US Steel Canada Heads to Mediation

The debt issue has become a priority for stakeholders at US Steel Canada that include the provincial government, union and salaried workers, and former Stelco president Bob Milbourne. The group fears that if US Steel’s claims are accepted, the company will use the debt to buy the bankrupt Canadian asset reducing the influx of cash that would top up the underfunded pension plan.

The group argues that the debt in question was actually an equity investment in the company and not a loan. The Hamilton Spectator reported that US Steel paid $1.2 billion in cash for the Stelco and assumed $785 million in debt. Another $34 million was put in the worker’s pension plan. By purchasing the assets US Steel sought control over the company rather than providing a loan to Stelco for it to manage its own affairs. The distinction is important because equity investments are considered last when paying creditors from a bankrupt company.

US Steel workers said that allowing the claim by US Steel, a foreign entity, to stand would harm the Canadian economy.

“Approval of these claims would sanction and encourage parent companies to engage in unilateral, undisclosed, and arbitrary financial engineering involving their captive Canadian subsidiaries for their exclusive benefit and to the extreme prejudice of other stakeholders, including unions, employees, retirees, and the subsidiaries themselves,” wrote the union in a brief.

US Steel has had a contentious relationship with the Canadian government and union workers at Hamilton and Lake Erie Works. US Steel was sued in 2008 by the Canadian government for not keeping production and employment promises made when the former Stelco assets were purchased. The suit was dropped in 2011 in a settlement agreement with the federal government that was never fully disclosed. The ensuing years were marked by lockouts and layoffs culminating in the permanent shutdown of all steelmaking operations at Hamilton Works in 2013 and bankruptcy in 2014.

Financial analysts for the province argue US Steel’s claims are more consistent with equity payments than debt. “A third party lender in an arm’s length transaction would not have provided financing to (U.S. Steel Canada) in the amounts and on the terms as those provided by USS,” wrote Brad Hall of Alix Partners LLC.

In another controversy, USW lawyers are working to bar a decision by US Steel to move key production at US Steel Canada to the United States. If US Steel cannot be stopped, 15,000 tons of production will be eliminated from Hamilton Works and Lake Erie Works, costing US Steel Canada an estimated $40 million of revenue in Q4 2015.

“This is an attempt to devalue our business here,” said USW Local 8782 President Bill Ferguson. “We will be going to court, we’re going to demand that 15,000 tons stay here in Canada.”

Ferguson, in his YouTube update to the membership, noted that the things are “heating up, things are starting to change.”

In response to rumors of layoffs, he assured workers there was no official notice as of Friday, Sept. 11. Market conditions, however, do not preclude the possibility of some limited layoffs in the future.