Special Edition
June 29, 2017

Redistribution of Value in the Stelco/Bedrock Plan of Arrangement

State-Sanctioned Theft of What Belongs to Workers and Canadians by Right

- K.C. Adams -

PDF

Looking at the numbers behind the Bedrock plan to seize control of Stelco
while under the Companies' Creditors Arrangement Act (CCAA)

Discussion is swirling around the Bedrock/Stelco Plan of Arrangement (PoA). Besides denouncing the theft of what belongs to workers by right, many are questioning the amount the Bedrock oligarchs are paying for Stelco's steel production facilities and ongoing business. The Hamilton Spectator puts the figure at $500 million. Others suggest the amount is far less taking into account that Stelco has around $300 million in cash accumulated under Companies Creditors' Arrangement Act (CCAA) protection. Using the police powers of the CCAA, Stelco has refused since September 2014, to make any payments into the pension plans or pay the legal entitlements of retirees to Other Post Employment Benefits (OPEBs). These unpaid legitimate claims of retirees have gone directly into company cash on hand and will become the property of Bedrock.

Another consideration reducing the proposed Bedrock payment arises from it not having to pay immediately most of the commitment for the pension plans and OPEBs. Much of the payments will come from future new value Stelco steelworkers produce. This means much of the promised payments will not come from Bedrock in the U.S. but from the realized steel value of Stelco production. Some of the future amounts, which satisfy only a fraction of the legitimate claims of retirees, are dependent on the amount of realized production. Those future payments into the plans will soon cease altogether, as the PoA removes retiree benefits and pension plans from the balance sheet cutting off existing and future retirees from any claim on Stelco produced value. This leaves more realized new value for the Bedrock oligarchs to seize as added-value and to dangle in front of prospective buyers who may want to purchase Stelco from Bedrock.

Deal Between Two Sets of U.S. Oligarchs

The PoA is essentially an agreement between two sets of U.S. oligarchs for transfer of value and ownership of Canadian steel mills called Stelco. The transfer mediated by the Canadian state through the CCAA, directly reduces the claims of Canadian workers and retirees on the new value Stelco workers produce. This means the new value the U.S. oligarchs seize from Stelco's ongoing production, the added-value, is increased. Also, the agreement absolves the U.S. oligarchs of the responsibility for environmental remediation of the historical Stelco lands after a one-time payment of $80 million.

The transfer of ownership from one set of U.S. oligarchs to another with the assistance of the Canadian state and its CCAA accomplishes what the U.S. Steel oligarchs wanted to do all along. Through a lawyer, they told the leadership of Local 1005 USW in 2014 that if steelworkers did not agree to take the pensions and OPEBs off the balance sheet voluntarily, then it would be forced upon them through the CCAA. The transfer of ownership with the state-organized CCAA will accomplish what the U.S. oligarchs wanted to do all along. The PoA fix between the USS and Bedrock was hatched last year. The plan was to transfer ownership to Bedrock with minimum damage to USS. Pensions and OPEBs would be taken off the balance sheet, substantial unsecured payments due and debt including the $150 million loan from the Ontario government would be extinguished with the Bedrock oligarchs paying almost nothing to take control.

The PoA states, "On November 1, 2016, USS announced that it had reached a non-binding agreement with Bedrock regarding the sale and transition of its ownership of USSC (the 'ITS' ). The agreement incorporated terms related to the treatment of USS' secured and unsecured claims against USSC, and contemplated the provision of mutual releases among key stakeholders, including USSC, the continued provision of certain shared services to USSC during a transition period, and an agreement for a five-year supply by USS of certain key raw materials to USSC."[1]

Looking at the Numbers in the PoA

Under the proposed PoA, an immediate payment will be made of $126.4 million to U.S. Steel, the owner of its supposed bankrupt yet profitable subsidiary. This reduces Stelco's cash on hand from $300 million to $173.6 million. The CCAA judge agreed to this strange payment to the equity owners of a bankrupt enterprise ahead of all other claimants including even an outstanding loan of $150 million from the Ontario provincial treasury. Putting the owners of U.S. stock equity first in line has the appearance of a victim paying an aggressor for having inflicted destruction, pain and suffering.

