SEC Order Granting Application: Algoma Steel Inc.

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Trust Indenture Act - Exemptive Orders

SEC Order Granting Application

Securities and Exchange Commission (File No. 22-28638)

Order Granting Application: Algoma Steel Inc.

December 23, 2002

Algoma Steel Inc. has filed an application under Section 304(d) of the Trust Indenture Act of 1939. In that application, Algoma Steel has asked the Commission to exempt from the certificate or opinion delivery requirements of Section 314(d) of the 1939 Act certain provisions of an indenture dated January 29, 2002, as supplemented by indentures dated January 29, 2002 and September 9, 2002, between Algoma Steel and Wilmington Trust Company. Algoma Steel seeks an exemption to the extent that the indenture allows specified dispositions of, and the related release of the indenture's lien with respect to, certain collateral that are made in Algoma Steel's ordinary course of business. A description of the indenture and the basis for the request is more fully set forth in the application from Algoma Steel dated November 1, 2002. That application is on file in the Commission's Public Reference Section, File No. 22-28638, 450 Fifth Street, NW, Washington, DC 20549.

It appears to the Commission, upon consideration of the application and the indenture, that a conditional exemption from the requirements of Section 314(d) of the 1939 Act is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the 1939 Act. In this regard, among other things:

The indenture permits Algoma Steel to dispose of collateral in the ordinary course of its business and have the collateral released from the indenture's lien;

Algoma Steel will deliver to the trustee annual audited financial statements; and

Algoma Steel will deliver to the trustee a semi-annual certificate stating that all dispositions of collateral during the relevant six-month period occurred in Algoma Steel's ordinary course of business and that all the proceeds were used as permitted by the indenture.

The Commission issued a notice on November 20, 2002 giving interested persons until December 19, 2002 to request a hearing on the application. As of December 23, 2002, there have been no requests for a hearing on the application. IT IS ORDERED that the provisions of the indenture governing specified dispositions of collateral and releases of the collateral from the indenture's lien that are made in Algoma Steel's ordinary course of business shall be, and the same are, conditionally exempted from the certificate or opinion delivery provisions of Section 314(d) of the 1939 Act.

For the Commission, by the Division of Corporation Finance, pursuant to delegated authority.

Margaret H. McFarland Deputy Secretary

SEC Notice of Application

Securities and Exchange Commission (File No. 22-28638)

Application and Opportunity for Hearing: Algoma Steel Inc.

November 20, 2002

The Securities and Exchange Commission gives notice that Algoma Steel Inc. has filed an application under Section 304(d) of the Trust Indenture Act of 1939. Algoma Steel asks the Commission to exempt from the certificate or opinion delivery requirements of Section 314(d) of the 1939 Act certain provisions of an indenture dated January 29, 2002, as supplemented by indentures dated January 29, 2002 and September 9, 2002, between Algoma Steel and Wilmington Trust Company. The indentures relate to 11% Secured Notes due 2009 and 1% Convertible Secured Notes due 2030.

Section 304(d) of the 1939 Act, in part, authorizes the Commission to exempt conditionally or unconditionally any indenture from one or more provisions of the 1939 Act. The Commission may provide an exemption under Section 304(d) if it finds that the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the 1939 Act.

Section 314(d) requires the obligor to furnish to the indenture trustee certificates or opinions of fair value upon any release of collateral from the lien of the indenture. The application requests an exemption from Section 314(d) for specified dispositions of collateral that are made in Algoma Steel's ordinary course of business.

In its application, Algoma Steel alleges that:

the indenture permits Algoma Steel to dispose of collateral in the ordinary course of its business;

Algoma Steel will deliver to the trustee annual audited financial statements; and

Algoma Steel will deliver to the trustee a semi-annual certificate stating that all dispositions of collateral during the relevant six-month period occurred in Algoma Steel's ordinary course of business and that all the proceeds were used as permitted by the indenture.

Any interested persons should look to the application for a more detailed statement of the asserted matters of fact and law. The application is on file in the Commission's Public Reference Section, File Number 22-28638, 450 Fifth Street, NW, Washington, DC 20549.

