Court File and Parties

COURT FILE NO.: 15-CV-0011169-00CL DATE: 20170306 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF ESSAR STEEL ALGOMA INC., ESSAR TECH ALGOMA INC., ALGOMA HOLDINGS B.V., ESSAR STEEL ALGOMA (ALBERTA) ULC, CANNELTON IRON ORE COMPANY, AND ESSAR STEEL ALGOMA INC. USA

BEFORE: Newbould J.

COUNSEL: David Bish and Jeremy Opolsky, for Essar Capital Limited Lou Brzezinski and Alexandra Teodorescu, for USW Local 2251 Debra Mckenna, for the USW and Local 2724 Karen Ensslen, for the Retirees Ashley J. Taylor and Sanja Sopic, for the applicants Derrick Tay and Delna Contractor, for the Monitor John A. MacDonald and Michael DeLellis, for Deutsche Bank Monique Jilesen, for GIP Primus, LP and Brightwood Loan Services LLC L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders Chris Shorey, for ICICI Bank

HEARD: February 14, 2017

Endorsement

[1] Essar Capital Limited (“Essar Capital”) moves for an order directing the Applicants to re-open the SISP. It also asks for an order to make certain information available to Essar Global to allow it to consider submitting a bid for Essar Steel Algoma Inc. (“Algoma”). The USW and Locals 2251 and 2724 and the Retirees support the motions. Local 2251 also moves for advice and directions of the Court as to whether it is permitted to engage in discussions with Ontario Steel Investments Ltd. (“Ontario Steel”), an entity owned and controlled by Essar Global, regarding potential sale transactions or matters related to the Applicants, their business and/or assets, and, if so, under what conditions those meetings and/or discussions should occur, if any.

[2] For the reasons that follow, I do not think that the moving parties are entitled to the relief they seek.

[3] On February 10, 2016 the SISP order was made authorizing the Applicants to conduct a sale and investment solicitation process with the assistance of the Monitor, CDG Group, LLC as Chief Restructuring Advisor to the applicants (the “CRA”) and Evercore Group LLC in its capacity as financial advisor to the applicants.

[4] During Phase I of the SISP, Evercore conducted a thorough canvas of the market and contacted 63 potential buyers to solicit interest in the Applicants’ business. Of the seven Phase I Bids received, four were determined to be Qualified Phase I Bids pursuant to the SISP. The four bids included a joint bid from certain of the pre-petition Term Lenders and KPS Capital Partners LP.

[5] Essar North America, an entity owned and controlled by Essar Global, submitted a Phase I Bid which was deemed non-compliant. However, the Applicants waived the deficiency and declared the bid to be a Qualified Phase I Bid subject to Essar North America providing satisfactory written evidence of adequate financial and other capabilities by April 18, 2016. Essar North America was unable to do so and its participation in the SISP was terminated.

[6] Essar North America did not challenge the Applicants’ determination that its bid did not constitute a Qualified Phase I Bid. However, in May 2016, Local 2251 brought a motion to have Essar North America qualified as a Phase II Bidder. The motion was dismissed on May 13, 2016.

[7] The only Phase II Bid received was a joint bid of certain of the Term Lenders and KPS Capital Partners LP (the “Joint Bidders”). In conjunction with the CRA, the Monitor and the Applicants, Evercore determined the joint bid to be a qualified Phase II Bid and began negotiating the terms of a sale of the Applicants’ business to the Joint bidders.

[8] Overseen by the Monitor, the Applicants, Evercore, the CRA, and the Joint Bidders negotiated the terms of sale, which culminated in an asset purchase agreement (“APA”) between certain of the Applicants and a subsidiary of the Joint Bidders. In accordance with the SISP, the Applicants accepted the joint bid as the successful bid and brought a motion for an order approving the APA and the associated sale transaction returnable July 19, 2016.

