Faced with a cash crunch, RG Steel has idled most operations at Sparrows Point, Baltimore’s biggest industrial complex.
Photo by: Mark Reutter
Maryland Gov. Martin O’Malley has asked the chairman of General Electric to intervene with his company’s financial unit, GE Capital, and free up funds in a revolving credit account that O’Malley claims has led to the liquidity crunch at RG Steel, owner of the Sparrows Point steel mill.
O’Malley’s letter provides new information – or at least new assertions – about the financial condition of RG Steel, which has lost hundreds of millions of dollars since June and whose nonpayment of bills has led suppliers and contractors to withdraw their services from Sparrows Point.
In the heat of state elections last year, O’Malley and other top Democratic politicians met with Sergei Kuznetsov, CEO of Severstal North America, to plead with the Russian company to reopen Sparrows Point’s then-suspended steel operations.
Last March, Severstal sold Sparrows Point and two other steel mills to a company controlled by New York billionaire Ira Rennert, who set up RG Steel as the operational owner of the mill.
Key to the transaction was a $750-million credit facility put together by GE Capital and Wells Fargo Capital Finance to underwrite RG Steel’s operations.
With those funds, RG Steel reopened Sparrows Point’s steelmaking operations last June. Last Friday, these same operations were suspended and 720 steelworkers placed on layoff.
Future Plans in Daily Flux
RG Steel has not issued any public statement about its financial condition, but in his letter O’Malley asserts that the steel company has been hobbled by GE Capital’s decision to place “substantial funds” needed to support business operations into a reserve fund.
O’Malley called on Jeffrey Immelt, CEO of GE, to “personally review this situation” with the object of reducing the “excess reserve requirements” allegedly placed on RG Steel by the banking consortium.
O’Malley letter points to the company’s “substantial cost reduction measures” – which involve plans to combine and eventually eliminate union jobs at the mill – and adds, without elaboration, that RG management “is projecting positive cash flow” in the first quarter of 2012.
The letter also asserts that Rennert’s Renco Group put $160 million in cash toward the new company.
Sources tell The Brew that RG Steel has signaled to the United Steelworkers Union and others that, if it gets a cash influx, it would reactivate the “L” blast furnace and other units idled last week.
They stress, however, that decisionmaking at the company is in daily flux and subject to change.
At least some finishing operations are expected to operate next week to fulfill customer orders placed with the mill, using back inventory of steel.
Text of Letter
Here is the text of O’Malley’s letter to Immelt. The governor’s office released the letter to the media yesterday. Spokesperson Takirra Winfield said today the governor has no further comment on the situation and has apparently not heard back from Immelt:
Thank you for your leadership on [President Obama's] new Council on Jobs and Competitiveness. The Council represents the kind of targeted efforts we know our country needs to create more jobs and opportunities for Americans.
Consistent with your work through the Council, I am writing to ask for your assistance in stabilizing the financial arrangements that helped build R.G. Steel, America’s fourth largest steel company. As you know, R.G. Steel provides 5,000 jobs to Maryland, West Virginia, and Ohio – over 2,000 of which are in Maryland.
It is my understanding that G.E. Capital led 10 other institutions in financing the stock purchase sale that created R.G. Steel, including an agreement to provide R.G. Steel with an initial credit revolver. As part of its consideration, R.G. Steel put forth significant collateral, the value of which far exceeded the revolver. Nevertheless, I am told, R.G. Steel’s liquidity is now unstable, in large part, because of a decision by G.E. Capital and other financing institutions to shift substantial funds that are needed to support business operations to “reserves,” to further collateralize and secure the loan. R.G. Steel feels that this decision has frustrated its efforts to improve its liquidity situation and runs counter to the purpose of the financing arrangement, forcing it to begin laying off workers.
This company has the will to fight for success, as demonstrated by its parent company, the Renco Group, through its infusion of more than $160 million in cash following the initial transaction. On December 24th, The Wall Street Journal reported that steel prices are on the rise. In addition, R.G. Steel has restructured its operations and instituted substantial cost reduction measures.
Furthermore, management is projecting positive cash flow by the 1st Quarter of 2012. As you are no doubt aware, R.G. Steel’s Sparrows Point plant in Maryland has already notified workers of pending additional layoffs, putting over 2,000 workers and their families in jeopardy. It would be a terrible situation if, despite significant positive data, employees of R.G. Steel unnecessarily face termination in the New Year. These are good-paying jobs that help sustain families, and in this fragile economic recovery, we simply cannot afford to lose them if other options exist.
Thus, in the spirit of the Jobs and Competitiveness Council and our nation’s progress on the road to recovery, I ask that you personally review this situation and any further considerations by G.E. Capital that may affect these jobs and the stability of R.G. Steel to achieve the turnaround it projects.
R.G. Steel does not request additional cash but that G.E. Capital and its partner financial institutions forego some excess reserve requirements. This request was initially rejected, but your assistance could make the difference that saves 5,000 jobs.
Please work with your colleagues to reconsider G.E. Capital’s decision and give R.G. Steel the resources it needs to truly leverage the financing arrangement for success.
Thank you for your time and understanding. Please do not hesitate to call and discuss potential resolutions to this matter any time.
I look forward to hearing from you.
Sincerely,
Governor Martin O’Malley
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