Court File and Parties
COURT FILE NO.: CV-14-10695-00CL DATE: 20160729 SUPERIOR COURT OF JUSTICE - ONTARIO
IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, as amended AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO U.S. STEEL CANADA INC.
BEFORE: Mr. Justice H. Wilton-Siegel
COUNSEL: Paul Steep and Heather Meredith, for the Applicant U.S. Steel Canada Inc. Robert Staley and Kevin J. Zych, for the Monitor Ernst & Young Inc. Alan Mark and Gale Rubenstein, for the Province of Ontario Max Starnino and Karen Jones, for the United Steel Workers International Union and the United Steel Workers International Union Local 8782 Sharon White, for the United Steel Workers International Union, Local 1005 Andrew Hatnay, Representative Counsel for the non-unionized active employees and retirees Michael E. Barrack, Jeff Galway and Kiran Patel, for United States Steel Corporation Sonja Pavic, for Brookfield Capital Partners Ltd.
HEARD: July 27, 2016
Endorsement
[1] The applicant, U.S. Steel Canada Inc. (the “applicant”), has brought a motion seeking (1) an extension of the stay of proceedings granted pursuant to the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”); (2) authorization, and approval, of the second amending and extension agreement dated as of July 15, 2016 (the “Second Extension Agreement”), which amends and extends the amended and restated DIP financing term sheet between the applicant and Brookfield Capital Partners Ltd. (the “DIP Lender”) dated November 4, 2015; and (3) approval of a second key employee retention plan (the “KERP”). The United Steel Workers International Union (the “USW”), USW Local 8782 and USW Local 1005 and Representative Counsel for the non-unionized employees and retirees (the “Representative Counsel”) have brought a motion to lift the suspension of the funding of post-employment benefit plans (the “OPEBs”) as ordered by the Court by order dated October 9, 2015.
[2] The motion of the applicant and the motion of the USW and Representative Counsel were both adjourned to a date to be set at a case conference, if required, pending discussions to be conducted between the parties and the filing of responding materials and a report of the Monitor if necessary. The remaining relief sought by the applicant was granted at the conclusion of the hearing. This Endorsement sets out the Court’s reasons for these determinations.
The Motion to Extend the Stay of Proceedings
[3] The motion to extend the stay of proceedings granted under the Initial Order in these proceedings is supported by the USW, USW Local 1005, the Province of Ontario and Representative Counsel, as well as the Monitor, and is not opposed by the remaining parties at this hearing or otherwise. However, United States Steel Corporation (“USS”) seeks a shorter stay period.
[4] The Court’s authority to extend the stay is found in section 11.02(2) of the CCAA, which gives a court the discretion to extend a stay where circumstances make it appropriate and the applicant has acted, and is acting, in good faith and with due diligence.
[5] The applicant is clearly acting in good faith and with due diligence to seek a plan of reorganization that will allow the applicant’s business to continue as a going-concern. The applicant has set a target date of August 5, 2016 to complete the period of consultation and negotiation between the bidders and the key stakeholders. The stay extension is sought to further the prospects of a viable going-concern restructuring, if agreement is reached for such a transaction after August 5, by enabling the completion of such a transaction. The stay extension would also be necessary if such an agreement were not reached. As the applicant has indicated, in such event, the applicant would consider alternative transactions, or a combination thereof, in the sales process for a portion of its business or lands.
[6] The applicant’s cash flows contemplate that it will have sufficient liquidity to operate during the proposed stay extension period. I note, as well, that the Monitor has provided its usual form of comfort with respect to these cash flows and supports the proposed extension period.
[7] As mentioned, USS seeks a shorter stay extension period. In its notice of motion, USS argues that the extension should expire on August 12 in view of the August 5 target date described above, and submits that the applicant should come back to court to seek a further extension based on the status of the SISP at that time. USS believes that, without a deadline, the applicant will not be in a position to bring the SISP process to a completion within a reasonable timeframe. At the hearing of this motion, USS argued for an “evidence-based” deadline, by which I understand it to mean a deadline described in terms of the process that is currently contemplated.
[8] It is important that the current SISP reach a point in the near-term at which it is clear to the stakeholders whether or not a going-concern restructuring is a viable option for the applicant. It may also be that, at some point, a court-ordered deadline may be required, upon a motion of the applicant or another stakeholder, to achieve such a decision. However, I do not believe that a court-ordered deadline, whether firm or “evidence-based”, is either necessary or would be useful to the restructuring process at the present time for the following reasons.
[9] First, and most important, significant progress has been made since the termination of Phase II of the SISP. Discussions and negotiations are on-going between the bidders and the key stakeholders. There is a target date of August 5, 2016 for completing this activity. After that, the applicant will be in a position to assess the options before it – which are basically to work toward completion of a going-concern transaction with a bidder it selects or to consider alternative transactions involving the applicant’s assets on a more limited basis. That decision will have a significant impact on the next phase of these restructuring proceedings.