The Commission also gives notice that any interested persons may request in writing that a hearing be held on this matter. Interested persons must submit those requests to the Commission no later than December 19, 2002. Interested persons must include the following in their request for a hearing on this matter:

the nature of that person's interest;

the reasons for the request; and

the issues of law or fact raised by the application that the interested person desires to refute or request a hearing on.

The interested person should address this request for a hearing to: Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. At any time after December 19, 2002, the Commission may issue an order granting the application, unless the Commission orders a hearing. For the Commission, by the Division of Corporation Finance, pursuant to delegated authority.

Jill M. Peterson Assistant Secretary

Application for Exemption

ALGOMA STEEL INC. 105 West Street Sault Ste. Marie, Ontario, Canada P6A 7B4

November 1, 2002

Director, Division of Corporation Finance Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549

Re:

Algoma Steel Inc. Application for Exemption Pursuant to Section 304(d) of the Trust Indenture Act of 1939, as amended

Ladies and Gentlemen:

Algoma Steel Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (the "Company"), hereby requests, pursuant to Section 304(d) of the Trust Indenture Act of 1939, as amended (the "TIA"), that the Director of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") issue an order exempting from the provisions of Section 314(d) of the TIA certain dispositions of collateral made in accordance with the terms of the Indenture, dated as of January 29, 2002 (the "Indenture"), as amended and supplemented, between the Company and Wilmington Trust Company (the "Trustee"), under which the Company has issued the Notes (as defined below), the General Security Agreement, dated as of January 29, 2002 (the "General Security Agreement"), by the Company in favour of Computershare Trust Company of Canada (the "Collateral Agent"), the Demand Debenture, dated as of January 29, 2002 (the "Demand Debenture") and the Trust Moneys Account Hypothecation Agreement, dated as of January 29, 2002, each between the Company and the Collateral Agent (the "Trust Moneys Account Hypothecation Agreement," and together with the General Security Agreement and the Demand Debenture, the "Security Documents"), the Collateral Agency Agreement, dated as of January 29, 2002 (the "Collateral Agency Agreement"), among the Company, the Trustee and the Collateral Agent, and the Intercreditor Agreement, dated as of January 29, 2002, by and among the Trustee, Bank of America, N.A., The Canada Trust Company and the Company (the "Intercreditor Agreement"). The Company has issued its 11% Secured Notes due 2009 in the aggregate principal amount of U.S.$125 million (the "2009 Notes") pursuant to the Indenture and the First Supplemental Indenture, dated as of January 29, 2002, between the Company and the Trustee (the "First Supplemental Indenture") and its 1% Convertible Secured Notes due 2030 in the aggregate principal amount of U.S.$62.5 million (the "2030 Notes," and together with the 2009 Notes, the "Notes") pursuant to the Indenture and the Second Supplemental Indenture, dated as of January 29, 2002, between the Company and the Trustee (the "Second Supplemental Indenture," and together with the First Supplemental Indenture, the "Supplemental Indentures"). Copies of the Indenture, the Supplemental Indentures, the Security Documents, the Collateral Agency Agreement and the Intercreditor Agreement are enclosed with this application.

Pursuant to the Indenture, the Security Documents and the Intercreditor Agreement, the Notes are secured by a first charge on fixed assets of the Company, subject to the prior security for a term loan in a maximum principal amount of U.S.$50.0 million and, to the extent permitted by applicable laws, a second charge on other assets, including inventory and accounts receivable. 1 Payments in respect of the Notes, whether on account of principal or interest or otherwise, are subordinate to the full and final payment of the Company's revolving credit facility and term loan. 2 In addition, neither the Trustee nor the holders of the Notes are entitled to declare a default or event of default or make any demand for payment of or accelerate the time for payment of any obligations under the Notes until full and final payment of the Company's revolving credit facility and term loan. 3

The Notes were issued in connection with the reorganization (the "Reorganization") of the Company under the Third Amended and Restated Plan Arrangement and Reorganization (the "Plan") pursuant to the Companies' Creditors Arrangement Act (Canada) and the Business Corporations Act (Ontario). 4 In the Reorganization, claims in respect of the Company's outstanding First Mortgage Notes due 2005 were converted into and exchanged for the Notes and common shares of the Company.

