KIRKLAND. Essar Steel Algoma: Restructuring Under the Canada Business Corporations Act and Chapter 15 of the Bankruptcy Code

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1 KIRKLAND January 2015 Essar Steel Algoma: Restructuring Under the Canada Business Corporations Act and Chapter 15 of the Bankruptcy Code Just as companies increasingly use the Bankruptcy Code to implement prearranged or prepackaged bankruptcies to reorganize quickly and cost-efficiently, companies reorganizing in Canada have sought procedures to reduce the time and expense of a Canadian restructuring. Often, Canadian companies have assets or creditors in the U.S. and therefore require a Canadian proceeding that a U.S. bankruptcy court will recognize under chapter 15 of the Bankruptcy Code. While a Canadian prepackaged or prearranged restructuring eligible for U.S. bankruptcy court recognition is available under the commonly used Companies Creditors Arrangement Act (the CCAA ), companies restructuring under the CCAA often suffer negative stigma and are subject to oversight from a court-appointed monitor. As an alternative, given the proper circumstances, Canadian companies can use the arrangement provisions under the Canada Business Corporations Act (the CBCA ), a Canadian federal corporate statute that, among other things, permits debt compromises. 1 Under the CBCA, debtors have the ability to implement a quick prearranged restructuring that can avoid the reputational and procedural drawbacks associated with a CCAA filing and that a U.S. bankruptcy court can recognize. Essar Steel Algoma Inc. s ( Algoma ) successful implementation of a CBCA plan of arrangement, which the United States Bankruptcy Court for the District of Delaware recognized under chapter 15 of the Bankruptcy Code, provides a useful roadmap for companies seeking an efficient balance sheet restructuring who have substantially all of their assets in Canada, but would benefit from the application of the stay in the U.S. served as Algoma s U.S. counsel while Stikeman Elliott LLP served as Canadian counsel. Algoma s restructuring highlights certain nuances regarding the application of the stay and adequate protection, and reaffirms the importance of building consensus. Background Algoma, based in Sault Ste. Marie, Ontario, operates one of Canada s largest integrated steel manufacturing facilities. Approximately 60% of Algoma s customers are located in the key steelconsuming regions of the U.S. Midwest, U.S. Northeast, and southern Ontario. Algoma employs approximately 3,000 employees, including eight in the U.S., and the United Steelworkers of America represents approximately 95% of Algoma s Canadian employees. Algoma s ultimate owner is Essar Global Fund Limited ( EGFL ), a multinational company based in India with assets diversified across the energy, metals and mining, infrastructure, and services sectors. Algoma s lenders and noteholders are U.S.-based financial institutions. Prior to its restructuring, Algoma had approximately $1.2 billion of outstanding funded debt and annual interest expense of approximately $113 million. In recent years, several factors nega- 1 Companies organized under provincial, as opposed to federal, corporate statutes (e.g., the Ontario Business Corporations Act) may also be able to implement restructurings through a plan of arrangement, though whether a U.S. bankruptcy court will recognize such restructurings under chapter 15 has not yet been tested. Attorney Advertising

