Isaacson Steel bankruptcy sends shivers through Berlin
Isaacson Steel bankruptcy sends shivers through Berlin
The Chapter 11 bankruptcy filing of Isaacson Structural Steel in Berlin is not a simple reorganization, but a mess. The situation is in flux, and it's uncertain whether the company will be able to stay afloat, leaving in question its 160 crucial jobs in an area that is already suffering from the highest unemployment rate in the state.After reviewing court filings and talking to most of the major parties, NHBR has learned: • Isaacson owes more than twice the amount it has, a $12.6 million gap that can't be filled without substantial write-offs from creditors. There are multiple liens far exceeding the value of the inventory and property. And Isaacson revenue has been roughly cut in half. The federal government may be on the hook - directly or indirectly - for about $2.5 million -- although it might add some more money to the pot. • The proposed plan to save Isaacson depends upon a $2.25 million loan through the New Hampshire Business Finance Authority, which in turn depends on the controversial proposed 75-megawatt wood-burning power plant in Berlin -- a plan that is at best "on the ropes," and at worst "is dead." (Indeed, Cate Street Capital, the company providing a $500,000 bridge loan for the project (or for Isaacson?), was a principal investor in the Berlin Station wood-burning plant, but that loan might be a bridge to nowhere if the power plant doesn't go through) • Passumpsic Savings Bank, Isaacson's largest secured creditor -- with claims of $12 million -- has frozen the company's bank account. The St Johnsbury, Vt.-based Passumpsic has also sued Isaacson's accountant, claiming that there was a $10.5 million overstatement in the company's inventory, making the company seem profitable for years when it wasn't. The accountant, however, alleges Isaacson was responsible for any misstatements and notified the bank as soon as he learned about it. Curiously, the accountant is a trustee of the bank. • Two Isaacson family trusts recently pumped $850,000 into the company, and its current owners, Steve Griffin and Arnold Hanson, have sunk another $625,000 in the company. Griffin's spouse bought a number of cars off the company, including a 2011 Lexus for $39,000, further infusing it with cash. Plus, the two owners personally guaranteed $3.4 million for purchases of steel, according to a lawsuit that names them individually."I'm afraid there are going to be people who take losses," said Hanson, president and half-owner of Isaacson. "It breaks my heart, but we have to do this to save the company for the jobs. That's first and foremost what we are trying to accomplish -- to save as many of these jobs as we can."The Berlin area's unemployment rate was 8.8 percent in May, compared to the statewide rate of 4.8. If all of Isaacson's workers were added to the rolls, that rate would shoot up to about 10.5 percent.Isaacson Structural Steel Inc. (ISSI) and its affiliate, Isaacson Steel Inc. (ISI) filed for Chapter 11 reorganization on June 22.ISSI is the larger entity, involved in providing steel for buildings throughout New England, including the 20-plus story Liberty Mutual building being built in Boston, a $24 million project.ISI sells steel to smaller contractors and individuals.The companies' fortunes, however, plummeted during the recession. In fiscal year 2008 (which ended Oct. 31, 2009), ISSI revenue exceeded $57 million. The following year, revenue fell to $40 million, and at the bankruptcy filing - after nearly two thirds of the fiscal year had passed - revenues were slightly less than $20 million.ISI revenues also were cut in half, going from $9.6 million in fiscal year 2009 to $5.6 million the following year.Competition has also driven down margins, said bankruptcy attorney William Gagnon, causing the company to sometimes operated at a loss.Last February, Griffin, who's the company's chief financial officer, told the Berlin Reporter, "We have been bidding work at or below our cost to avoid layoffs. Obviously, a company can only go about this for so long"To keep the company going, ISSI borrowed heavily against its assets, which aren't worth very much, according to the filing. ISSI's total assets, include $6 million in receivables, $3 million in equipment and vehicles, $1.8 million of property, and about $500,000 in inventory, adding up to $11.3 million. But it has loans of nearly $24 million, $17 million of which were supposedly secured against those assets.(ISI's balance sheet is a little more positive, with $2.78 million in assets and $2.26 million in debt, but the two companies are intertwined, since ISSI owes ISI $1.6 million.Passumpsic Savings, the biggest creditor, has "secured assets" of between $12 and $14 million. Passumpsic's largest loan totals $10 million and was renewed in July 2010. The bank also issued two loans backed by the U.S. Small Business Administration -- one approved in 2004 with a 75 percent guarantee and a newer $2 million loan approved in December 2010 with a 90 percent guarantee.As part of the federal stimulus program the SBA increased its risk in order to encourage banks to lend more during the recession. ISSI had some other help through the stimulus program: a $31,000 grant in February to cover three quarters of the cost to install a energy efficient engine.)Passumpsic, however, thought the loans were more secure then they were, because it believed ISSI had $12 million in inventory, when it only had $1.5 million, according to a suit filed in Grafton County Superior Court against DJ Driscoll & Company of Littleton.