Section 304(d) of the TIA permits the Commission, upon its own motion or by order on application by an interested person, to "exempt conditionally or unconditionally any person, registration statement, indenture, security or transaction, or any class or classes of persons, registration statements, indentures, securities, or transactions, from any one or more of the provisions of this title, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by this title." As set forth in Release No. 39-2263 (effective May 15, 1991), the Commission has delegated to the Director the authority to issue orders granting exemptive relief pursuant to Section 304(d) of the TIA.

Description of the Company's Business

The Company is a vertically integrated steel producer located in Sault Ste. Marie, Ontario and is Canada's third largest steel producer, accounting for approximately 13% of Canadian raw steel production. In 2001, the Company produced approximately 2.2 million tons of raw steel and shipped approximately 1.9 million tons of finished products. The Company's principal product is sheet which represented 80% of its annual shipments in 2001 with plate products accounting for the balance. The principal markets for the Company's products are steel service centers, the automotive industry, steel fabricators and manufacturers. Currently, virtually all of the Company's production is sold in Canada and the United States. The Company's sales for the year ended December 31, 2001 were U.S.$570.0 million.

The Company's common shares are listed for trading on The Toronto Stock Exchange under the trading symbol "AGA."

Description of Certain Provisions of the TIA and the Indenture

Generally, Section 314(d)(1) of the TIA requires the delivery of certain certificates and opinions in connection with obtaining the release of collateral subject to the lien of an indenture. Each release of collateral that is subject to the lien of an indenture requires the obligor to deliver to the indenture trustee a certificate or opinion from an engineer, appraiser or other expert as to the fair value of the collateral to be released, and to include a statement that, in the opinion of the expert delivering the certificate, the proposed release will not impair the security under the indenture in violation of the indenture's terms. Furthermore, the certificate or opinion must be delivered by an independent expert if the fair value of such collateral and of all other property released since the commencement of the then current calendar year is equal to or greater than 10% of the aggregate principal amount of the indenture securities at the time outstanding.

Section 10.14(a) of the Indenture provides for the Company's compliance with the requirements of Section 314(d)(1) of the TIA in connection with the release of property or securities from the lien of the Indenture and the Security Documents. Section 10.14(b) of the Indenture further provides that the Company shall not be required to comply with Section 10.14(a) in respect of transactions undertaken pursuant to Section 10.06.

Section 10.06 of the Indenture provides that, so long as there is no Event of Default, the Company may, without any prior release or consent by the Trustee, conduct ordinary course activities in respect of the collateral subject to the lien of the Indenture which do not individually or in the aggregate adversely affect the value of such collateral including: making cash payments (including for the scheduled repayment of Indebtedness) from cash that is at any time part of the Collateral in the ordinary course of business that are not otherwise prohibited by the Indenture and the Security Documents; selling or otherwise disposing of inventory in the ordinary course of business; collecting, selling or otherwise disposing of accounts receivable in the ordinary course of business; selling or otherwise disposing of in the ordinary course of business free from the Liens of the Security Documents, any machinery, equipment, furniture, apparatus, tools or implements, materials or supplies or other similar property ("Subject Property") which, in the reasonable opinion of the Company, may have become obsolete or unfit for use in the conduct of its businesses or the operation of the Collateral upon replacing the same with, or substituting for the same, new Subject Property constituting Collateral not necessarily of the same character but being of at least equal value as the Subject Property so disposed of as long as such new Subject Property becomes subject to the Liens of the Security Documents; and selling or otherwise disposing of in the ordinary course of business any personal property the use of which is no longer necessary or desirable in the proper conduct of the business of the Company and is not material to the conduct of the business of the Company.

Discussion

The TIA was adopted in response to certain then common abuses involving publicly issued debt securities. One such abuse was the practice of substituting collateral of significantly lesser value for collateral which had originally been subject to the lien of an indenture, with the effect of impairing the collateral security enjoyed by the holders of the securities secured thereby. See Hazard v. Chase National Bank , 159 Misc. 57, 287 N.Y.S. 541 (Sup. Ct. 1936), aff'd , 257 App. Div. 950, 14 N.Y.S.2d 147 (1939), aff'd , 282 N.Y. 652, 26 N.E. 2d 801, cert.denied , 311 U.S. 708 (1940) (involving abuse described).

