(Reuters) - RG Steel LLC filed for Chapter 11 bankruptcy protection on Thursday, saying it could not overcome the deterioration of the steel market and would sell off the three plants it bought from Russian steelmaker Severstal (CHMF.MM) for $1.2 billion.
RG Steel and several affiliates filed for protection from creditors in the U.S. bankruptcy court in Wilmington, Delaware, saying it has more than $1 billion in assets and liabilities.
The filing comes at a time when U.S. steelmakers are struggling with weak demand, rising costs and narrowing margins. Production capacity has yet to fully recover from the most recent recession.
According to the filing, Severstal is RG Steel’s largest creditor, with $36.5 million in unsecured claims.
However, in an affidavit in support of the filing, RG Steel’s former chief financial officer, Richard Caruso, said the company was asserting a claim of $82 million against Severstal for a working capital shortfall.
He cited Severstal’s “failure to disclose material contracts...which resulted in significant losses for the company due to its obligations to take on or provide supplies and services on unfavorable terms.
“Absent the working capital shortfall and unanticipated losses stemming from Severstal’s misrepresentations and contractural breaches, the debtors’ liquidity crisis may have been surmountable,” Caruso said.
Later, Severstal, which sold the plants to RG Steel last year, issued a statement denying the allegations. “Severstal vehemently denies that its performance related to the stock purchase agreement between it and RG Steel was in any way a cause of RG Steel’s filing for bankruptcy protection.
“RG’s claims of misrepresentation and contractual breaches are without merit. Faulting Severstal, even in part, for RG’s bankruptcy filing is absurd and self-serving, particularly since we appear to be RG’s largest creditor,” said the statement from Severstal International in Dearborn, Michigan.
Caruso said RG Steel was seeking “breathing room” to sell its assets after “substantial liquidity problems driven by a rapid decline in steel prices, while raw material prices remained at peak levels.”
In a news release, RG’s chief executive, John Goodwin, said the company was “unable to overcome the impact of the continued deterioration of the market and the inability of the industry to sustain a meaningful recovery.”
The filing came despite the company’s aggressive cost-reduction efforts, significant improvements in its cost structure and substantial investment capital, he said.
Goodwin said that privately held RG Steel had begun the process to sell its Sparrows Point mill outside Baltimore and its plants in Warren, Ohio, and Wheeling, West Virginia. Last week, the company said it was suffering a liquidity crisis, looking for a buyer and would idle its steel mills starting in June.
Sparrows Point, which has been producing steel for more than a century, was acquired by Severstal for $810 million in 2008 after its then-owner Europe-based ArcelorMittal ISPA.AS (MT.N) was ordered to divest by the U.S. Justice Department. It is one of the largest U.S. steelmaking plants, with annual capacity of 3.9 million tons of sheet, slab and tin products.
Warren produces 1.4 million tons a year and Wheeling has annual capacity of 2.9 million tons. The company has about 4,000 full-time employees.
Analysts did not see RG Steel’s move as a sign that other steel companies might follow into bankruptcy, but they were also skeptical a single buyer would emerge for the plants.
“This is the first real steel company bankruptcy since the recession, so that’s an indication of the relative health of the domestic steel industry,” said Michelle Applebaum, of Steel Market Intelligence in Chicago.
“Most others assets are owned by very stable companies. There may be other situations of red ink, but nothing on such shaky ground as this was,” she said.
“I don’t see a buyer, not for the whole plant,” she added, citing uncertainty over environmental rules that might discourage a company from purchasing them. Also, Nucor (NUE.N) is planning a new state-of-the-art steel mill in the United States, which would also compete with the RG assets.
“I am not surprised at all,” said analyst Charles Bradford, of Bradford Research in New York. “They were not good plants anyway, they each had problems, and who on earth will buy them?”
He said a sale of the RG plants was complicated by the fact that German steelmaker ThyssenKrupp (TKAG.DE) has just put its Alabama plant up for sale, too.
Renco Group Inc and Cerberus RG Investor LLC hold ownership stakes in some of the debtors, according to court filings.
U.S. Bankruptcy Court District of Delaware (Delaware) Bankruptcy Petition #: 12-11662-KJC
Reporting By Jonathan Stempel and Steve James in New York; editing by Gerald E. McCormick, Jeffrey Benkoe, Matthew Lewis and M.D. Golan