Financial expert pans U.S. Steel’s claim about loan

Evidence in the U.S. Steel claims trial wrapped up Monday

TORONTO — Evidence in the U.S. Steel claims trial ended Monday with a financial expert shredding the company’s claim the former Stelco owes it more than $2.2 billion.

John Finnerty, hired by the provincial government to assess U.S. Steel’s claims, was blunt, telling Superior Court: “It is my opinion from a financial economics perspective that the terms of the term and revolver loans ... are suggestive of their being equity rather than debt.”

“I’m not saying that U.S. Steel was acting irrationally, only that it was acting like an equity investor, not a lender,” he added.

That difference is important for U.S. Steel. If Superior Court Judge Herman Wilton-Siegel decides the company’s claim is legitimately debt, it emerges as U.S. Steel Canada’s largest creditor and gains enormous power in shaping the final outcome of Stelco’s restructuring under creditor protection.

If his decision sides with the coalition of workers, retirees and the provincial government opposing the claim, the American parent company goes to the absolute end of the line of creditors waiting to be paid.

Opponents fear a win for U.S. Steel will mean a restructuring that leaves little or no cash to top up the Stelco/U.S. Steel Canada pension plans. That, in turn, would mean sharp cuts in retirement income for pensioners, a huge pension insurance bill for the province and a precedent other companies would be quick to copy.

U.S. Steel claims it advanced more than $2.2 billion to its Canadian subsidiary under a term loan and a revolver loan. Finnerty looked at 15 measures of how those loans were administered and said most of them point to them being equity injections rather than debt.

Most telling, he said, were the facts U.S. Steel agreed to waive in- terest payments under the revolver loan and to allow U.S. Steel Canada to make a large and early payment on the term loan’s principle — something that’s hardly ever done without some financial penalty.

“It would be very unusual to see a borrower repay a large sum ... that has the character of a dividend, which is a feature of an equity situation,” he said.

Finnerty also testified the f act money borrowed under one loan was used to make payments under the other also pointed to equity injections rather than real debt.

“Really, the revolver loan was being used as an equity instrument to take debt off the balance sheet of U.S. Steel Canada,” he said. “The cash was just being round-tripped.”

Also telling, he said, is the f act there are no financial covenants attached to the loan — restrictions such as requiring the borrowing company to meet sales or revenue or debt to equity ratios. Missing those targets, with private lenders, can mean a loan is pushed into default and a company into bankruptcy. Cash injections without those covenants, Finnerty said, are equity investments.

The case is expected to continue Tuesday with closing arguments. In a related development, the Ontario Court of Appeal is to release its decision Tuesday on a United Steelworkers motion to unseal the “secret” 2011 deal between the former Harper government and U.S. Steel that ended a federal lawsuit to enforce employment and production promises the company made in exchange for approval to buy Stelco in 2007. All of those promises were broken within a year of the deal being closed. The federal government sued in 2009 to enforce them, but suddenly dropped the case in 2011 in exchange for promises of capital investment in the Canadian plants and donations to community groups.