[9] On July 13, 2016, the Applicants and the Monitor were advised by the Term Lenders that KPS no longer intended to proceed with the joint bid. The Term Lenders advised the Applicants of their commitment to close the transaction contemplated by the APA as quickly as possible. The motion returnable July 19, 2016 was adjourned.

[10] In response to the APA approval motion, the USW filed a cross-motion seeking an order to advance a purported transaction with Ontario Steel. Local 2251 filed a motion for an order approving Ontario Steel as a qualified bidder under the SISP and a motion for an order declaring the SISP terminated. At the time the USW and Local 2251’s motions were brought, Ontario Steel had not put forward a bid for the Applicants’ business, although the Monitor had been advised that a formal bid was forthcoming. The Applicants had received, through the Globe and Mail, a copy of a term sheet executed by Ontario Steel and Local 2251. That term sheet was never sent to the Monitor or the Applicants. To date, Ontario Steel has not advanced any bid for the Applicant’s assets.

[11] On September 15, 2016, approximately 77.4% of the Term Lenders and approximately 72.6% of the beneficial holders of Algoma’s outstanding 9.5% Senior Notes (together, the “Participating Lenders”) entered into a Restructuring Support Agreement (“RSA”) pursuant to which they agreed to complete the sale transaction, which contemplates an equity injection of up to US$200 million, an exit term loan facility of US$100 million and a third party ABL facility of US$125 million or greater.

[12] At the outset of this CCAA proceeding, the Applicants obtained a US $200 million debtor-in-possession facility. Court approval of the DIP facility and associated credit agreement with the DIP Lenders was obtained on November 19, 2015. The DIP facility has been extended and amended from time to time.

[13] The DIP facility was to mature on September 30, 2016. The Applicants were unable to complete a restructuring prior to the maturity date under the DIP facility and accordingly entered into an amendment to the DIP facility, which was approved by the Court, to obtain a net increase in the amount of funding available to the Applicants of US$20 million to extend the maturity date to January 31, 2017. The increase in funding was necessary as Algoma needs to accumulate inventory in the fall of each year to ensure it has sufficient inventory levels to sustain operations for the months of January to March the following year, which process is known as the winter build. The Applicants subsequently obtained a Court approved further extension of the maturity date of the DIP facility to March 31, 2017, that can be extended to April 30, 2017 on consent of the DIP Lenders.

[14] The evidence on the record is to the effect that in accordance with the RSA, the Participating Lenders have continued to work, with assistance from the Applicants, to conclude the sale transaction. Among other things, the Participating Lenders have engaged in numerous discussions with the federal and provincial governments and have met with the City of Sault Ste. Marie. The discussions between the Participating Lenders and the government have been described as constructive with progress having been made by the parties. I think it fair to say that discussions between the Applicants and the USW and its Locals have been difficult.

[15] Essar Capital relies on a letter of Essar Global addressed to the Monitor dated January 28, 2017. In the motion material filed by Essar Capital, Ms. Coodin of the Tory firm states that the letter “is a true and complete copy of the letter of Essar Global Fund Limited dated January 28, 2017”. While the Essar Global letter appears to have been signed, there is no information on the face of it as to who executed the letter or what position the person executing the letter holds with Essar Global.

[16] Ms. Coodin does not state whether the letter, which on its face is addressed to the Monitor, was in fact sent by Essar Global to the Monitor. The Monitor has no record of having received the letter other than as an exhibit to the Coodin Affidavit. The letter, however, was quoted on January 28, 2017 in the SooToday, a local newspaper in Sault Ste. Marie. The letter asked the Monitor to advise the Court of its continuing interest a possible acquisition Algoma’s assets, either alone or “in partnership with others” and to support a re-opening of the SISP.