No one twisted the arms of executives of U.S. Steel to buy Stelco in 2007. They jumped at the chance for three reasons:

1) The steel sector was at the top of its cyclical pattern of boom and bust. The executives at USS appeared to forget that booms inevitably bust in this crisis-ridden imperialist economy.

2) They wanted to block competitors from gaining control of Stelco, in particular PAO Severstal from Russia, an consortium that at the time was interested in making Stelco a major factor in its direct entry into the North American steel sector.

3) USS wanted to take control of Stelco to block it from competing with its U.S. mills in supplying steel to the lucrative automotive sector.

With the economic crisis in 2008 and the downturn in the steel sector, USS began a campaign to degrade Stelco and transfer its steel production to USS mills in the United States. USS broke all its promises of jobs and production levels agreed to under the Investment Canada Act. It locked out workers at both Hamilton Works and Lake Erie Works for extended periods demanding concessions, cratered the blast furnace at Hamilton Works, and sold off a productive facility in Hamilton to German imperialists called MANA masquerading as friendly businesspeople who turned out to be violently anti-worker and in opposition to Hamilton's economy and standard of living.

USS took away Stelco's best automotive customers, supplying them from its U.S. mills; it attacked retirees by forcing the removal of a cost-of-living allowance from their pension benefits, eliminated the defined-benefits pension plan for new employees, refused to honour its public commitment to make the pension plans whole by the end of 2015, and now under CCAA refuse to pay the legitimate OPEBs to Stelco retirees, and have stopped paying their municipal taxes to Hamilton and Haldimand. U.S. Steel since 2008 has generally played havoc with the steel communities and Canada's economy.

USS as a "Secured Creditor" to Itself and the
Previous Stelco Bankruptcy

The Bedrock payment to USS of $126.4 million is to be made despite U.S. Steel having voluntarily put Stelco into CCAA bankruptcy protection. A payment of this size to owners of equity of a bankrupt company appears fishy to say the least. Other claimants have been shuttled to the back of the line behind the claim of the current owners of Stelco, who are the owners of U.S. Steel stock equity listed on the stock exchanges.

Equity owners of bankrupt companies generally are considered below other claimants especially owners of debt. During the last Stelco CCAA bankruptcy in 2004-06, equity owners of Stelco shares lost almost all their money in the 2006 CCAA Plan of Arrangement. Many who lost money were steelworkers, retirees and others from the Hamilton community who had bought Stelco shares in an effort to prop up the company. Those in control of the 2006 CCAA process made Stelco equity stock ownership a target unlike the current bankruptcy. This reflects the Wild West nature of the CCAA and how the most powerful oligarchs control the process in their favour.

In 2006, Brookfield Asset Management, the Stelco CEO Rodney Mott who was parachuted in from the U.S. to pave the way for the eventual USS takeover, the CCAA Chief Restructuring Officer and Monitor and their allies seized control of the CCAA process. The plotters issued new Stelco shares to replace the old shares, which CCAA Judge Farley declared worthless. The plotters sold the new Stelco shares to themselves at a low price and then after exiting CCAA sold them a year later to U.S. Steel at a much higher price. It should be remembered that the hundreds of millions taken as a quick score in 2007, when U.S. Steel bought the new Stelco shares, went into the pockets of the oligarchs such as Mott and the Brookfield owners. The money USS paid was not put into Stelco for its renewal or used to make whole the pension plans or to assist the steel communities in any way.

Upon buying those new Stelco shares in 2007, USS deactivated them and transferred the Stelco equity into its own stock structure of share ownership in the United States holding what it calls "shares" in USSC (Stelco) its directly owned subsidiary. The value of Stelco's fixed assets, the buildings, machinery and other equipment in Hamilton and Nanticoke plus the circulating assets, mostly material to make steel such as stockpiled iron ore, the steel inventory and business as a going concern were added to the global assets of U.S. Steel.

