Mon May 27th, 2019 at 09:41:19 AM EST
Is Scunthorpe the British version of Ohio's Youngstown?
Mix private equity, Brexit mania, state incompetence and what do you get? Scunthorpe | The Guardian Opinion |
Last week, as British Steel went into receivership, Scunthorpe was set to join them. Two thirds of its citizens voted for Brexit three years ago, and so unintentionally helped accelerate the insolvency and potential closure that duplicitous Leave politicians - including our expected next prime minister, Boris "fuck business" Johnson - said that Brexit would avert. Or it would, they argued, be only transitional pain before the sunlit uplands of immigrant-free, global free trade brought riches back to these threatened communities.
British Steel works, at Scunthorpe, England. The four foundries visible in this photo are named after four queens of England: Anne, Bess, Victoria and Mary.
In particular, what broke British Steel was £2.6bn of revenue it expected to receive under the EU's carbon trading scheme, now frozen because of a threatened Brexit.
More below the fold ...
The business secretary, Greg Clark, a thoughtful politician doubtless to be replaced in a Johnson cabinet by some Thatcherite throwback babbling about deregulation and the magic of markets (Jacob Rees-Mogg? Dominic Raab? Steve Baker?) is honourably trying to salvage something from the wreckage. But the public loans and public special purpose vehicles he proposes are after-the-event initiatives cramped by the reality that a no-deal Brexit will eviscerate British Steel's trading prospects. What's more, the company's vital reinvention - around making decarbonised steel, say - and a general revived manufacturing industry requires a purposed industrial strategy on a much larger scale than what we have.
In any case, British Steel has been battered enough by the private sector so uncritically beloved by rightwing Brexiters. Clark has to deal with its owner, the private equity firm Greybull Capital, which bought British Steel for £1 in 2016 and runs it from a Knightsbridge office via a holding company based in Jersey.
Private equity or, as the US investor Warren Buffet calls it, “private debt”, is a $5tn worldwide industry that owns ever more of western business, especially in the US and UK - bought by huge loans (serviced by the taken-over companies) run for no nobler purpose than vast personal self-enrichment. The recipe is well-known: aggressive lay-offs and wage freezes, targeted cost reduction, balance sheet and cash-flow manipulation to maximise tax breaks - and then selling off or breaking up what is left. Or walking away largely scot-free if it fails.
How A Private Equity Firm Brought About The Death Of British Steel | Forbes |
On Wednesday May 15 - one week before its failure - British Steel was scheduled to complete the acquisition of French steelmaker Ascoval for a cool £40m ($50.6m). It couldn't afford this, so it approached the U.K. government for help. This was of course refused. But according to the French daily Le Monde, the acquisition went ahead anyway. Ascoval is now owned by Greybull. So in effect, Greybull had asked the U.K. government to fund its acquisition of a French company.
There isn't much doubt that it is Greybull that has pulled the plug. British Steel's accounts show that it is heavily indebted... to Greybull.
In May 2016, Greybull, via an opaque company called Olympus Steel registered in the British tax haven of Jersey, advanced British Steel £154m ($195m) at an interest rate of 9% over six-month sterling Libor. Sterling Libor is currently just under 1%, so the effective interest rate on the loan is nearly 10%. British Steel also has loans from banks at 3% over sterling Libor. The company's owner is extracting cash at a rate 6% higher than that charged by banks.
The accrued interest on the loan from Olympus Steel will be capitalized after 36 months, and six-monthly thereafter until the maturity date of the loan, which was originally November 2019 but last year was extended to November 2021. So the first interest capitalization would occur at the end of this month. As British Steeel is now in liquidation, Greybull stands to lose not only the loan but also the interest on it. No wonder it was keen on the U.K. Government bailing it out.
When Greybull acquired Longs Steel for a notional £1, it wiped the negative equity (including Tata's loan notes) and advanced £154m ($195m), representing the costs of acquisition plus a substantial injection of additional funding. The newly formed British Steel spent this on plant and assets, much of it bought below book value. The eventual negative goodwill recorded on British Steel's books due to Greybull's acquisition of Longs Steel amounted to some £50m ($63.3m).
Negative goodwill is a double-edged sword. It can indicate that the acquirer has gotten itself a bargain: if it can extract more value from the assets than the discounted purchase price, then it is in the money. This was no doubt Greybull's hope. And not just for British Steel: in 2017, Greybull bought a Dutch steelmaker, FNsteel, for £15m ($19m) less than its book value. This too ended up on British Steel's books.
But negative equity is also a warning. A company whose market price is far below the book value of its assets is deeply troubled. And assets sold off in a fire sale may or may not be worth more than the acquirer pays for them: caveat emptor, and all that. Growing through heavily discounted acquisition is a risky strategy. Many, if not most, of the companies purchased at a heavy discount will eventually fail.
DB transfers: Freedom under fire
Carillion is the latest corporate disaster folding as it did this year with a £2.6bn pension deficit. This followed the British Steel takeover by Tata, which left members choosing between a less generous workplace scheme, joining the PPF or transferring out.
Members are given a cash equivalent transfer value for their total DB pot which looks very generous at present because schemes are discounting liabilities using a risk-free best estimate.
This makes taking the cash option look attractive, particularly when members are desperate to retrieve their funds from a defunct employer, but they do not fancy reduced benefits from the PPF.
Henry Tapper, director at consultancy First Actuarial, says this makes people vulnerable to poor advice from unscrupulous companies who seek to profit from the fees available when helping with a transfer.
Related reading ...
○ How private equity is shaking up Southeast Asia | Asian Review – June 2018 |
○ The Truth About Private Equity: Politicians Need It, Taxpayers Fund It | Daily Beast – Jan. 2012 |
○ Carlyle, Blackstone, KKR and others | WSJ – 2007 |
○ All Out Class Warfare, No Compromise
○ Why Do White Working-Class People Vote Against Their Interests? They Don't. | The Nation - Nov. 17, 2016 |
○ The Youngstown, Ohio, Trump Supporters by Martin Longman @BooMan on Sept. 13, 2016
○ The Unwinding: An Inner History of the New America by George Packer - review | The Guardian - June 2013 |
○ Scavengers in France by geezer in Paris @EuroTrib on April 24, 2011