Powell Steel's Chapter 11 reorganization faces uphill battle
Powell Steel Corp. has been in Chapter 11 bankruptcy reorganization since February, but recent court filings illustrate a stressed relationship with one of its largest creditors, Manufacturers & Traders Trust Co., the parent of M&T Bank.
And the company faces a significant uphill battle if it wants to emerge from reorganization.
With millions in debt, financial reports illustrating declining revenue for the Lancaster County steel structures contractor, and assets that don't add up to the bank's credit, M&T has been urging the bankruptcy court to move Powell Steel toward liquidation.
Powell Steel's reorganization is a significant turn from past success, which even attracted the attention of national business publications as one of the best among its ownership peers in 2010.
Deep in debt
Powell Steel owes M&T more than $3.2 million, according to court documents filed in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania. However, Powell assets, including real estate, equipment and cash, total $2.8 million, according to filings.
"Accordingly, there is no prospect for an effective reorganization," M&T wrote in its Nov. 15 filing asking the court to allow it to liquidate its collateral in Powell Steel and proceed with actions against the company in state courts.
Powell Steel President and CEO Stephen Powell did not respond to repeated calls and emails for comment on this story, nor did the company's bankruptcy court attorneys, Philadelphia-based Ciardi Ciardi & Astin.
Attorneys for M&T Bank from New Jersey law firm Klehr Harrison Harvey Branzburg did not respond to requests for comment.
Powell Steel has a hearing scheduled for Dec. 17 to consider the demands of M&T Bank, according to the bankruptcy court.
There are several big issues in the Powell Steel case, bankruptcy attorneys said. The company's continued use of cash collateral, personal loans to the company from leadership, the debts to workers and government tax bureaus and Powell Steel's slow business all are working against it.
"At the very least, you have to operate on a break-even basis," said Larry Young,a shareholder and chairman of the bankruptcy department at York-based CGA Law Firm.
Young represented Wolfgang Candy Co. in its 2012 bankruptcy proceedings. That company was sold to new ownership as part of its emergence from Chapter 11 earlier this year. Young is not involved with the Powell Steel case.
M&T Bank's main problem with Powell Steel is that the company continues to use cash collateral — money the bank made available — for operations, according to October court documents. The bank urged the court to stop Powell Steel from burning through the money, especially given its slow business as outlined in the August operating report.
"You can't use (cash collateral) without replacing it," Young said.
That isn't happening with Powell Steel, according to the August financial report, the most recent filed with the court.
Accounts receivable for the company were worth $240,673, and total receipts were worth $339,673, according to court documents. However, total disbursements — including payroll, insurance, taxes and inventory — was worth $360,838, a deficit of $21,164 for the company.
At the end of August, cash collateral provided by M&T Bank had eroded by $1.7 million, according to documents filed by M&T with the court requesting the discontinued use of cash collateral.
"If the Debtor's operations in September are similar to the Debtor's results in the prior monthly post-petition periods, then it is all but a given that M&T's collateral has been eroded by more than $2 million, a 70 percent decrease in its collateral position," according to the bank's objections.
Powell Steel's billings declined from more than $843,000 in February to just over $200,000 in August, according to M&T's filing. The company's revenue dropped from $705,280 in March to $318,572 in August. Monthly revenue hovered around $300,000 for much of the year.
Powell Steel's monthly operating loss was nearly $300,000 for three of the seven months since February, according to M&T's court filing. Cumulative operating losses grew from $66,084 in February to more than $1.3 million in August.
The chances of a smaller company emerging from bankruptcy become less likely with such numbers, unless it finds new business, Young said. But without evidence of that, M&T Bank is asking the court to stop what it perceives as detrimental to its interests, he said.
"They are saying, 'Judge, kill this company,'" Young said.
Part of the issue is that the court authorized Stephen Powell to give a $90,000 loan to the company. However, M&T Bank says in its court filings that Powell routinely posted larger loans to the company.
In the August report, Powell Steel reported loans of $99,000, according to court documents.
Plan of attack
There still could be a future for Powell Steel, even if M&T Bank makes the case that reorganization is untenable, attorneys said.
Judges can approve collateral use if the company demonstrates it has more business that will soon move onto the books.
"In many instances, the judge will allow (the company to continue) because they're pro-reorganization," said Brian Bisignani, a principal with law firm Post & Schell's Harrisburg office. He is not involved with the Powell case.
Most companies should demonstrate progress after 12 months in reorganization, he said. But, they need a plan for the future, something Powell Steel hasn't yet filed with the court. It's not unusual for Chapter 11 cases to go on for years before a company can emerge, he said.
"My oldest case has been running since 2000," Bisignani said.
If a company can produce and sell, then reorganization can continue, he said. It just depends on the individual circumstances, industry and the overall economy.
For example, Bisignani represented creditors in the bankruptcy of iconic camera, film and imaging pioneer Eastman Kodak Co., which filed in 2012. The company emerged from Chapter 11 in 18 months but sold most of its patents to other tech giants. Today, it focuses on corporate digital imaging, conceding the consumer market.
Armstrong World Industries Inc. took years to emerge from bankruptcy protection. It was saddled with the massive costs from asbestos injury liability lawsuits. Armstrong formerly manufactured products containing asbestos, which has cancer-causing properties.
The company filed for Chapter 11 in 2000 and emerged in 2006.
Today, the company is stronger, manufacturing flooring, ceiling and building materials. It is expanding Lancaster production in 2015 with work reshored from China.
For Powell Steel, construction markets could pose stiff headwinds. There is more competition for less work in the steel construction industry, according to an October report from the Chicago-based American Institute of Steel Construction.
The steel industry, including fabricators and erectors like Powell Steel, provided material for 8,000 buildings in 2012, but that's down from 20,000 in 2006, according to AISC. National employment exceeded 150,000 people, down 27 percent from 2006.
"This market is still up from the bottom of the recession, and while we have seen some fabricators leave the market or merge with other fabricators, the overall number of fabricators has not decreased significantly," AISC Vice President John Cross said.
The 797 million square feet of nonresidential and high-rise residential steel construction in 2012 is less than half of 2006's work, according to AISC. New construction was 396 million square feet in 2013's first half, and the institute expects totals to be about 6.6 percent better than 2012. However, with large buildings such as retail, warehouses and dorms being just 39 percent of the market, business is still slow.
"The uncertainty surrounding the general economy translates to reticence on the part of developers to build," Cross said, "which in turn creates uncertainty within the fabricator community about what is going to happen next."