October 1, 2019
It’s all of the rage these days to rail on private equity. Elizabeth Warren is all over the industry these days and we, too, have been very critical of PE-backed shenanigans (mostly dividend recaps) that ultimately help destroy companies. The truth is, however, that there are two sides to that coin. Private equity can be a critical source of liquidity to businesses that might not otherwise get it.
And so this means that private equity is often in places you wouldn’t suspect. As just one example, we’ve previously noted, in our usually snarky way, how your Nana’s post-acute care may be powered by private equity. Here is another example: Bayou Steel BD Holdings LLC. Bayou Steel is a mini-mill with electric arc furnace steelmaking, continuous billet casting, and a medium section rolling mill; it also operates a bar product rolling mill. Its facilities are in Tennesee and Louisiana; it also has distribution depots in Oklahoma, Illinois and Pennsylvania. Since 2016, nearly 13 years after a previous foray in bankruptcy court, the company has been owned by Black Diamond Capital Management. Three years later, it and two affiliated companies are chapter 11 debtors: they filed for bankruptcy earlier this week in the District of Delaware.
The debtors’ bankruptcy papers are not as fulsome as we’re accustomed to. They don’t provide an extensive history of the company; they don’t offer a sweeping synopsis of the events that led to the chapter 11 filings; they don’t mention any sort of sordid mismanagement by their private equity sponsor; they don’t serve as de facto marketing materials for any prospective buyer. To that last point, there’s no mention whatsoever of any banker marketing the assets at all. There’s also no DIP credit facility: the company intends to function in bankruptcy using Bank of America NA ($BAC) and SunTrust Bank’s ($STI) cash collateral. To what end? To liquidate its inventory and assets.
They do mention, however, that the company “suffered under its debt load” which, ultimately, created “severe liquidity issues” and “eventually default” under its asset-backed loan facility (“ABL”). The company has $41.25mm outstanding under the ABL and another $36.5mm outstanding, mostly on a second lien basis, under a term loan with Black Diamond Commercial Finance LLC.* Per the company:
Left with no liquidity, and little hope of turnaround, the Company determined not to purchase any further raw materials and, as it has done in the ordinary course of business in the past when faced with excess inventory or liquidity concerns, the Company began selling off its finished goods inventory in order to pay down its secured debt.
They also sh*tcanned an overwhelming majority of their employees — all of whom were in “complete shock.”
Governor John Bel Edwards (D) — who is set to experience a tough primary in mid-October — chimed in with a statement:
“The Louisiana Workforce Commission is working with the company, the parish president and elected officials to assist those employees who are directly impacted by today’s news,” said Gov. Edwards. “While Bayou Steel has not given any specific reason for the closure, we know that this company, which uses recycled scrap metal that is largely imported, is particularly vulnerable to tariffs. Louisiana is among the most dependent states on tariffed metals, which is why we continue to be hopeful for a speedy resolution to the uncertainty of the future of tariffs. Meanwhile, we will do everything within our power to help those displaced workers.”
Curious. Indeed, the company did give a specific reason for the closure: its debt. Is it possible that tariffs played a role? Sure, that wouldn’t surprise us. But the company did not expressly state that (in its papers at least).
But since we’re on the topic of tariffs, let’s go there. In early September, in “💥PG&E. Sugarfina. uBiome. PetroSmart.💥,” we wrote the following:
Retail (Long Leverage & BSDs). Oh man. Target Inc. ($TGT) ain’t trifling. Choice bit:
“Target has communicated to its suppliers the retailer will not be raising prices for consumers nor accepting higher prices from suppliers as a result of existing and forthcoming tariffs on imported Chinese goods.
‘Our expectation is that you will develop the appropriate contingency plans so that we don’t have to pass price increases along to our guests,’ wrote Target Executive Vice President and Chief Merchandising Officer Mark Tritton in a memo, according to multiple outlets.”
Savage. Can’t wait to see “the Target Effect” mentioned in future First Day Declarations.
We were highlighting Target, specifically, but we were also foreshadowing something we expected to see, generally, over coming months: that is, US trade policy affecting domestic companies and, at least in part, causing chapter 11 bankruptcy filings. Is it happening?
In mid-September, the Barber Steel Foundry in Rothbury Michigan announced that it would close at the end of the year. 61 people will have a rough holiday season. This followed a July announcement that NLMK Pennsylvania, would layoff 80 workers and slow production. Even big time U.S. Steel Corp. ($X) announced that it would shut down two furnaces at its flagship plant in Indiana. Professor Mark Perry, writing for the conservative American Enterprise Institute blog, noted the following:
Measured by the loss of stock market capitalization since March 2018, the steel tariffs have contributed to the following losses: the stock market value of Nucor has declined by $5.2 billion, US Steel by $5.5 billion and Steel Dynamics by $3.7 billion, for a combined loss of stock market capitalization for the three steel companies of $14.4 billion.
Regardless of whether Governor Edwards’ claims are correct in this specific case, there is zero doubt that tariffs will continue to reverberate throughout the business community and help spark bankruptcy filings.
*The second lien term lenders have a first lien on the company’s real estate. They may be a critical element to this case.
Jurisdiction: D. of Delaware (Judge Owens)
Capital Structure: $41.25mm ABL Credit Facility (Bank of America NA, SunTrust Bank), $36.5mm Term Loan (Black Diamond Commercial Finance LLC — first lien on real estate)
Legal: Polsinelli PC (Christopher Ward, Shanti Katona, Stephen Astringer)
Financial Advisor: Candlewood Partners LLC
Claims Agent: KCC (*click on the link above for free docket access)
Other Parties in Interest:
Prepetition Agent: Bank of America NA
Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman) & Richards Layton & Finger PA (Mark Collins)
Secured Lender: Black Diamond Commercial Finance LLC