CHICAGO When the economy
faltered in 2008 and 2009, banks relationships with their
commercial customers changed.
The banking industry has revised
its "modus operandi in how they deal with borrowers," Bill
Feniger, president of Toledo, Ohio-based Universal Metals LLC,
said during an AMM-led roundtable at an Association of
Steel Distributors meeting in Detroit. "(Banks) have to wear
skirts now, and Im not sure they think it looks
The weight of federal oversight
is key, he said. "The amount of reporting (and) the scrutiny
you go through means higher overhead, because you have to have
more people writing 27 trillion reports every day."
Traditional lending has been
replaced by "creative financing," Feniger said. "Its like
a gift. It looks good when its all wrapped up, but when
you get inside they arent such great financing packages.
As long as youre adding inventory and getting more
receivables, they love it. Theyll let you grow as big as
you want. But when you want to take a step back"to
eliminate unprofitable sales, for example"you are
bringing inventories and receivables down. Now, all of a
sudden, theres no money."
Lisa Goldenberg, president of
Fort Washington, Pa.-based Delaware Steel Co., has seen this
development as well. In the past, a commercial financial
partner "liked your business model and wanted to invest," she
said. In contrast, today the bank is a "co-investor in your
inventory. Thats very different."
The banking industry has "so
much tied up in bad paper, in their regulations and their
uncertainty, I dont think they will be a viable partner
in helping you run your businesswhether through growth,
sideways, diversifying or downsizing," she said. "Creative
lending is not interested in that kind of a model."
"We are able to borrow, but we
are forced to adjust our valuations based on swings up or
down," Jim Gerth, executive vice president of commercial for
Bedford Park, Ill.-based Alliance Steel LLC, said.
The irony, Gerth said, is that
his company profits more along a flat sales trajectory than up
a steep incline, but lenders are interested only in the second
"They tell us to buy more
inventory if we want to borrow more money because they think
(that will generate) more sales," Feniger said. "It drives you
to make that buy, but once you make a bad buy youre going
to make a bad sale. Thats what that type of financing
Because of heavy regulation and
the pitfalls of creative financing, Feniger believes that "a
whole new stream of private equity money (will be) coming into
the steel industry." Private equity firms have a hard time
making 2 percent these days, he said, but investing in an
industrial company that returns 6 percent is an attractive
option. And theres a carrot for the manufacturer, who is
"absolutely paying through the nose" on bank fees.