U.S. Steel made the bold move to expand its operations into Canada with the purchase of Stelco in 2007 but with the financial meltdown coming soon after, U.S. Steel is now in court to try and settle its debt claim against its nearly insolvent Canadian subsidiary.
When U.S. Steel went into the purchase, the steel industry was booming and U.S. Steel was looking for a company that it could purchase to provide synergies and boost its overall profitability. In fact at the time, U.S. Steel analysts predicted that Stelco could add as much as $360 million a year to the bottom line.
However, with the financial crisis hitting hard in 2008, demand for steel quickly evaporated and along with it, the confidence of steel customers globally. As a result, instead of generating millions in revenue, the newly named U.S. Steel Canada created billions in losses and drained U.S. Steel’s cash reserves in an effort to keep going.
Battle for Control
U.S. Steel Canada took on significant debt after the buyout with a $1.6 billion loan as well as a $600 million revolving credit facility. U.S. Steel has now taken its Canadian subsidiary to court to get these funds repaid. If U.S. Steel is successful in its claim, then it will become U.S. Steel Canada’s largest creditor and regain the power it needs to restructure the organization to meet its needs.
On the other hand, U.S. Steel Canada is claiming that the cash and other funding provided to it were equity injections and therefore the lowest on the list of any credit claim in the event of insolvency. In fact, many opponents of the original purchase of Stelco think that U.S. wanted to buy the company originally just to gut it and remove a major competitor.
Whatever the outcome, it is almost certain that the Canadian steel sector is going to suffer a massive blow even if the outcome of the trial in Pittsburgh ends up working in its favor.