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A bankruptcy is a terrible thing to waste Demetriou


If Steven J. Demetriou could go back and do things differently during Aleris International Inc.'s 15-month stint under bankruptcy protection, he wouldn't change very much.

"I probably would have slept better," he quipped in an interview at the company's headquarters in Beachwood, Ohio. But restless nights aside, the rest of the process—from filing for Chapter 11 in February 2009 to emerging as a restructured entity in June 2010—proved in the end to be the right move for the downstream aluminum company, he said, leaving Aleris' management team with few regrets.

"As much as it was painful to go through the process—and our process is obviously more painful because of the stigma of Chapter 11—it turned out to be a success for us," said Demetriou, the company's chairman and chief executive officer. "We emerged essentially with the same set of assets, which showed that all we really needed was two things a short-term cash infusion coupled with what everyone's done—to really make sure we reduced costs and restructured where we needed to restructure."

Aleris certainly wasn't the only player in the aluminum sector to require a strategy change in the aftermath of the global financial crisis. Alcoa Inc., for example, turned to the equity markets, while Novelis Inc. and Rio Tinto Alcan received support from parent companies Hindalco Industries Ltd. and Rio Tinto, respectively, allowing them to weather the storm of collapsing aluminum prices and stagnant demand. Privately owned Aleris, however, was barred from the equity markets and its then-parent company, Texas Pacific Group, opted against a cash injection, leaving it with one clear survival strategy in its search for liquidity bankruptcy.

"This restructuring was really no different than anyone else's. It's just the way we did it. What we actually ended up doing was raising cash and financing for the company. We did it in the way that was best for us, whereas most of our competition had to do the same thing (but) they did it in different ways," Demetriou said.

"The company wasn't broken," he said. "It was really the only way we could react to the sudden downturn."

When Aleris' U.S. operations filed for bankruptcy protection, it secured $1.075 billion in debtor-in-possession financing to support operations and keep metal flowing throughout the restructuring period. The company's creditors approved its proposed exit strategy in May 2010, and Aleris emerged under the wing of private equity funds Oaktree Capital Management LP, Apollo Management LP and Sankaty Advisors LLC as a leaner and more profitable version of its former self.

Despite the stigma that bankruptcy brings, Aleris' leadership team contends that customers steadfastly stood by the company throughout the process, providing the ongoing support it needed for a quick turnaround.

"I don't think we have customer trust issues related to the bankruptcy. Our customers were phenomenal in the early stages and all the way through bankruptcy, and the best way to validate that is that they voted with their orders," said K. Alan Dick, executive vice president of Aleris and president of its North American rolled products business. "We had many customers in the early days of Chapter 11 who we had meetings with at the senior levels who expressed their desire to see us be successful and survive, and realized that for us to do that they needed to continue to support us—and they did."

Sean M. Stack, the company's executive vice president and chief financial officer, agreed that customers appeared relatively unfazed by the process. "In the field, where the rubber hits the road, our sales force .?.?. did a lot of hand holding in the process. From the top down, we did a great job of keeping everyone educated in terms of the process and how the process was unfolding, and making sure that communication got out to the field," he said. "A couple of weeks into the bankruptcy, once the cash showed up and once the metal started coming back and deliveries went out, (it became clear) this was really almost more of a contained process and everyone else got back to their day jobs, focusing on delivering value to the customer."

Suppliers weren't as forgiving, however. According to market sources, a number of Aleris' suppliers found themselves paid just pennies on the dollar for their at-times multimillion-dollar claims, creating resentment and distrust among some players.

"Aside from the bankers and the financiers, those who supplied them material lost a lot of money," one market source said. "The scrap community lost a lot of money and I don't think those memories are fading so fast."

Among Aleris' 30 largest unsecured creditors were Rusal America Corp. ($7.8 million), Glencore International AG ($7 million), United Scrap Metal Inc. ($2.2 million) and Schnitzer Steel Industries Inc. ($2.1 million), with more than a dozen other trading houses and scrap suppliers—from Sims Metal Management Inc. to OmniSource Corp.—rounding out the list.

The company's top management concedes that ties with some of its suppliers have been strained due to the bankruptcy. "Certainly that's a healing process that's been under way for quite some time. It's been under way since the day of the filing," Terrance J. Hogan, vice president and general manager of Aleris' aluminum recycling unit, said.

Demetriou agreed. "I'm sure there is a handful that will always have some frustration. I lost money in Aleris during the restructuring period, but I think the key now is going forward," he said, noting that the inability to pay creditors in full is unfortunately often part of the bankruptcy process.

"We'll always regret the fact that some of our suppliers had to go through that and we tried everything humanly possible to avoid that," Demetriou said. "(But) once we got into it, it was a legal process. We had to follow the rules and it was 100 percent specified what you can do and what you can't do as far as dealing with your suppliers. It was a pretty unprecedented downturn and I think we handled it well."