[17] Who provided the letter to the SooToday is not in the record but it is passing strange that the letter on Essar Global letterhead with a Cayman Island address and signed by an indecipherable signature was dated the same day that the letter appeared in the local newspaper. If it truly was a letter from Essar Global and Essar Global was honestly trying to engage the Monitor, it was not any kind of way to do that. I find it hard to give any bona fide credit to the letter. I agree with the Monitor that negotiating through the press, which tends to be not only unproductive but may well be harmful to the process of navigating Algoma successfully through the CCAA proceedings by the dissemination of untested allegations and causing unwarranted confusion among the stakeholders, will likely have a deleterious effect on Algoma and its business. This is the second time at least that this has occurred, the first being the Ontario Steel term sheet that was not sent to the Monitor but sent to the Globe & Mail.

[18] It is also significant that Essar Global was not entitled to be a Phase II bidder because it failed to establish that it had adequate financial resources to acquire the Algoma business. Essar Global has filed no evidence that it now has such financial resources. In the face of that, to now re-open the SISP for the benefit of Essar Global with all of the negative effects that will have is not something that should be considered.

[19] There is evidence that Essar Global is having its own financial problems. Essar Steel Minnesota LLC, a sister company to Algoma, is seeking more than $1 billion in damages from Essar Global and other related companies in the Delaware Court as part of its Chapter 11 proceedings for alleged misconduct related to a stalled Minnesota iron-ore mine and processing plant. A group of Indian banks are suing Essar Global in New York court for $560 million in connection with delays and cost overruns at the Minnesota iron-ore mine and processing plant. Further, there are a number of press reports dealing with Essar Global’s financial problems. These lawsuits do not, of course, mean that they will succeed and the press reports do not amount to any admissible evidence of financial problems with Essar Global. But in light of the prior inability of Essar Global to satisfy the requirement that it establish its financial means to become a Phase II Bidder, Essar Global on this motion should have filed evidence to establish that it has the wherewithal to become a serious bidder. It did not attempt to do so.

[20] Essar Capital says it does not oppose the Participating Lenders RSA. It points however to a provision in the DIP facility that required Algoma to provide a comprehensive liquidation plan to the DIP lenders no later than February 28, 2017, and says that a re-opening of the SISP is preferable to a liquidation. I see this as an argument of lawyers parsing the many provisions of the DIP facility to raise a spectre of insolvency. Why the amended DIP facility included this provision is not at all clear. But I do not see Deutsche Bank simply moving to bankrupt Algoma. It is a DIP lender and a participant in the bid to acquire Algoma. Bankrupting Algoma would not be in its interests. This argument of Essar Capital is way overblown.

[21] Re-opening the SISP will delay the restructuring process by several months, and the DIP Lenders are highly unlikely to extend the DIP facility a third time in order to permit it. Further, the DIP Lenders have confirmed that they are not willing to fund another winter build in the CCAA proceedings. There is no other available DIP lender, as made clear by Mr. Aronson of Evercore. On each occasion when the DIP facility was obtained or extended, Evercore went to the market to attempt to see if there were any alternative DIP lenders. There was no market interest. Mr. Aronson’s evidence is that the two main concerns cited by potential lenders are (1) a DIP facility may not have sufficient collateral coverage to provide a full recovery in the event of a liquidation and (2) the uncertainty surrounding the Applicants’ ability to raise sufficient exit financing to repay the DIP facility and successfully exit from CCAA, especially if the proposed transaction with the Participating Lenders is unsuccessful. For the foregoing reasons, it is unlikely that any other lender apart from the DIP Lenders would be willing to advance adequate funds to repay the DIP Facility and continue operations.

[22] The SISP was a thorough investment process carried out with the professional advice of the CRA and Evercore. It resulted in a Phase II bidder accepted as such in accordance with the terms of the SISP. The fact that a large percentage of the senior noteholders of Algoma have replaced KPS as the partner with the Term Lenders does not make the accepted bid less reliable. In my view, it makes it more viable. It is quite often the case in an insolvency for the pre-filing lenders to provide the financial assistance for a restructuring and to exchange their debt position for equity.

