Real Industry and its US subsidiaries have filed for voluntary Chapter 11 bankruptcy, according to a filing with the US Bankruptcy Court in Delaware, but the secondary aluminium alloy producer expects to conduct business as usual during its reorganization effort.
“As we said earlier this week, all plants are open for business, operating on normal schedules and meeting customer requirements,” a Real Alloy spokesman told American Metal Market on November 17.
Real Alloy has reached an agreement with its existing asset-based facility lender and certain bond holders to be able to continue to tap into its $110-million asset-based lending facility and up to $85 million through debtor-in-position (DIP) financing, which also includes the conversion of $170 million of senior secured notes into new notes.
These funds - combined with money generated from ongoing operations - will be used to support Real Alloy’s normal operating and working capital requirements, including employee wages, salaries and benefits, as well as supplier payments during the reorganization effort.
“We have received commitments for up to $195 million for debtor-in-position financing. Upon court approval, this DIP financing will provide us with greater financial flexibility and sufficient liquidity to meet our obligations during the Chapter 11 process - including payments to suppliers,” the spokesman said.
Affiliates listed on the company's bankruptcy filing include Real Industry Inc, Real Alloy Holding Inc, Real Alloy Recycling Inc, Real Alloy Specialty Products Inc, Real Alloys Specification Inc, and Real Alloy Bens Run LLC, among others.
Real’s operations in Germany, the United Kingdom, Norway, Canada and Mexico - and its joint venture in Goodyear, Arizona - are not included in the filing, because those operations are supported by their own cash flows.
The company’s North American division includes aluminium melting, processing, recycling and alloying operations at 21 facilities across the United States, Canada and Mexico.
The Chapter 11 protection was initiated after the company extensively reviewed and determined that a combination of “severely tightened liquidity” and “constrained trade credit terms” hindered its ability to refinance its $305 million 10% senior secured notes due January 2019 or expand borrowing capacity under its asset-based lending facility.
The filing brings a close to a tumultuous week in the secondary aluminium alloy industry, which was with marked with Real’s recent quarterly earnings loss and one major credit insurer’s decision to cancel coverage on the company.
Following the announcement, the company's stock on the Nasdaq Stock Market dropped by more than 60% early on Friday, falling to 24 cents per share from 60 cents per share, according to American Metal Market's calculations.
Michael Hobey has been named president and interim chief executive officer of Real Industry; he will continue to serve as chief financial officer and will also serve as chief financial officer of Real Alloy.
Hobey succeeds Kyle Ross, who resigned from the Real Industry board of directors and will now serve as chief investment officer for the company.
Terry Hogan has been elected to the Real Alloy board of directors and will continue to lead Real Alloy as president.
Real to pay for future orders, but not past ones
Real Alloy appears to be seeking to solidify existing relationships by providing suppliers with the assurance that new business will be paid in full, according to a letter signed by Hogan and obtained by American Metal Market.
“We need you to continue being a supplier to Real Alloy. … Real Alloy fully intends to pay you in full and under normal terms for goods and services you provide to us on or after November 17, 2017. In fact, these ‘post-petition’ obligations are given priority administrative status in the process and will provide additional protection for you to get paid for all post-filing deliveries,” Hogan said.
But despite that reassurance, he noted that federal law prohibits the company from making payments for goods prior to the filing.
“Real Alloy is now generally prohibited from making any payments for services or goods received prior to the filing date, November 17, 2017. … Unpaid obligations incurred by Real Alloy before the filing date are now frozen, and the treatment of those obligations will be addressed in the reorganization proceedings,” Hogan wrote.
Long list of creditors
Real’s bankruptcy filing names Real Industry’s 30 largest creditors, which are collectively owed more than $14.12 million.
The company holding the largest claim is Dallas-based Commercial Metals Co, which Real listed as being owed more than $1.34 million. The second-largest claim belongs to Marysville, Ohio-based Honda Trading America Corp, which is owed more than $1.25 million. The third-largest goes to Chicago-based Alter Trading Co, which is owed more than $1.04 million.
According to the filing, other companies owed large sums include Trenton, Michigan-based Huron Valley Steel Corp. ($847,594); Cleveland-based N.T. Ruddock ($752,377); Cohoes, New York-based Nathan H. Kelman Inc ($717,811); Dayton, Ohio-based Midwest Iron & Metal ($663,173); and Chicago-based Omnisource Corp ($572,970).
Outside the US
Scrap suppliers outside the United States expressed relief to learn that not all of Real’s operations were included in the bankruptcy filing.
Similar to the US scrap markets, suppliers in other regions of the world have witnessed scrap prices falling precipitously since Real announced its earnings loss.
“What a difference a week makes. We were in turmoil over this last Friday [November 10] because we do a lot of business with Real Alloy in Mexico. When I found out they were not included in this, it was great relief. They are great people to work with, and now that there is no interruption we feel more comfortable sending material into them,” one supplier said.
A second supplier who sells into Real’s Canada operation echoed that sentiment.
“They are in full compliance and running on their own. It’s business as usual. I’m going to continue to ship to the Canadian operation, and we will continue to support them. There is a threshold that we’re comfortable with,” the second supplier said.
But suppliers noted that credit insurance coverage remains an important factor when it comes to resuming normal shipments. As result, some said they will be focused on reinstating lost coverage, and will closely manage their exposure to Real Alloy in the meantime.
Real’s filing has effectively destabilized the entire scrap industry for the time being, according to scrap suppliers who spoke with American Metal Market.
“This is a big chunk of aluminium that could get taken out of the market. What kind of restraint will this put on brokers selling other grades? This is a big concern,” according to a third supplier.
Real’s ability to obtain court approval to tap into finances during the restructuring process remains in question. Most scrap suppliers said that ruling will be the make-or-break point for whether they continue shipping scrap to Real going forward.
“The prices have already started to come down over the last week, but at the volumes [Real Alloy] bought there is no company that can take in that much scrap. It has to be dispersed to other secondaries, and even between all of them it’s not like they can take in all the extra pounds,” a fourth supplier said.
“Some suppliers are stuck having to move material quickly. It’s a bad situation because some suppliers need to keep sending material into their facilities,” a fifth supplier noted.
However, suppliers unanimously agreed that if financing falls through, then prices will likely drop tremendously.