2 KIRKLAND & ELLIS 2 tively impacted Algoma s financial position and liquidity, rendering its leverage and interest expense unsustainable. Algoma also faced impending maturities of its debt obligations: approximately $385 million of its secured asset-based term loan facility (the ABL Facility ) matured on September 20, 2014, approximately $400 million of secured notes and a $25 million secured term loan matured on March 15, 2015, and approximately $385 million of unsecured notes (the Unsecured Notes ) matured on June 15, More immediately, Algoma owed an approximately $19 million coupon payment under the Unsecured Notes on June 15, 2014, which would trigger a default and cross-defaults if left unpaid for 30 days. Accordingly, Algoma began negotiations with its debtholders and ultimately successfully negotiated a restructuring support agreement (the RSA ) with an ad hoc group holding over 70% of Unsecured Notes and with EGFL. The RSA contemplated a cash payment and new notes for holders of Unsecured Notes and an EGFL equity infusion. Algoma required a court process to bind other holders of Unsecured Notes, and because substantially all of its assets were in Canada, it determined that its primary proceeding should take place in Canada. CCAA vs. CBCA Whether a debtor should use the CBCA or the CCAA depends on the circumstances, and companies should consult Canadian counsel to evaluate the merits of each statutory regime. As a general matter, under the CCAA, a debtor can implement a plan of compromise or arrangement to compromise claims of secured creditors (including holders of bank debt), unsecured creditors, and trade creditors. A debtor can seek a broad stay of proceedings and other relief, and can obtain DIP financing and reject contracts. The court must appoint a monitor to oversee the affairs of the debtor and report to the court. Like chapter 11 plans, CCAA plans require the approval of the court and two-thirds in amount and one-half in number of creditors voting. Unlike the CCAA, under the arrangement provisions of the CBCA, a corporation can only apply for court approval of a plan of arrangement that affects security holders of the corporation. Security holders generally means holders of equity or notes, but not holders of secured bank debt, trade claims or unliquidated, contingent claims. The court has jurisdiction to order a stay of proceedings, though the stay is more limited than a CCAA stay and typically does not prevent trade creditors from exercising remedies. Other relief, such as DIP financing secured by a priming lien, contract rejection, or critical supplier payments, have not typically been granted under CBCA proceedings, and the court does not appoint a monitor in a CBCA proceeding. The court determines the requisite security holder approval for a CBCA plan. While there is no statutory requirement, usually courts require two thirds in amount, subject to compliance with securities laws. Companies often restructure in a prearranged manner, with support from a majority of the affected security holders locked up. Algoma expected that it would reach a deal with the ad hoc group of unsecured noteholders. The company also planned to continue operations with little disruption, paying trade creditors in the ordinary course and maintaining its employee, union, and pension obligations. Also, Algoma expected that it would not require a court to authorize DIP financing on a priming basis, as EGFL was willing to provide new capital on an unsecured basis as part of its commitment to recapitalize Algoma and maintain equity ownership. Algoma therefore decided to use a CBCA plan of arrangement to implement the deal memorialized in the RSA. As additional benefits, Algoma would avoid the appointment of a CCAA monitor and any potential negative stigma.

3 KIRKLAND & ELLIS 3 Algoma s Court Processes A CBCA process typically consists of two court hearings and a meeting of security holders. At the first court hearing, the applicant company files a proxy circular (similar to a chapter 11 disclosure statement) and applies for an interim order from the court. The interim order approves the proxy circular, procedures for holding and giving notice of the meeting of security holders, and the requisite level of approval by security holders. This hearing and interim order are similar to the disclosure statement hearing and order in a chapter 11 case. The company then distributes the proxy circular to security holders and holds the meeting to conduct a vote on the arrangement, which is comparable to the chapter 11 plan solicitation process. Upon obtaining requisite security holder approval, the company applies to the court for a final order approving the plan as fair and reasonable, similar to the confirmation order in a chapter 11 case. The company implements the arrangement once the debtor files necessary documents with the CBCA Director. The time from application to implementation can be as short as 30 to 45 days, about the same as for a prepackaged chapter 11 case. Algoma filed its CBCA application on July 16, 2014, and held a meeting of holders of its Unsecured Notes on September 10, At the meeting, 92% of holders submitted votes, all of whom approved Algoma s plan of arrangement (the Arrangement ). On September 15, 2014, the court entered a final order approving the Arrangement. Because Algoma has assets, trade creditors, lenders, and noteholders in the U.S., and U.S. law governed Algoma s debt documents, Algoma sought recognition of its CBCA proceeding under chapter 15 of the Bankruptcy Code, which would provide stay protection in the U.S. The U.S. bankruptcy courts for the District of Delaware and the Southern District of New York have recognized CBCA proceedings as foreign main proceedings. 2 Recognition as a foreign proceeding requires, among other things, that the proceeding be collective and judicial, and consider the rights and obligations of creditors generally. Because a CBCA plan of arrangement is less formal than a prepackaged chapter 11 case, some creditors may argue that it is not sufficiently judicial or collective. In previous cases recognizing a CBCA proceeding, no party posed such challenges. To minimize risks to recognition of a CBCA proceeding, it is prudent to achieve consensus regarding implementation as early in the process as possible. Algoma filed its chapter 15 petitions in the District of Delaware on the same day it filed its CBCA application and later obtained recognition of the CBCA proceeding as a foreign main proceeding. Notably, the chapter 15 venue requirements, governed by section 1410 of title 28 of the United States Code, differ from the chapter 11 venue requirements of section 1408 in that domicile does not establish venue for chapter 15 cases. A chapter 15 debtor may file where it has a principal place of business or principal assets, where litigation is pending against it, or where venue would be consistent with the interests of justice and convenience of the parties. 3 As described further below, Algoma requested and the court granted certain provisional relief as part of Algoma s first day pleadings. Upon recognition of the CBCA proceeding as a foreign main proceeding on August 20, 2014, Algoma also obtained recognition of the CBCA interim 2 See In re Mega Brands Inc., Case No (CSS) (Bankr. D. Del. Mar. 23, 2010); In re Tembec Indus. Inc., Case No (RDD) (Bankr. S.D.N.Y. Oct 31, 2008). 3 See 28 U.S.C