Allowing certain collateral to be released without requiring compliance with the provisions of Section 314(d) of the TIA, as provided in Section 10.14(b) of the Indenture, would not lead to the abuses described above, nor would requiring such compliance further the interests of the holders of the Notes or the purposes of the TIA. In recognition of this, the Commission has granted exemption applications, and the staff of the Commission has taken no-action positions, in connection with a number of indentures containing substantially similar provisions as those described in Section 10.14(b) of the Indenture. See Coltec Industries, Inc. , Trust Indenture Act Release No. 2367, 1998 LEXIS 1753 (August 17, 1998); Metallurg, Inc. , Trust Indenture Act Release No. 2352, 1997 WL 156652 (S.E.C.) (April 2, 1997); Jack Eckerd , SEC No-Action Letter, 1991 SEC No-Act. LEXIS 198 (February 5, 1991), Monogram Models, Inc. , SEC No-Action Letter, 1987 SEC No-Act. LEXIS 2531 (October 1, 1987); Mary Kay Cosmetics, Inc. , SEC No-Action Letter, 1986 SEC No-Act. LEXIS 2470 (June 17, 1986).

In the exemption applications and no-action letter requests listed above, the issuer regularly sold inventory, collected customer receivables or engaged in other limited activities which resulted in releases in the ordinary course. Given the volume of such transactions, the issuer obtained relief from the requirements of Section 314(d) since compliance therewith for such transactions would be impractical and prohibitively expensive and would impair the issuer's ability to operate its business efficiently in the ordinary course. In lieu of the certificate requirements of Section 314(d), the issuer in each of the exemption applications and no-action letter requests listed above agreed to (i) deliver a certificate to the trustee generally confirming that all dispositions of collateral in the previous six months were in the ordinary course of the issuer's business and that the proceeds therefrom had been used in the issuer's business or to make payments on the indenture securities or as otherwise permitted by the indenture and the related documents and (ii) deliver annual audited financial statements to the Trustee.

Consistent with these exemption applications and no-action letters, Section 10.14(b) of the Indenture requires the Company to deliver to the Trustee on or before August 29, 2002 and within 15 days following each December 31 and June 30 thereafter a certificate signed by two officers to the effect that all of the transactions undertaken by the Company pursuant to Section 10.06 during the preceding semi-annual period were in the ordinary course of the Company's business and that all proceeds therefrom were used by the Company as permitted by the Indenture and the Security Documents. If the Company fails to provide the Trustee such semi-annual certificate, the Indenture protects the holders of the Notes by, in effect, reinstating the requirements of Section 314(d)(1) of the TIA as to the release of collateral. Furthermore, Sections 4.08 and 4.10 require the Company to deliver annually to the Trustee financial statements audited by independent accountants of established national reputation.

Section 10.14(c) of the Indenture also provides that the fair value of the collateral released pursuant to Section 10.06 of the Indenture is not to be considered in determining whether the aggregate fair value of the collateral released in any calendar year exceeds the 10% threshold specified in Section 314(d)(1) of the TIA. With respect to Section 10.14(c) of the Indenture, the exclusion is necessary given that the Company sells inventory and collects accounts receivables on a daily basis in the ordinary course of its business. If sales of the collateral subject to the lien of the Indenture and collection of such collateral were counted for purposes of the 10% threshold test, the Company would, as a practical matter, not have the benefit of the threshold. Given the Company's level of activity in the sale of inventory and collection of receivables, the 10% threshold (which would initially be approximately $18.75 million) would likely be reached soon after the beginning of each calendar year. Thereafter, each release of any collateral that equaled or exceeded the greater of $25,000 or 1% of the outstanding principal amount of the Notes, even if such release would otherwise be exempt from the requirement to deliver an opinion or certificate of an independent engineer, appraiser, or other expert, would have to comply with such delivery requirements. Compliance with such requirements would be extremely burdensome or impossible and prohibitively expensive, and would serve no real purpose given other substantial protections provided by the Indenture to the holders of the Notes. Again, however, the Company's right to rely on Section 10.14(c) of the Indenture is conditioned upon the Company having furnished to the Trustee all certificates then required by Section 10.14(b) of the Indenture.