USS paid around $1.1 billion for the new Stelco shares and another $900 million in assumed debt. It also assumed the social obligations that go with ownership of a large enterprise including in this case the pension plans and OPEBs. No other ownership of Stelco equity has since been established. Stelco's fixed and circulating assets, steel inventory, cash balance and business, technically the equity minus any liabilities remain the private property of owners of U.S. Steel stock until the Bedrock PoA takeover is finalized.

U.S. Steel executives declare that their equity ownership of Stelco exists on paper as "shares," but has ceased to exist in practice. It says the relationship with its wholly-owned subsidiary became that of a secured creditor owed $126.4 million and an unsecured creditor owed countless millions more. How is this possible or even rational? Could the owners of shares in a small bankrupt business declare that certain fixed and other assets of the company should not be considered as equity but as secured debt held by the owners of stock if that served their private interests? A creditor in a company is generally assumed to be an outside lender of money to the enterprise.

At any rate, besides raising the issue that these CCAA bankruptcies solve no problem and actually block finding a new direction that works, the comparison of this Stelco CCAA PoA and the previous one in 2006 raises serious questions. Both PoAs were given a judicial seal of approval even though no explanation for the difference between the dispersal of equity ownership in 2006 and today with this Bedrock PoA payment to the USS equity owners has ever appeared. The CCAA court has agreed to accept USS as both a Stelco creditor and equity owner. In effect, the court declares no ownership is responsible for the bankruptcy and the USS ownership should not suffer the loss of value of its shares in Stelco and USS stock or have its U.S. assets cover the Canadian liabilities.

The CCAA recognizes U.S. Steel's ownership of Stelco on paper but refuses to make it responsible in practice. This is convenient for the actual owners because they are in the U.S. and the CCAA has declared their assets cannot be used to settle the many claims against Stelco. In fact, the U.S. owners have been accepted as secured creditors and awarded $126.4 million.

CCAA Is a Fraud to Serve the Narrow Interests of Those in Control

The CCAA fraud in 2006 has now been eclipsed by this CCAA fraud in 2017. Obviously, USS did not want the bankruptcy of Stelco to affect, at least not directly, its USS equity stock ownership and assets in the United States. In this situation and with the approval of the CCAA court, USS concocted a firewall between the Stelco bankruptcy and its equity stock ownership and U.S. assets. The CCAA process turned the equity ownership of USS and its Stelco subsidiary into a creditor/borrower relationship in practice with USS holding $126.4 million in secured debt and millions more in unsecured debt and its equity stock ownership and U.S. assets untouched. This arrangement is very convenient for a U.S. consortium and confers on Canada a status of manipulated colony.

The U.S. ownership greatly damaged Stelco and weakened its gross income but with the sleight of hand and connivance of the state-organized CCAA, USS becomes the beneficiary of a payoff and avoids any direct threat to its equity stock ownership or assets in the United States. One could say that the U.S. oligarchs as a class are the beneficiaries of the damage to Stelco and this bankruptcy. The U.S. oligarchs' redistribution of value amongst themselves and away from the Canadian working class and economy benefits their narrow interests as now even greater added-value from future Stelco production will flow into their U.S. coffers.

Using the Cash on Hand to Purchase Stelco --
General Unsecured Creditor Pool

The PoA says another immediate payment is $15.4 million to the General Unsecured Creditor Pool. This represents 10 per cent of the total $154 million in claims of those in the Unsecured Pool. The CCAA court has awarded these creditors only 10 cents on the dollar. The Pool consists of suppliers, contractors and others who are owed money for services, loans or material.

The payment of $15.4 reduces the remaining Stelco cash on hand of $173.6 million to $158.2 million. In practice, Bedrock still has not used any of its own money, as it will gain the cash on hand on June 30, and no money will be paid before that time. The Unsecured Pool does not include the $150 million plus interest owed to the Ontario treasury as the PoA simply extinguishes the debt to the province, as if it never existed. Nor does it include U.S. Steel's claim of unsecured debt of over a billion dollars. Without explanation, USS dropped its claim of unsecured debt in the PoA, yet another example of possible collusion.

Municipal Taxes

A secured municipal tax claim to be paid for back property taxes, penalties and interest owed to the City of Hamilton totals $10 million. An unspecified amount, said to be around $2 million, is owed to other municipalities including Haldimand.

