Evaluating Distressed Intercompany Debt
In 2007, United States Steel Corporation (USS) acquired the predecessor company of US Steel Canada, Inc. (USSC) and funded the transaction with intercompany loans and equity. In September 2014, following a downturn in the worldwide steel market, USSC sought protection under the Companies’ Creditor Arrangement Act (CCAA). Certain USSC creditors challenged the validity of USS’s intercompany debt claims as bona fide indebtedness. These creditors retained two finance experts to support their allegation that USS’s intercompany loans should be recharacterized as equity.
A Brattle Principal was retained by Blake, Cassels & Graydon, counsel for USS, to review and respond to the conclusions from these two experts. Brattle consultants performed various analyses demonstrating that the terms of the intercompany debt were consistent with terms available in a broad set of third-party debt markets (including the leveraged buyout market), and that, as of the date of the financing transactions, it was reasonable to expect that USSC could service its debt.
The Principal testified in court in January 2016. Justice Wilton-Siegel issued his decision on February 29, 2016, rejecting the recharacterization of USSC’s debt to equity. In particular, he credited the Brattle expert’s report with explaining the importance of (1) evaluating the transactions using ex ante information rather than using hindsight; (2) performing a debt capacity analysis taking into account reasonably projected cost savings; and (3) considering the realities of a diverse corporate debt market from which financing could have been achieved. The decision retained the priority of over $2 billion of United States Steel’s claims in the proceedings of USSC.