4 KIRKLAND & ELLIS 4 order. After the Canadian court entered the final order approving the Arrangement, Algoma also obtained an order in the chapter 15 case recognizing the final order in the U.S. Obtaining Stay Protection While there is no automatic stay under the CBCA, the CBCA grants courts broad authority to make any... order it thinks fit. 4 Canadian courts have used this authority to grant limited stay protection prohibiting creditors from taking enforcement actions due to the commencement of a CBCA proceeding. Canadian courts have deemed such stay provisions reasonable, as they seek to maintain the status quo for companies, without unduly restricting the rights of other stakeholders. Canadian courts typically also limit the duration of the stay provision and extend it only when necessary for the CBCA process. Algoma obtained a limited stay in its CBCA proceeding through the effective date of the arrangement. Because the anticipated effective date would occur after September 20, 2014 (the ABL Facility maturity date), the court modified the stay to prohibit enforcement actions due to Algoma s failure to pay amounts due under the ABL Facility on September 20. In a chapter 15 proceeding, no automatic worldwide stay applies upon filing as in chapter 11 cases. Once the court recognizes a foreign main proceeding, the protections of sections 361 and 362 of the Bankruptcy Code apply with respect to property within the U.S. 5 However, a recognition hearing requires 21 days notice to parties potentially subject to a stay, creating a gap period during which no stay applies. Accordingly, Algoma requested provisional relief under section 1519 of the Bankruptcy Code to apply sections 362 and 365(e) of the Bankruptcy Code on an interim basis. Such provisional relief requires satisfaction of the injunctive relief standard, which Algoma met. 6 Because section 362 of the Bankruptcy Code provides broader protections than the limited CBCA stay, Algoma acted carefully to ensure that it would not unduly restrict trade creditors, in consideration of the Canadian court s limited stay. The court granted Algoma s request for provisional relief at the first day hearing on July 17, 2014, and extended the application of sections 362 and 365(e) of the Bankruptcy Code on a final basis upon recognition of the CBCA proceeding as a foreign main proceeding on August 20, Providing Adequate Protection to Secured Creditors In order to make the stay of proceedings more palatable for secured creditors and because of the consensual nature of the proceedings, Algoma offered its secured creditors adequate protection during the proceedings. Notably, the CBCA does not contemplate adequate protection, and section 361 of the Bankruptcy Code (setting forth adequate protection options) applies only upon recognition of a foreign main proceeding. Nevertheless, at the outset of the proceedings, Algoma offered to provide adequate protection in the form of payment of advisor fees for administrative agents and indenture trustees, delivery of a budget, and payment of interest at the non-default contract rate. 7 Algoma also ultimately reached an agreement with its secured creditors to pay default interest on its secured debt from September 20, 2014 (when the ABL Facility matured) until the effective date of the Arrangement on November 14, Section 192(4) of CBCA U.S.C See 11 U.S.C. 1519(e). 7 It bears noting that providing adequate protection supports the argument that no greater harm will result to creditors if a provisional stay is granted, one of the factors required under section 1519 of the Bankruptcy Code.

5 KIRKLAND & ELLIS 5 Conclusion Ultimately, the Canadian court entered a final order approving the Arrangement on September 15, On the same day, Algoma sought recognition of the Canadian court s final order, which the Delaware bankruptcy court granted on September 24, Algoma finalized its secured debt refinancing and the Arrangement became effective on November 14, As Algoma s restructuring illustrates, combining a CBCA process with an ancillary U.S. chapter 15 recognition proceeding can effectuate a balance sheet restructuring of a company with assets in Canada and the U.S. in a highly effective and efficient manner. Given the proper circumstances, including consensus among the impaired creditor groups, a financial restructuring pursuant to a CBCA plan of arrangement can potentially be faster, less expensive, and less damaging to the business than a restructuring under the CCAA. If you have any questions about the matters addressed in this publication, please contact the following Kirkland authors or your regular Kirkland contact. Paul M. Basta, P.C (212) Christopher T. Greco +1 (212) Patrick R. Evans +1 (212) Caroline P. Nguyen +1 (212) This communication is distributed with the understanding that the author, publisher and distributor of this communication are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assume no liability whatsoever in connection with its use. Pursuant to applicable rules of professional conduct, this communication may constitute Attorney Advertising KIRKLAND & ELLIS LLP. All rights reserved.