Low Steel Prices, High Commodity Prices and a Lack of Cash Force RG ...

On May 30, 2012, RG Steel, LLC and various related entities (collectively "RG Steel" or "Debtors") filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to the Declaration of the company's CFO (the "Decl."), RG Steel enters bankruptcy as the fourth largest flat-rolled steel company in the United States.  At full capacity,  the company can produce 8.2 million tons of steel per year.  Decl. at 2.

Based in Sparrows Point, Maryland, RG Steel operates steel producing facilities in Maryland, Ohio and West Virginia.  RG Steel was formed in March 2011 as the result of a stock purchase agreement with Severstal U.S. Holdings II, Inc., and various related entities (collectively, "Severstal").  Decl. at *5.  RG Steel's acquisition of Severstal required Severstal to deliver $450 million in net working capital at closing. After the acquisition, however, RG Steel asserted an $82 million claim against Severstal.  According to RG Steel, this "working capital shortfall" brought on by "Severstal's misrepresentations has greatly exacerbated the company's liquidity problems, which ultimately culminated in the commencement of these cases."  Decl. at *6.  In addition to the capital shortfall claim, RG Steel also brings claims against Severstal for breach of representations, warranties and indemnification.  Decl. at *6.

Days after filing for bankruptcy, RG Steel filed a motion authorizing the sale of certain "idled" or "excess" assets (the "Sale Motion").  Under the Sale Motion, the company seeks authority to sell their idled steel facilities in Steubenville, Ohio.  The Sale Motion also seeks approval of procedures to sell or abandon other "excess assets" without having to seek further court approval.  See Sale Motion at *2-3.  As part of the Debtors' marketing efforts, three potential purchasers have expressed interest in the Steubenville facility.  According to the Debtors, the best offer for the Steubenville property totals $15 million.  Sale Motion at *4.  The Sale Motion provides for auction procedures in the event Debtors receive an offer exceeding the current offer which is "no more burdensome to the Debtors."  Sale Motion at *5.

RG Steel attributes its bankruptcy filing to "substantial liquidity problems" due to a drop in steel prices while raw material prices remain high.  Decl. at *14.  Normally, steel prices move in tandem with the prices of raw materials such as iron ore, scrap metal and coke.  Decl. at *14.  However, steel and material prices diverged last summer.  The company's financial problems worsened when they discovered the working capital shortfall claims attributed to Severstal.  Decl. at *14. 

The RG Steel bankruptcy proceeding is before the Honorable Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware.  Judge Carey recently served as Chief Judge of the Delaware Bankruptcy Court.  Debtors are represented by the law firms Morris, Nichols, Arsht & Tunnell LLP and Wilkie Farr & Gallagher LLP.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware.  You can contact Jason at [email protected] or at 302 252 5833.

For those not familiar with corporate bankruptcy proceedings, below are prior posts on issues that frequently arise in bankruptcy:

    Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

    Seeking Relief from the Automatic Stay in Delaware.

    A Tale of Two Bankruptcy Auctions.

    What Information is Required in a Chapter 11 Disclosure Statement?