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Steel distributors face new financing landscape

Keywords: Tags  banking relationships, creative financing, private equity, Association of Steel Distributors, Jim Gerth, Alliance Steel, Bill Feniger, Universal Metals Lisa Goldenberg

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 I’m not sure they think it looks good."

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Traditional lending has been replaced by "creative financing," Feniger said. "It’s like a gift. It looks good when it’s all wrapped up, but when you get inside they aren’t such great financing packages. As long as you’re adding inventory and getting more receivables, they love it. They’ll 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, there’s 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. That’s very different."

The banking industry has "so much tied up in bad paper, in their regulations and their uncertainty, I don’t think they will be a viable partner in helping you run your business—whether 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 scenario.

"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 you’re going to make a bad sale. That’s what that type of financing does."

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 there’s a carrot for the manufacturer, who is "absolutely paying through the nose" on bank fees.

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