[10] At the present time, however, without knowing which road the applicant will be going down, it is premature to try to craft conditions to the requested stay extension order. It is obvious that the imposition of a deadline of August 12, 2016 is impracticable. It may not be a reasonable time frame for the applicant to conclude its immediate deliberations regarding the form of the restructuring. It would certainly be unreasonable in terms of any expectation of completing all the principal terms of any proposed reorganization transaction with a selected bidder. More generally, under either restructuring scenario currently contemplated, more time will be required for the applicant to complete any transaction that the applicant resolves upon.
[11] Second, in extending the stay extension to November 30, 2016, the Court is not renouncing its authority to impose an earlier deadline if required by the restructuring process. In this sense, the issue of the stay extension and the supervisory role of the Court in respect of the restructuring process engage separate issues.
[12] Third, it is also important for a successful going-concern restructuring to support the applicant’s continued operations on a “business-as-usual” basis to the extent possible to further the prospects of a going-concern restructuring. In this regard, the imposition of short-term milestones, beyond which the circumstances of the applicant remain subject to a determination of the Court, would be counter-productive. It could easily raise unwarranted concerns on the part of third parties dealing with the applicant in the SISP and require the diversion of the applicant’s limited resources away from maintaining and growing the business of the applicant as an independent entity.
[13] Fourth, on this extension motion, the financial position of the applicant, as reported upon by the Monitor in its Twenty-Eighth Report, indicates that the applicant has experienced results in line with the Independent Business Plan approved by the Court pursuant to its order dated October 9, 2015 through May 31, 2016 and has experienced better results since then. The forecast cash flows of the applicant for the stay extension period reflect a generally stable cash balance throughout the period despite the anticipated seasonal increase in inventory in the autumn of 2016. Accordingly, there does not appear to be any material prejudice to the security position of any of the creditors who assert secured claims in this proceeding.
[14] Lastly, the monthly reporting and information flow from the Monitor, as well as the case conferences in this proceeding, provide the key stakeholders with on-going information regarding the status of the SISP as well as the financial state of the applicant. Accordingly, the key stakeholders, including but not limited to USS, are in a position to respond as they see fit to developments in respect of the applicant’s restructuring process, notwithstanding the absence of any court-imposed deadline to return to court for a formal stay extension motion.
[15] Accordingly, the applicant’s motion to extend the stay of proceedings to November 30, 2016 under section 11.02 of the CCAA is granted.
Approval of the Second Extension Agreement
[16] The revised terms of the DIP facility, as set out in the Second Extension Agreement, are principally a reduced availability to $30 million, a reduced extension fee (because the fee is calculated on the reduced availability), an extension to December 31, 2016 and a milestone requirement that an agreement for the restructuring of the assets or business of the applicant be signed by November 1, 2016.
[17] The motion for approval of the Second Extension Agreement is supported, or not opposed, by all of the key stakeholders. While the applicant has not drawn on the DIP Loan to date and its cash flows for the stay extension period do not contemplate the need for any draws during such period, the existence of the DIP Loan is important in several respects. The following considerations form the basis of the Court’s approval of the Second Extension Agreement.
[18] First, the DIP loan, as amended to date including the Second Extension Agreement, (the “DIP Loan”) will provide an important cash buffer to meet any unforeseen working capital needs resulting, in particular, from market price volatility or the need for increased seasonal inventory stockpiling during the remainder of 2016. Second, the DIP Loan provides for stability and confidence to the bidders participating in the SISP, in particular, in respect of the continuity of the business as it is currently operated, which it is hoped will be restructured on a going-concern basis in that process. The revised terms of the DIP Loan are also consistent with the SISP currently underway. Third, the DIP Loan provides comfort regarding the continuity of the applicant’s operations to the end of 2016 to the applicant’s employees, customers and suppliers. Their current and continuing relationships with the applicant are critical to a successful restructuring on a going-concern basis. Fourth, the revised terms of the DIP Loan, as set out in the Second Extension Agreement, have been approved by the board of directors of the applicant. Fifth, the Monitor has advised that it considers the reduction in the availability under the DIP Loan to be appropriate and reasonable in the circumstances. Lastly, there is no evidence of any material prejudice to any creditor of the applicant if the Second Extension Agreement is approved and implemented. As mentioned, the forecast cash flows of the applicant for the stay extension period do not currently contemplate a draw under the DIP Loan during that period. While the existing charge in favour of the DIP Loan will continue, there is no change to the priority of such charge and there will be a reduction in the amount secured.
[19] Accordingly, the Second Extension Agreement is hereby authorized and approved.