US Steel: 'If they had turned off the tap it would've been ugly for everyone'

The U.S Steel Canada executive who signed off on deals to keep the cash coming from its American parent company said he had no choice if he wanted to keep the Canadian operation going.

And while he may have tried to question some of the terms, he always signed off.

I wanted to do what was best for USSC and all stakeholders.- Mike McQuade, USSC president

Mike McQuade, the executive charged with navigating U.S. Steel Canada through choppy waters told a bankruptcty protection hearing Thursday that without infusions of cash from the parent company, the Canadian subsidiary risked not being able to make its pension fund payments, cut its payroll cheques and pay its suppliers. 

Bottom line, the company needed cash. 

"It allowed us to continue to operate the business," he said.

And so, in the interest of staying alive, McQuade signed on to financing terms prescribed by the parent company, headquartered in Pittsburgh, for money exchanged in the years following U.S. Steel's acquisition in 2007.

Is it equity or debt? Stakes are high

Those terms are now under close scrutiny as Ontario Superior Court Justice Herman Wilton-Siegel decides on the merits of a $2.2 billion claim that U.S. Steel, is making in the Canadian operations' bankruptcy protection process. At issue is whether that money is debt or equity: If it's debt, USS is at the front of the line for the company's assets, ahead of pensioners- and putting pensions at risk. If its equity, the company moves to the back of the line leaving some hope for thousands of retirees their pensions will still be funded.

McQuade was a vice president at Stelco prior to U.S. Steel acquiring the company, moved up to become CFO in 2010 and eventually president of the U.S. Steel Canada operations in 2013. He took the stand in an ongoing hearing on Thursday.

"I don't believe as a standalone that U.S. Steel Canada or Stelco as it was known, would've had the wherewithal to survive the financial downturn," he testified.

I believed we were still an asset worth owning.-Mike McQuade, USSC president

So every time the parent company drew up or amended terms for the various pots of money it made available for the Canadian operations after 2007, McQuade reviewed them, asked some questions of his counsel for U.S. Steel Canada, and signed the agreements, he told the court.

The terms of the financing appeared favourable to U.S. Steel Canada, he said, without as many conditions, covenants and terms as prior third-party financing available to Stelco had been.

• DAY 1: U.S. Steel was optimistic when it bought Stelco, but now it wants billions back
• DAY 2: U.S. Steel CFO says Canadian arm was 'bleeding cash' in 2013
• DAY 3: Expert testimony: What passes for fireworks in $2.2 billion U.S. Steel trial

McQuade told Michael Barrack, attorney for U.S. Steel, he never considered the advances of money from the U.S. Steel parent company anything other than debt.

But he also agreed with a statement by Alan Mark, attorney for the province, that the decision-making and business operations for the U.S. Steel Canada plants, were "highly centralized in Pittsburgh."

The province and steelworkers, both union and salaried, object to that claim of debt and fear that if U.S. Steel becomes the largest creditor, it would compromise the now-independent U.S. Steel Canada's ability to meet other obligations, like pensions.

'We were in a tight timeline'

Some of the hearing Thursday centred on October 2013. For much of the fourth quarter that year, McQuade was basically living in Pittsburgh, brought in for company-wide business training and also to work on a plan to make the Canadian operations profitable again.

Under questioning from Mark, McQuade said he was focused on business improvement that quarter, on a "turnaround" plan.

Meanwhile, as the court heard last Friday, a new CFO for the parent company was disturbed by how much cash was going to the Canadian operations, and instituted a rule that no more money be sent to Canada unless it was secured, or had collateral attached to it.

Some of the questions for McQuade this Thursday centred on the security terms the company was adding to its agreements to fund the subsidiary under a revolving loan. A first security agreement called for the Canadian operations' inventory of iron ore pellets to be used as collateral.

But an amendment expanded the collateral the parent was seeking to encompass the entire U.S. Steel Canada business and its assets.

Though McQuade was "concerned" about some of those terms, he signed it, knowing the company had payroll, pension and vendor payments to make — in a matter of days. He said no one from U.S. Steel issued an ultimatum about signing the security agreement.

"We were in a tight timeline," he said.

"If they had turned off the tap, it would've been ugly for everyone," Mark said.

'I believed we were still an asset worth owning'

An attorney representing retired steelworkers, Kris Borg-Olivier, asked McQuade whether he considered the fact that agreeing to U.S. Steel's security terms would put it ahead of the union and pension obligations the company had, should a restructuring take place.

"I would think they might have been interested, yes," McQuade said, "But I wanted to do what was best for USSC and all stakeholders. You can look at it another way: Not having cash would significantly impact that same group."

It wasn't until late December that McQuade began hearing that U.S. Steel was considering "other alternatives to business improvement," like restructuring under the Canadian Creditors' Arrangement Act. It ultimately pursued that in the fall of 2014.

Even though there was not much activity at the Canadian plants after the parent had idled them, McQuade testified Thursday he was optimistic.

"I believed we were still an asset worth owning," he said.