unduly restrict the rights of unsecured trade creditors. In this respect, the stay is limited.

[48] I accept the submission that the Stay Provision is substantially similar to existing case law. It seeks to maintain the status quo while the Applicants and their affected Stakeholders negotiate and finalize the terms the proposed Arrangement and the Recapitalization.

[49] I am also satisfied that the potential prejudice that may be caused by the Stay Provision outweighs the benefits that will be achieved for all Stakeholders. In my view, the scope of the Stay Provision is limited to only what is necessary for the success of the Applicants’ restructuring efforts. Further, it will be necessary for the Applicants to revisit this issue as the Stay Provision automatically expires on August 15, 2014, unless extended or terminated earlier by further court order.

[50] I am also satisfied that Algoma should be authorized and empowered to act as foreign representative in recognition proceedings before the United States Bankruptcy Court under Chapter 15.

[51] In the result, I am satisfied that it is appropriate to grant the motion. The Preliminary Order has been signed in the form submitted, as amended.

Morawetz, R.S.J.

Date: July 16, 2014