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Enron Mail |
Steal industry
Feb 1st 2001 | NEW YORK From The Economist print edition=20 ON THE face of it, the bankruptcy of a steelmaker, LTV, is another sad stor= y=20 about a once-dominant company in a once-mighty industry. Though its $2=20 billion of debts are not trivial, the case would have got little attention= =20 but for a nuance in LTV=01,s bankruptcy filing in an Ohio court that has al= armed=20 some of the world=01,s biggest lenders. The crux of the issue is whether a desperate plea for money that the court = is=20 hearing this week will undermine one of the great acts of financial alchemy= =20 in recent years: to wit, cheap financing for bad creditors. Reams of papers= =20 have been filed by two of LTV=01,s main creditors, Chase Manhattan Bank (no= w=20 merged with J.P. Morgan) and Abbey National, a British bank. An adverse=20 ruling from the court would be a blow to plenty of other banks. Behind the litigation are LTV=01,s efforts in the early 1990s to fund a=20 capital-intensive business as cheaply as an earlier bankruptcy in 1986 and= =20 difficult operating conditions would allow. The solution, which has been=20 applied by too many other American companies to count, was to create a coup= le=20 of special-purpose vehicles=01*essentially, independent legal entities. The= se=20 were supposedly insulated from the risk of their parent going bankrupt. The= =20 first of these vehicles contained LTV=01,s receivables (what it was owed by= =20 customers), and the second its inventory (piles of steel). LTV would inject= =20 assets into these entities, paid for by attractively priced asset-backed=20 loans. The size of these loan facilities last year, according to Standard &= =20 Poor=01,s, was about $650m, or equivalent to slightly more than half of LTV= =01,s=20 total long-term debt. When LTV filed for bankruptcy on December 29th, everything seemed normal (i= f=20 normality is an empty till and 18,000 employees wondering whether they have= a=20 job). Alarms started ringing at the commercial banks when it became clear= =20 that LTV was going to argue in court that it could use as it liked (ie, not= =20 necessarily to repay interest and principal on the asset-backed loans) the= =20 money got from receivables=01*since, it claimed, the original transfer of t= he=20 receivables to the special-purpose vehicles was not a sale but a =01&disgui= sed=20 finance transaction=018. The alarms rang louder when the judge appeared to = be=20 sympathetic to LTV=01,s arguments. The case continues. If the judge rules i= n LTV=01, s favour, there will be intense pain and embarrassment at many banks.
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