Court File and Parties

COURT FILE NO.: CV-15-11169-00CL DATE: 20170530 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: Ashley Taylor and Lee Nicholson, for the Applicants Clifton Prophet and Nicholas Kluge, for the Monitor Max Starnino and Debra McKenna, for USW and its Local 2724 Lou Brzezinski and Alexandra Teodorescu, for USW Local 2251 Susan Ursel, for the Retirees Peter Griffin, for GIP Primus, LP and Brightwood Loan Services LLC L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders John MacDonald, for the Term and DIP Lenders Tony Reys, for the board of directors of Essar Steel Algoma Inc. Jeremy Nemers, for the City of Sault Ste. Marie D. Magisano, ICICI Bank Canada

HEARD: May 23, 2017

Endorsement

[1] The Applicants (“Algoma”) move (i) for the approval of a DIP extension agreement with the current DIP lenders for a DIP loan that expired on April 30, 2017 and (ii) for the appointment of a restructuring committee. The motions are supported by the Monitor, the ad hoc committee of the Algoma noteholders and the DIP lenders. They are opposed by the USW and its locals, the retirees and GIP.

DIP motion

[2] The original DIP facility provided for in the Initial Order provided a US$200 million loan from some of Algoma's prepetition term lenders (the “DIP lenders”). The DIP facility was secured by a charge of most of Algoma's property ranking third after the Administration charge and a critical suppliers charge. All of the charges ordered in the Initial Order rank ahead of all other secured charges.

[3] The Applicants developed a two phase sale and investment solicitation process to solicit interest in a sale, restructuring or recapitalization of their business. At the Phase II bid deadline, a bid between certain of the applicants’ prepetition term lenders (the “Term Lenders”) and KPS Capital Partners, LP was the only bid received. However, on July 13, 2016, Algoma was advised by the Term Lenders that KPS and the Term Lenders had agreed to terminate the Consortium Agreement governing the terms of their bid.

[4] 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 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. The DIP lenders are comprised of a number of financial institutions or hedge funds. Many are also Term Lenders. While the exact identity and make-up of the Term Lenders and of the DIP lenders has not been disclosed in the record, it is generally accepted that a substantial number of the DIP lenders are also Term Lenders to Algoma.

[5] The DIP facility was to mature on September 30, 2016. Algoma was unable to complete a restructuring prior to the maturity date of 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. Algoma subsequently obtained a Court approved further extension of the maturity date of the DIP facility to March 31, 2017, that was later extended to April 30, 2017 on consent of the DIP lenders.

[6] Prior to the maturity of the DIP facility on April 30, 2017, Algoma, with the assistance of Evercore and under the supervision of the Monitor, commenced a DIP solicitation process. Algoma received three DIP financing proposals following the solicitation, including an initial proposal from the DIP lenders. One potential lender chose not to pursue its proposal further once Algoma indicated that certain terms of their DIP financing proposal were unacceptable. That left two proposals for the new DIP, one from the existing DIP lenders and one from an alternative source.

[7] On April 28, 2017, I made an endorsement requiring the Monitor and Algoma to file a confidential report on the status of the DIP solicitation process. On May 1, 2017, an oral report from the Monitor and Algoma was made and a further endorsement was made stating that Algoma was not to sign any DIP financing agreement pending further direction of the Court.

[8] I have received a confidential report from the Monitor setting out the two DIP proposals, one from the current DIP lenders whose loan expired on April 30, 2017 and one from a new alternative DIP lender. A copy of the confidential report has been made available to any party who has signed a confidentiality agreement. Counsel for the USW has in that way obtained a copy of the confidential report.

[9] After evaluating the proposals received, Algoma, in consultation with the CRA, Evercore, and the Monitor, made a determination that the proposal of the current DIP lenders was the superior proposal. This proposal, which would constitute the fourth DIP amendment, provides for an extension of the maturity date of the DIP loan to August 30, 2017, with a further automatic extension to September 29, 2017 if certain repayments are made.

[10] Section 11.2(1) of the CCAA provides a court with the jurisdiction to order a DIP loan secured by the debtor’s property. Section 11.2(4) directs a court to consider, among other things, a number of factors.

[11] It is acknowledged by Algoma and the Monitor that the decision as to the competing DIP proposals was not an easy one. It is clear that there are pluses and minuses of each.