(not sure what this means ????)"If the inventory had been stated correctly, the Borrower (ISSI) would have shown significant losses," claims the suit.Frozen accountIn an unusual step, the bank first moved against the accounting firm, attempting to attach its assets and its bank, as well as the property of its principal, David Driscoll, CPA, who also was a trustee of the bank.The complaint says that Driscoll knew about the company's financial situation, but signed off on it anyway, violating his fiduciary duty to his client as well as the bank.Driscoll, however, objects to the "extreme nature" of the attachment, arguing that his financial statements were based on what Isaacson presented to him and that he disclosed the misstatement (which he said was $6 million) as soon as he learned of it."The CFO of the company involved made the accounting entries," said Driscoll's attorney, Jack Crisp. "Not my client."CEO Hanson said that Isaacson wouldn't comment about the suit. Isaacson's attorney, William Gannon, attorney said that the inventory figures were "clearly wrong" but won't say who is to blame.As for Driscoll's role as bank trustee, the bank well knew of his clients - he says - and made him a trustee so he would bring those clients to the bank as customers. Therefore, it was "disingenuous" to imply that there was some kind of conflict of interest.Besides, he argued, Driscoll worked for the borrower, not the bank, and the bank hadn't even lost any money yet - nor did it know how much it would lose.In its reply, Passumpsic says that it would "suffer at least $5 million, and likely more, in losses" and that the collateral "is never going to be sufficient to repay the $13 million in outstanding loans."Passumpsic froze Isaacson's account on June 10, according to a July 1 filing, depriving the company of $930,000, which caused work to cease on a number of projects, and about $1.5 million in accounts receivables to dry up. Steel wasn't delivered, and some 72 workers were furloughed briefly, with 42 of them later called back in. Hanson said at this point there are 25 still out, which could be rehired as soon as the bankruptcy court rules on motions to free up some cash.Some of these motions are opposed to a limited extent by Passumpsic, but both sides are trying to negotiate.Passumpsic attorney Greg Moffett issued a statement saying that the bank had "supported this business for years. When financial issues were identified, bank management attempted to work with the company owners for months to develop a viable plan. Unfortunately no viable plan was worked out, which required the bank to take action. Passumpsic Savings Bank is empathetic to the situation and the effects this will have on the employees, families and the community."Other creditorsPassumpsic isn't the only one with claims against the same limited collateral.The Northern Community Investment Corp. (NCIC) -- a development agency for the upper three counties in New Hampshire and Vermont, in partnership with the Coos Economic Development Corp. -- lent ISSI $475,000 in a 2006 expansion to create 32 full-time jobs. Isaacson still owes $279,000 on that loan, according to its bankruptcy filings. Although NCIC was there first, the nonprofit took a back seat to Passumpsic to help Isaacson secure the Passumpsic loan.If NCIC isn't paid, it will have less to lend out to other deserving companies, but the agency be willing to do whatever it can to keep Isaacson alive."It's very important," said NCIC president Jon Freeman. "It has some of the highest-paid jobs in the county. We really need that company to make it."Other creditors include Infra-Metals Co., a Connecticut firm that sold Isaacson $3.4 million worth of steel on credit, with a lien against the company's inventory. Infra-Metals, however, knew there were previous liens, and received personal guarantees from Hanson and Griffin. Less than a week after the bankruptcy filing, Infra-Metals launched a suit against the two owners personally.But the president of Infra-Metals, Mark Haight said that this was done for legal reasons, and that he hoped some arrangement would be worked out."I have no animosity at all towards the owners," he said. "Most people involved are working real hard to make it a positive outcome."Everybody knew of the other's liens, explained Gannon. "There is nothing secret or sleazy about this," he said.And then there are those 140 creditors with no security who are collectively owed $6.8 million.How much any creditor gets - secured or unsecured - depends on the bankruptcy plan.The one proposed by Isaacson on July 1 would partly depend on a $500,000 bridge loan from Cate Street Capital Inc., a Portsmouth-based private equity firm. (Hanson and Griffin would also contribute $50,000 in equity).The bridge loan would - at a 5.25 percent interest rate - last until Sept. 30. That's when the BFA's 2.25 million loan would kick in.Cates is a financial backer in Laidlaw Biopower's proposed Berlin Station, a wood-burning plant that would produce 75 megawatts of power.But a consortium of existing wood burning plants have been fighting the plant at every procedural step, saying it would threaten their own long-term contracts.Indeed, on July 5, Berlin Mayor Paul Grenier and other elected officials said that opposition actually killed the plant by causing it to miss a June 30 deadline."The project as it stands today is dead," Grenier reportedly told his city council on July 5, according to the New Hampshire Union Leader.Some sources, however, said that there is still a good chance that the power plant could be salvaged.Berlin Station -- construction on which was supposed to have started on July 15 -- would be a boost to the area's economy in its own right, creating 400 temporary construction jobs and 40 permanent ones, but now it also may be crucial to Isaacson's survival.As part of the plant's approval process, Berlin Station agreed to set aside proceeds from some of its tax credits for loans to the community. Those loans were going to small businesses, but with such a large employer "looking for a lifeline" the BFA could use that money for Isaacson, said BFA director Jack Donovan.Such new loans shove the old secured lines aside, so it is not surprising that Passumpsic has filed opposition to the idea, though these things can sometimes be negotiated.Donovan said that such a loan should be able to leverage some private financing -- perhaps another $1.25 million -- though that would still be far short of what the company would need to continue operating in the long run.At the end, creditors would have to eat some of the money owed to them, either voluntarily or via a bankruptcy court order. But the court could also just liquidate the firm, if that is deemed in the best interest of creditors. All that remains to be seen.But all that's if the biomass deal goes through. Donovan agreed that the proposal was "on the ropes," and Isaacson also acknowledged the situation in its filing."Lender is familiar with the status of the closing of the biomass project and accepts the risk that BFA financing may not close and that a reorganization plan may not be confirmed in this case," says the filing.If it does, the BFA and other agencies will try to find another way to keep Isaacson alive."They have been a good citizen to the area, amazingly supportive of the community," Donovan said. "It's too important to lose."
This article appears in the July 15 2011 issue of New Hampshire Business Review