The estimated $12 million for back taxes to be paid upon exiting CCAA reduces the cash on hand from $158.2 million to $146.2 million.

Claim of Non-USW Employees

Non-USW secured creditors (non-USW employees) are to receive $9 million. This reduces the cash on hand from $146.2 million to $137.3 million.

Other Payments Not Detailed

The amounts of several other payments due upon exiting CCAA are not specified in the PoA.

The PoA states: "The Corporation will pay the DIP [Debtor in Possession] Lender all amounts required to satisfy all obligations and liabilities of the Corporation to the DIP Lender."

The DIP lender is Brookfield Capital Partners Ltd., one of the principals in control of the last Stelco bout in CCAA in 2004-06. Brookfield and others in the controlling clique at that time purchased the new Stelco shares before exiting CCAA and subsequently sold them to U.S. Steel for a quick fortune in 2007.

The amount of the DIP loan used and to be returned with interest and an exit fee will be calculated by June 30. Other payments under the PoA due on June 30 include CCAA Priority Payment Claims, Construction Lien Claims, and all claims secured by the CCAA Charges.

Stelco (USSC) cash on hand is $137.3 million after all known immediate claims are paid except for those payments that have to be determined in the final days before exiting CCAA. This does not include the promised money to pay certain claims for pensions, benefits and environmental remediation.

Pension Plans, OPEBs and Environmental Remediation

The payments due under agreements covering the pension plans, OPEBs and environmental remediation in the immediate sense are somewhat offset with loans from the Provincial treasury. The payments as they come due after Bedrock takes control should be considered as part of the ongoing operations and claims on the new value Stelco steelworkers produce. The promised claims for the pension plans, OPEBs and for environmental remediation will be covered by the value Stelco workers produce from making steel and having it realized. In this sense they are similar to claims for wages. Workers reproduce their wages and benefits when they produce new steel value and the value is realized. Wages and benefits come out of the new value workers produce as do benefits, pensions and issues such as environmental remediation.

Apart from the future promises, Bedrock is due to pay on June 30, a certain amount to the pension plans, OPEBs and for environmental remediation of the Stelco lands. These amounts essentially are claims on new value of a going concern business, which Stelco still is even while under CCAA. The amount will be reimbursed with the production of new value or will come out of what remains of the cash on hand.

The PoA states: "The Corporation will pay $30 million to the Main Pension Plans in accordance with the Pension Agreement."

The $30 million to be paid reduces the cash on hand from $137.3 million (not including certain other claims) to $107.3 million.

The PoA calls for $33 million to fund the OPEBs in the first year following exit from the CCAA. However, the $33 million immediate payment is mostly offset with a loan. The PoA states: "The Province will loan $22 million in aggregate to USSC in Years 1-2 to fund the Advance OPEB Payment."

If Bedrock takes the entire loan on June 30, the immediate amount it pays into the OPEBs is $8 million. The amount Bedrock will pay to meet only a portion of the legitimate claim of retirees for OPEBs will come from new value Stelco steelworkers produce both now and in the future. This net payment of $8 million reduces the cash on hand from $107.3 million to $99.3 million.

Another payment is for environmental remediation of the polluted Stelco land. With this payment Bedrock is absolved of all future responsibility for existing pollution caused in building Stelco and its ongoing production over the past century. The PoA makes this clear stating:

"Funds for Historical Environmental Issues

"1. At the Plan Implementation Date, a one-time payment of $61 million (U.S. Dollars) shall be paid to the Province on a non-refundable basis. For the avoidance of doubt, the receipt by the Province of $61 million (U.S. Dollars) in cash shall satisfy this condition."

This net payment of U.S.$61 million (CAD$80 million) reduces the cash on hand from $99.3 million to $19.3 million.

