That Steel Bailout? The Bucket Leaks
Last August, President Clinton came through for the beleaguered steel industry, signing into law a federal program guaranteeing $1 billion in bank loans for steel producers hit by low-priced imports. By co-signing for the loans, the government was making a "smart, effective investment in the steel industry," said Senator John D. Rockefeller IV, who, with fellow West Virginia Democrat Senator Robert C. Byrd, led the push for federal assistance. The program, Rockefeller said, would "provide badly needed help for our struggling steel companies."
Try telling that to the folks at Laclede Steel Co.: In Chapter 11 bankruptcy since November, 1998, Laclede has eliminated 25% of its 1,600-person payroll and has lost $112.3 million over the past three years, as imports siphoned away business. Still unable to turn a profit, Laclede has just fired an additional 10% of its unionized workforce at its flagship mill in Alton, Ill., and slashed medical benefits for retirees. "We felt we were the poster child for the program," says Michael H. Lane, Laclede's vice-president for finance.
But Laclede let the Feb. 28 application deadline for federal aid pass without signing up. The reason was that it had pledged so many of its assets to secure previous loans that the St. Louis company found it couldn't qualify for government assistance.
STYMIED. Whenever the government is asked to lend a hand to a down-on-its-luck corporate constituent, success stories of the past inevitably are cited, such as when Congress and the White House stepped in to bail out Chrysler in 1980 and Conrail in 1976. But despite lopsided political support, the government's effort to salvage the steel industry doesn't look as if it ever will be inducted into that hall of fame. Stymied by ambiguities and the almost impossible conditions of the program, several applicants were forced to lower their loan requests, while others simply gave up. "This is not a program for the faint of heart," concedes Roger B. Schagrin, a Washington lawyer who lobbied for the loan guarantees on behalf of steel clients and who still says that, for some, it will be a lifeline. "If you're not a farmer, it's pretty tough to get any money from the government today."
How tough is it? With four U.S. steel companies in bankruptcy (table) and with titans such as Bethlehem Steel Corp. and LTV Corp. hemorrhaging money, plenty of steelmakers could make a case for federal support. In fact, as the Commerce Dept. was assembling the program last fall, the consensus within the industry was that guarantee requests would easily top the measure's $1 billion limit, acing out anyone who didn't hustle to get a bid in early. But even after extending the original Dec. 31 filing deadline twice, the Emergency Steel Loan Guarantee Board solicited just 13 applications for a total of only $901.3 million.
"EYEWASH." Om P. Sharma's experience helps explain why the numbers fell short. Sharma runs Riverview Steel Corp., a 60-employee mill in Glassport, Pa., that makes reinforcing bars for highway construction. He had hoped to borrow $13 million so Riverview could begin producing goods that foreign competitors do not ship to the U.S. But even with the prospect of federal insurance, Sharma was turned away by seven banks. Without a committed lender, he was locked out of the rescue program. Now, he says, his business may close. "The banks don't want to deal with a government program," he says. "This program is an eyewash."
Maybe so, but the loan guarantees mark the government's most ambitious attempt to offset the forces of global steel trade since President Ronald Reagan imposed import quotas in 1984. And by targeting only high-risk borrowers--"crummy credits," in the blunt assessment of the program's executive director--the intervention could end up costing taxpayers. Congress seeded the program with $140 million to cover defaults. But more money would be needed if default rates exceed projections.
Here are the program's basics: To get assistance, a steelmaker has to show that it is in awful shape by citing layoffs or losses and that it couldn't get money elsewhere at reasonable terms. At the same time, it has to prove that it has the collateral or projected earnings power to pay off a loan before 2006 and that it has lined up a lender. In turn, the government promised to make good on 85% of a loan of up to $250 million to each applicant judged qualified by the three-member loan guarantee board, with the banks responsible for the remaining 15%. Word on which of the 13 would-be borrowers has qualified could come by May 31.
Landing a government-backed loan could make a world of difference for these marginal players. Applicants say banks are now offering them loans with annual interest rates of 10% to 12%. Without government support, they say, they would have been charged three to four percentage points more, adding as much as $9 million more in interest on a five-year, $100 million loan. And that assumes they could catch a lender's eye.
DOWN AND OUT. Thomas M. Vercillo, chief financial officer of Northwestern Steel & Wire Co., began knocking on bank doors a year ago so the company could tear down its decades-old construction-beam mill in Sterling, Ill., and replace it with a new one. "But no matter what rate, there wasn't a market for us," Vercillo says. No wonder, given that Northwestern has lost money two of the past three years, and its share price sank so low--down 81% from its peak last spring, to just 25 cents a share--that Nasdaq delisted the stock in December. Thanks to federal guarantees, the 1,600-employee company now has a $170 million loan, pending government approval. Acme Metals Inc., which slid into bankruptcy in September, 1998, has also finally found a lender, Citibank, through the program.
But with a potential payoff still months off, many executives wonder whether it has been worth it. Problems began almost from Day One. The program's preliminary language spooked lenders, because it didn't make clear how much and how quickly they would get reimbursed if a borrower defaulted. With no one firmly in charge of the program--Executive Director Jay Dittus was not brought on board until Dec. 1--that issue took months to clarify, killing some deals and postponing others. Another muddle developed over whether new assets bought and built under the program could be used as collateral. After some back and forth, the answer was no, spiking Laclede's loan package.
BUREAUCRACY. Then there were the piles of paperwork. Weirton Steel Corp. assigned a lawyer to work full-time on its loan application, and it still took him more than a month to finish, says Gregg Warren, a spokesman for the Weirton (W.Va.) company. "There were too many strings attached," snorts John D. Correnti, chairman of money-losing Birmingham Steel Corp., who says he took one look at the bureaucracy attached to the program and walked away.
The compressed time frame also forced some applicants to scale back their requests. Dennis L. Wanlass, treasurer at Geneva Steel Co., says the Vineyard (Utah) company initially had planned to go for $150 million in loan guarantees but wound up putting in for $110 million. Why? Because the government requires full-blown environmental assessments for any new capital project. Fearing they might blow the deadline by trying to comply, Wanlass and his team decided it would be wiser to shelve their expansion plans. "It was a very cumbersome program," he says with a sigh.
Program director Dittus, a retired Inland Steel Industries executive, makes no bones that some steelmakers couldn't qualify. By definition, those seeking federal guarantees are a bad credit risk, he says, and some lenders don't want to be on the hook for even a 15% share. For the same reason, steel executives shouldn't be surprised that the government is requiring them to be extraordinarily thorough in documenting their applications, or that some will be rejected. Fearful of betting entirely on the federal program, at least one company is preparing a backup: Northwestern Steel won shareholder approval of a prepackaged bankruptcy plan at its Mar. 21 annual meeting. Other applicants might be smart to draw up a Plan B as well.