[12] The current DIP lenders proposal is for a short period of time. It will extend the maturity of the DIP loan, currently at approximately $164 million, to August 31, 2017 with an automatic extension to September 30, 2017 if Algoma makes cumulative principal prepayments equal to or greater than US$35 million between May 1, 2017 and August 31, 2017, or if otherwise consented to by 60% of the DIP Lenders. The alternative DIP proposal is for a term loan of up to $175 million with a maturity date of January 31, 2017.

[13] The current DIP lenders proposal calls for substantially less fees than the alternative proposal.

[14] The current DIP lenders proposal removes the milestone that required Algoma to achieve annualized costs savings that were expected to result from reduced compensation terms for Algoma’s unionized employees and removes the weekly cash sweep following repayments of the DIP loan of US$40 million.

[15] The alternative DIP proposal contains a condition that only a minimal amount will be released to Algoma with the balance to be placed in trust to be released after the appeal period for the DIP expires.

[16] Mr. Strek of the CRA says that the most significant advantages of the DIP arrangements set out in the current DIP lenders proposal, as compared to the arrangements proposed by the alternative DIP loan, relate to the lower transaction fees required under the current DIP lenders proposal and the avoidance of the uncertainty created by the refusal of the alternative DIP lender to fully fund DIP advances to Algoma until after the expiry of relevant appeal periods.

[17] In connection with the latter issue, Mr. Strek in his affidavit said that the Applicants were concerned regarding the direction the CCAA proceedings might take if the alternative DIP proposal were selected. The Applicants were concerned that the DIP Lenders would oppose any replacement DIP financing that primed their prepetition term loans.

[18] This issue arises because the DIP lenders are comprised of various financial institutions or hedge funds that are also Term Lenders to Algoma. The exact make-up of the DIP lenders and the Term Lenders has never been revealed, but it is believed that a large percentage of each are common. In this regard, there is no basis for the identity of the DIP lenders and the Term Lenders being kept from the parties and an order I make is that the identity of the DIP and Term Lenders and their percentage of the DIP and Term Loans be disclosed to the Monitor and, subject to any proper reason for their not being disclosed, be disclosed to those on the service list who request the information.

[19] I have concerns that the DIP lenders are imposing terms to assist their position as Term Lenders who are party to the Restructuring Agreement. Possible litigation has been discussed with counsel for Algoma by counsel for the DIP lenders and Term Lenders, and Mr. Macdonald candidly said during argument that it is not surprising to anyone that the Term Lenders would not “roll over” with another DIP lender. Whether it can be said that the DIP lenders and the Term Lenders are in conflict, I am concerned in this proceeding that their interests are now too closely aligned with what has been proposed and that the provision of DIP lending is now being too negatively affected.

[20] The problem with acceding to this litigation threat is that the current DIP lenders are agreeable to extending the DIP facility only to the end of August or September of this year. That means that the funding for the winter material build-up that will be necessary before the northern freeze would have to be financed by a further DIP loan. I have considerable concern that the current DIP lenders would have material leverage to exact large fees for any further extension and an increase of their DIP loan and the current lower fee proposed by them might be short lived. The current DIP lenders have not shied in the past from extracting heavy fees, even for short extensions of their DIP loan. No doubt the appearance of a competing DIP proposal has affected their extension fee attached to their proposal, but there is no assurance at all that in September a competing proposal for a DIP loan will be forthcoming. Counsel for Algoma said that it is hoped that with a smaller DIP loan of say $125 million that other DIP lenders will be interested, but there is no evidence before me that such a hope is or is not realistic.

[21] I also have a concern that the Term Lenders in September will have the same reason to threaten or bring litigation if another DIP lender is chosen as they now claim to have to threaten such action. Mr. Starnino asserted in argument that the litigation concern will still be there in September and it is better to deal with it now than when the winter build-up becomes crucial. I think there is much in that.

[22] I frankly do not see litigation risk at this stage to be all that great to accede to the threat of the Term Lenders /DIP lenders and accept their short term DIP extension proposal. Leave to appeal must be quickly sought from the Court of Appeal and without in any way assuming what the Court of Appeal would do, it is well known that leave to appeal from a discretionary decision of a CCAA judge is not an easy matter. So far as the alternative DIP proposal is concerned, I think the litigation risk has been given too much prominence. Even if leave to appeal were granted, it is difficult to think that any decision of an appellate court to reverse a decision to approve their DIP proposal would not include an order that any replacement DIP lender would have to reimburse the alternative DIP lender for their advances on the DIP loan.