[23] To re-open the SISP in these circumstances would be foolhardy. There is no evidence from Essar Capital of any viable bidder who can or is interested in being a bidder. As well, a SISP should not be lightly ignored. To re-open the SISP would be unfair to the bidders who participated in the SISP and interfere with the efficacy and integrity of the process approved by this Court. A court must exercise extreme caution before it interferes with a previously court ordered process. See Royal Bank v. Soundair Corp (1991), 7 C.B.R. (3d) 1 at para. 46.

[24] What is going on here is causing great difficulty in this CCAA process coming to a successful conclusion. This is made clear by the affidavit of Mr. Strek, the managing director of the CRA. Algoma needs to restructure itself in order to position its business to successfully manage the volatility of the steel industry. Among other things, the Applicants need to significantly deleverage their capital structure in order to reduce interest costs, decrease raw material costs, decrease annual pension costs, and revise labour costs to be competitive with the Applicants’ direct competitors. The term sheet between Ontario Steel and Local 2251 that Local 2251 sought to promote through its motion in July, 2016 did not contemplate any amendments to Algoma’s collective agreements or post-employment benefits. Mr. Strek is of the view that so long as Local 2251 thinks that Essar Global has a role to play in the restructuring proceedings, it is unlikely that it will engage in serious negotiations with the participating lenders who are behind the accepted bid. It is hard not to credit the CRA’s view.

[25] Without any concrete evidence of Essar Global’s financial ability to make a bid, the notion that holding out for Essar Global to provide all that the USW wants is fanciful.

[26] Mr. Strek is also of the view that the Applicants have been in creditor protection for over 15 months and their creditors and suppliers are becoming increasingly concerned about the Applicants’ ability to successfully emerge from CCAA protection as a going concern. Reopening the SISP would elevate these concerns by causing further uncertainty in the market. This concern cannot be ignored.

[27] The Participating Lenders are owed approximately US$1 billion between the DIP and their pre-filing secured indebtedness. In the absence of satisfying these obligations, any proposed alternative restructuring transaction can only proceed with the consent of the Participating Lenders. The Monitor’s view is that given the capital structure of Algoma and the priority of secured debt encumbering Algoma’s assets and undertaking, for a sale or restructuring transaction to be successful, it requires, amongst other things, the support of the Term Lenders and the Consenting Secured Noteholders.

[28] The Monitor does not believe there is a need to reopen the SISP at this stage as any party seriously intending to acquire or restructure Algoma has the continuing opportunity to reach out to the Term Lenders and the Consenting Secured Noteholders to propose and negotiate a transaction that they are willing to accept and support.

[29] The request by Essar Capital for further information is made in the context of its motion to re-open the SISP. In light of my decision that the SISP should not be re-opened, there is no need to consider this request for information. However, it is normal in giving access to a data room in a SISP that the person given access has demonstrated a financial ability to undertake the proposed transaction. Essar Global has not demonstrated that it has that financial ability.

[30] So far as the motion by Local 2251 for “advice and direction” as to whether it is permitted to engage in discussions with Ontario Steel regarding potential sale transactions or matters related to the Applicants and, if so, under what conditions those meetings and/or discussions should occur, Mr. Brzezinski said in argument that there is no impediment to such discussions but that Essar Global does not want to do that without the Monitor’s consent because of the oppression claim. The Monitor points out that in the Non-Disclosure Agreement signed by Local 2251, it was agreed that Local 2251 needed the consent of Algoma to talk to a SISP bidder and that the bidder needed to be a qualified SISP bidder. Ontario Steel has not been a SISP bidder at all and the Monitor was in no position to be agree to something not involving the SISP.

[31] The SISP is not to be re-opened. There is no evidence that Essar Global has the financial wherewithal to undertake a purchase of the assets of Algoma. The apparent Ontario Steel term sheet seen only through the Globe & Mail has never been provided to the Monitor or the Applicants. Thus there is no basis for an order authorizing Local 2251 to do anything with Ontario Steel in this process.

[32] The motions are dismissed.

Newbould J. Date: March 6, 2017