Stack agreed. "Ideally, you'd love to figure out a way to put a fence around the supplier base because that is the one area where we still have a lot of recovery to go. But given the set of circumstances, our hands were relatively tied on that," he said.

Losses aside, the vast majority of suppliers have maintained ties with the company, management said, leaving a handful that have been more difficult to win back. "On the metal side of the suppliers, I would say you might be able to count those who are no longer supplying to us on two hands," Dick said. "At the end of it, what our suppliers want is a place that they can deliver where they've got some confidence that they'll get a return for delivering to us, and the fact is we probably have one of the best balance sheets in the industry now, given our capital structure, our debt structure, our availability and our liquidity."

But even as the majority of suppliers continue to do business with Aleris, few have yet to offer normal payment terms for the new Aleris. "We need to re-earn the trust of our suppliers when it comes to payments and we are doing that, but our expectation is that we will return to what we would consider the standard industry payment terms at some point in the future," Dick said.

Even outside the United States, some suppliers continue to restrict payment terms, even though only the U.S. assets filed for bankruptcy. "Suppliers have been using the U.S. bankruptcy as an excuse to try to move to shorter payment terms," said Roeland Baan, executive vice president of Aleris and chief executive officer of Aleris Europe. "We are now in the process of getting back those terms. Where suppliers are not prepared to put the terms back to normal terms, as is common and custom in the industry, we basically have no other choice but to change suppliers. I can fully sympathize with them. Once you get paid after seven days instead of after 35, it's hard to give up."

Hogan is optimistic that Aleris will see a return to standard terms in the coming year, but he acknowledged that each decision is case by case. "We've seen terms extend and we would expect to see that continue as we get some history under our belt from an earnings standpoint and a quarterly performance standpoint. And we've certainly seen a dramatic improvement from cash on delivery, but it doesn't take much to see improvement from there—there's only one way to go," he said. "We would expect to see that continue as the results continue to improve. I would expect, as we move though 2011, we should get back to those levels. It would be nice if it were Jan. 1, but I think more realistically it's some time after that. In some cases we're already there."

With the bankruptcy a recent—but fading—memory, Aleris once again has its eyes set on growth. A company itself comprising two former industry giants—Commonwealth Industries Inc. and Imco Recycling Inc.—Aleris has a history of mergers and acquisitions, from its 2006 purchase of Corus Group Plc's aluminum rolling and extrusion businesses to its 2007 buy of Wabash Alloys LLC.

"We're much more passionate about growth than ever before," Demetriou said. "We've had a successful M&A run since 2004, and when the right acquisitions present themselves we'll clearly implement some."

Most of Aleris' expansion plans will be centered around emerging economies, with the company having already announced plans to form a joint venture with a Chinese company to build a greenfield aluminum rolling mill in Zhenjiang and more than triple extrusion capacity at its Tianjin facility by 2015. China's booming urbanization makes the decision to expand there a no brainer, Demetriou said. "In the past, they built a lot of automobiles but they were just looking for low-quality materials. Now they're looking for the most sophisticated capabilities and products, looking to get into much more premium vehicles, and that—whether its automotive or aerospace or other key markets of ours—is sort of right in our sweet spot."

But other developing nations also could be on the radar. "I'd say our focus is on China, but at some point we'll look at other emerging economies," he said.

Baan agreed that other regions also will be key to Aleris' growth. "If you want to be a global payer and if you want to move with your global customers and accompany them to those markets, you have to invest into those markets and be a local player. I think we would love to be able to join our customer base where they want to expand," he said. "We are already in Brazil, of course, with our recycling activities, and we would definitely be interested in looking at other opportunities there. The same goes for India or any other big territory where we see our customers move into."

That's not to say that developed markets are off the table for expansion. According to Demetriou, the company also is eyeing any bolt-on acquisitions that make sense in the United States or European markets to complement current assets. "Scrap is extremely important to us. Metal supply is extremely important to us overall," Demetriou said. "As part of our strategic thinking going forward, we are evaluating different options to ensure we have the metal when we need it at the lowest cost and the highest quality. We're working on ideas and strategies around that."

Expansion will be particularly important if Aleris hopes to capture a portion of the growing aluminum demand it is forecasting going forward. Demand across most major end-use sectors should swing higher in 2011, with even lackluster building and construction showing welcome signs of bottoming out, the company said.

"I think despite what you read about the potential of a double-dip (recession), we are not hearing that from our customer base. And I would say across all the segments, whether it be OEM (original equipment manufacturer) or distribution or construction, all of them at this point are projecting 2011 growth over and above 2010," Dick said.

Demetriou agreed. "We think the worst is behind us," he said. "We think that it will clearly be better than today, and today is better than we expected." ANNE RILEY

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