Furthermore, Section 10.06 applies only to transactions in the ordinary course of the Company's business, and, as a result, dispositions of collateral that are not in the ordinary course of business would require separate certificates or opinions of fair value in accordance with Section 314(d) of the TIA. In addition, Section 4.17 of the Indenture places limitations on the ability of the Company to dispose of assets and the Company's use of proceeds from dispositions not in the ordinary course of business.

Finally, the Indenture provides other substantial protections to the holders of the Notes by including various restrictive covenants. These protections include, among others, limitations on making restricted payments (Section 4.03), incurring additional indebtedness (Section 4.04), entering into transactions with affiliates (Section 4.12), impairing the security interest (Section 4.13), declaring dividends and other payments (Section 4.14), incurring additional liens (Section 4.15) and selling assets (Section 4.17).

Conclusion

For the reasons set forth above, we believe that the provisions of Section 314(d) of the TIA should not be construed to apply to dispositions of collateral permitted by Section 10.06 of the Indenture. Furthermore, compliance with the provisions of Section 314(d) of the TIA would be unduly burdensome and is not necessary for the protection of the holders of the Notes or necessary or appropriate in the public interest and the lack of any requirement so to comply would be consistent with the protection of investors and the purposes fairly intended by the TIA. We also believe that the Indenture, the Security Documents and the Collateral Agency Agreement prevent the occurrence of extraordinary transactions affecting the collateral that would work to the detriment of the holders of the Notes. Consequently, the Company requests that the Director grant, pursuant to Section 304(d) of the TIA, an order conditionally exempting dispositions of collateral made in accordance with Section 10.06 of the Indenture from the requirements of Section 314(d) of the TIA.

Pursuant to Rule 4d-7(a) under the TIA, enclosed are three copies of this application, one of which is executed by the undersigned, a duly authorized officer of the Company. In accordance with Rule 4d-8(a) under the TIA, the Director should note that the name, address and telephone number of the Company is Algoma Steel Inc., 105 West Street, Sault Ste. Marie, Ontario, Canada P6A 7B4, telephone number: (705) 945-2351.

Should the Director have any questions or require any additional information in connection with this application, please contact Kenneth R. Blackman of Fried, Frank, Harris, Shriver & Jacobson at (212) 859-8280 or, in his absence, Joshua Wechsler at (212) 859-8689.

Respectfully submitted,

ALGOMA STEEL INC.

By: /s/ PC Finley Name: Paul C. Finley Title: General Counsel and Corporate Secretary

Enclosures (Schedule A)

Schedule A List of Enclosed Documents for the Commission's Reference

Copies of the following documents have been provided by the Company with this application for the Commission's reference. Each letter corresponds with the tab behind which the document can be found.

A)

the Indenture

B)

First Supplemental Indenture

C)

Second Supplemental Indenture

D)

Third Supplemental Indenture, dated as of September 9, 2002, between the Company and the Trustee

E)

the General Security Agreement

F)

the Demand Debenture

G)

the Trust Moneys Account Hypothecation Agreement

H)

the Collateral Agency Agreement

I)

the Intercreditor Agreement

439721

1

Section 10.01(a) of the Indenture provides in part that liens created under the Security Documents in respect of inventory and accounts receivable shall not be effective until the Company has received relief from the SEC from the provisions of Section 314(d)(1) of the TIA.

2

See Section 3.5 of the Intercreditor Agreement.

3

See Section 3.7(b) of the Intercreditor Agreement.

4

The Reorganization and the Plan are more fully described in the Company's Application for Qualification of Indentures under the TIA on Form T-3 filed with the Securities and Exchange Commission.

http://www.sec.gov/divisions/corpfin/cf-noaction/algoma122302.htm

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Modified: 01/14/2003