All promised future payments to the pension plans and OPEBs will come out of new value Stelco workers produce and cannot be considered as part of any purchase price. The payments will reduce the claim of Bedrock owners on the new value they control but the payments do not come out of their own cash reserves in the United States. This also holds true when they repay the provincial loans. In a sense, Bedrock already owns and controls Stelco at least since the bidding process ended with last November's agreement with U.S. Steel. It became obvious that those in control of the CCAA favoured Bedrock, especially U.S. Steel and its handpicked Monitor, Chief Restructuring Officer and DIP lender. The fact that Stelco under CCAA amassed cash on hand of $300 million by refusing to pay the claims for OPEBs, while paying millions to all the CCAA parasites, shows just how profitable the Stelco steel mills can be when prices are not below the price of production.

The provincial government has made the Bedrock takeover of Stelco virtually cashless for the new owners using internal accumulation of new Stelco value and provincial loans. In return for paying next to nothing Bedrock receives profitable facilities where workers are producing and will continue to produce enormous amounts of new value, from which Bedrock will claim added-value and do with it as it wishes. The existing imperialist relations of production dictate this right to seize the value workers produce and use it according to their narrow private interests.

Almost all the social responsibilities ownership has had towards the current and future Stelco retirees have been extinguished. Bedrock assumes little if any responsibility for environmental remediation for damage to the land that occurred while giving rise to the productive facilities it will now seize. The pensions, OPEBs and environmental responsibility have been taken off the balance sheet. The previous $150 million loan from the provincial government is extinguished and new loans to Bedrock are promised.

The PoA says:

"The Province (i) has agreed to the compromise of the entirety of its unsecured claims and interest accrued thereon which is approximately CAD$150.7 million;

"(ii) will provide secured loans to the Land Vehicle, the OPEB Entities and USSC to fund the closing of the Transaction and certain funding commitments thereafter; and (iii) will also provide a release of certain environmental liabilities relating to USSC's land."

After all the immediate known payments are made out of cash on hand, Bedrock still has $19.3 million in Stelco cash to pay for those few items to be finalized on or before June 30. At that time, they will gain access to Stelco workers' continuing production of new value. The promised future amounts for pensions and OPEBs from Bedrock will come from new value Stelco workers produce. Any new material to be purchased as part of the production process will go into the produced value of steel as transferred-value and will be returned to the owners when the social product is realized (sold).

In completing the deal, Bedrock does not put up any of its own cash but rather organizes a line of credit. If the remaining cash on hand is not sufficient, the amount will come from this asset-based facility. If money is used from the asset-based lending, it could be returned using new value from Stelco production.

The PoA states:

"Bedrock will make available to USSC a revolving asset-based lending facility in an amount of at least $125 million to fund the closing costs of the Transaction and the cost of exiting the CCAA Proceedings."

The PoA is a complete disgrace and abdication of duty by all those in positions of official responsibility in the provincial and federal governments, the Ontario Superior Court and other state agencies. In sharp contrast, the leadership, members and retirees of Local 1005 USW at Stelco Hamilton Works and their allies have done their best to defend the interests of themselves, the Stelco facilities, the steel communities and the Canadian economy. Canadians greatly appreciate their effort but are confronted with the sobering example of the power of the oligarchs and their state machine on full display. The oligarchs are in full attack mode.

The working class is charged with the social responsibility of organizing and mobilizing its members for sustained actions with analysis to defend their rights and to move the country in a new direction that deprives the oligarchs of their power to deprive Canadians of their rights. Just this week, the oligarchs in control of Sears Canada announced the company's entry into CCAA with the immediate layoff of 2,900 workers and a big assault on their pensions and other claims. These attacks must be stopped!

The Time Is Now to Organize the Workers' Opposition and
Mobilize Canadians to Build the New!
It Can Be Done!

Note

1. The PoA states:

"Share Transfer Agreement

"(i) a Share Transfer Agreement providing for the transfer of USSC shares from USS to Bedrock, (ii) a Debt Discharge Agreement providing for the release of the USS Unsecured Claims for nominal consideration, (iii) three Transition Services Agreements between USSC and USS providing for (x) continuing IT services, (y) transitional IT services, and (z) transitional business services, (iii) an Intellectual Property Agreement, and (iv) an Iron Ore Pellet Supply Agreement."

---

PREVIOUS ISSUES | HOME

Website:  www.cpcml.ca   Email:  office@cpcml.ca