[23] Now that the Restructuring Support Agreement has been reached, what has prevented a successful conclusion of the proceeding is a failure of the Participating Lenders, the buyers, and the USW to come to an agreement on labour terms and conditions in spite of the appointment of the Honourable Warren Winkler as a mediator. No doubt each side would say the other is to blame. It is argued that the short term for the extension proposed by the current DIP lenders is motivated by a need to have this CCAA proceeding end as soon as possible. If what is meant by this statement is that the short term will put pressure on the parties to come to an agreement on labour terms and conditions, that has not worked to date. There have been earlier short term extensions of the DIP loan that has not resulted in a settlement of labour issues.

[24] In all of the circumstances, and taking into account the factors in section 11.2(4) of the CCAA, I am not prepared to approve the proposed extension of the current DIP loan. I am not at all satisfied that the proposed extension would enhance the prospects of a viable and reasonable outcome of this CCAA proceeding. I have not overlooked the support for this motion by the Monitor, the CRA, Evercore and the ad hoc committee of the Algoma noteholders. The motion to approve the proposed DIP extension with its terms is dismissed. Any attempts by the current DIP lenders to take steps under their DIP security is of course stayed pending any further order of this Court.

Appointment of Restructuring Committee

[25] The Applicants have also brought a motion to appoint a Restructuring Committee to oversee and direct Algoma's restructuring efforts. In its factum, Algoma says that the Restructuring Committee would act as its independent guiding mind. It is proposed that the members of the Restructuring Committee will be Kalyan Ghosh, the CEO of Algoma, and two independent members being Andrew Schultz and Courtney Pratt. These two independent members have extensive experience in restructuring and turnaround situations and in acting as independent directors of corporations.

[26] The motion is supported by the Monitor. It is also supported by the Term Lenders and the DIP lenders, although their interest in the motion is not apparent. The motion is opposed by the USW and its two locals and by the Retirees.

[27] Due to a prior order in this CCAA proceeding made on July 19, 2016, no confidential information is being given to the special committee of the board of directors of Algoma. Since then, no meetings of the audit committee have been held. Algoma also decided to cease holding board meetings or meetings of the special committee and to stop paying fees to the members.

[28] Algoma is not proposing to appoint the members of the Restructuring Committee to its board of directors. Thus they will have no governance authority. It is said however that the establishment of the Restructuring Committee would restore a more typical governance structure to Algoma's decision making process to ensure that informed and prudent decisions are being made by Algoma through this part of the CCAA proceedings.

[29] I have considerable difficulty with the request for a Restructuring Committee. Algoma has had a Chief Restructuring Advisor, CDG Group, from the outset of this CCAA proceeding. Mr. Strek was the person from CDG that fulfilled that role until last month when on April 17, 2017 Robert Del Genio, the managing member of CDG, was added to the team and the CDG monthly fees were increased from US$125,000 to US$200,000.

[30] There would be considerable overlap of the duties of the Chief Restructuring Advisor and the Restructuring Committee. Included in the proposed duties of the Restructuring Committee are (i) analyzing and considering all alternatives that may be available to Algoma to successfully complete the restructuring and emerge from the CCAA proceedings as a going concern; (ii) establishing and overseeing such processes and work plans as it considers appropriate to effect the restructuring; and (iii) overseeing discussions and negotiations with Algoma's creditors, unions, retirees and other stakeholders.

[31] A restructuring advisor is to advise on restructuring. The responsibilities of the Chief Restructuring Advisor in this case include the obligation to work collaboratively with the senior management and other Algoma professionals in evaluating and implementing strategic and tactical options through the restructuring process and to perform a number of management services including performing due diligence on Algoma, assist Algoma's management with any reporting to or negotiations with stakeholders, including the unions, customers, suppliers and the court approved representative counsel for the retirees.

[32] I do not see how the proposed Restructuring Committee will alleviate work of management, particularly as Mr. Ghosh, the CEO of Algoma, will be on the committee. A Restructuring Committee will just add another layer of advisors that would be in a position to second guess the Chief Restructuring Advisor without any responsibilities or powers of a board of directors. It makes little or no sense to create another body of restructuring advisors that will likely create disruption.

[33] The problems at Algoma with the restructuring are mainly the inability of the Participating Lenders under the Restructuring Support Agreement to come to terms with the USW and local 2251. Why that has occurred is something the Court is not privy to. I fail to see, however, that adding another layer of restructuring advisors will do much to resolve the labour negotiations. The resolution lies in the hands of the Participating Lenders, working with management of Algoma, and the USW and its local 2251.

[34] In the circumstances, the motion to appoint a Restructuring Committee is dismissed.

Newbould J. Date: May 30, 2017