Case #816

$400 million non-integrated steel mill

This $400 million steel mini-mill made medium- and light-grade steel for steel service centers and commercial building contractors from a huge facility in western Illinois. The company had three furnaces and four mills.

To be frank, it was an old-line steel manufacturer with aging plants, high-cost union labor, significant over-staffing and steel industry insider management in a commodity business where cheaper foreign imports had drastically impacted sales volume and pricing.

The company was burning $3 million a month in cash and planning a $100 million investment in a new mill to be financed by a U.S. Government Steel Guarantee Loan Program. The company's forecasts were consistently overly optimistic and unachievable, both on a sales volume and a cost basis. A Big 5 accounting firm was assisting management in the preparation of plans and forecasts, but cash was poorly controlled and no operational cost changes were in the works. The company's debt hung around $150 million.

Morris-Anderson & Associates was brought in by the lenders to assess the situation and provide financial counsel to the secured lender group that had a $50 million asset-based loan with the company. Our assessment included a variety of possible action items the company should undertake to eliminate the cash burn, including a stop of activities and expenditures on the planned new mill, a reduction of staffing and an outsourcing of certain job functions, and a reduction of payroll and benefit programs. Our crew predicted that the company would run out of cash and file bankruptcy if dramatic actions weren't taken immediately.

Unfortunately, the company's management declined to implement any of our recommendations, and was forced to file a Chapter 11. We then worked with the company in the development of the DIP budgets to make sure that the lenders' collateral position would not deteriorate in the Chapter 11; when the company failed to achieve its planned targets for sales and trade credit in Chapter 11, we organized and oversaw an orderly liquidation of the company with the cooperation of management.

It was an orderly liquidation. WIP inventory was finished out on a limited basis when it was clearly cash positive, finished and raw material inventory was sold with tight control of credit risk, and receivables were aggressively collected. Headcount and all variable costs were rapidly controlled cut to minimize costs. The facilities were shut down and mothballed in compliance with laws. Over a 150-day period, the senior loan was fully paid off, based upon the liquidation of the working capital alone. When we and the secured lender left the case, the fixed assets and the bankruptcy causes of action were remaining to pay the other creditors and the administrative expenses of the case.

This is likely the only liquidation of a steel company that occurred so quickly and so successfully from a secured lender's perspective in the 2000-2002 recession.