U.S. steel mills threatened as hot metal piles up in private-equity recycler’s ‘chaos’ bankruptcy
Phoenix Services, a Radnor company that keeps the largest US steel mills running by recycling their molten slag, is in its sixth month of bankruptcy reorganization as tons of waste pile up at its customers’ plants.
But why? Has inflation, Fed rate hikes, the war in Ukraine, and other factors beyond its control that have made known business arrangements untenable compelled Phoenix to seek Chapter 11 protection?
Or have Phoenix and its financiers, led by its private-equity owner Apollo Global Management, used economic conditions as an excuse to tear up contracts and try to pass rising financial costs on to steelmakers in order to jeopardize the profits of its billionaire investors to protect consumers?
Ever since Phoenix filed for a Chapter 11 reorganization in September, these are the rival stories lawyers have been telling in the battle over the slag disposal company’s future. Phoenix’s fleet of 1,700 purpose-built machines removes hot waste from plants operated by Nucor, US Steel, ArcelorMittal, Cleveland-Cliffs and other major steelmakers and sells it for building and road materials. Previous buyers include PennDOT.
Phoenix uses the bankruptcy to impose new conditions on the steel manufacturers. Nucor, the largest US-based steelmaker, is fighting back, rejecting Phoenix’s price proposals and asking the court to draw up a detailed plan for removing Phoenix’s on-site bulky specialty vehicles and recycling facilities — or leave them with someone else she can take over work.
If there isn’t a plan soon, Nucor says a growing slag backlog at its major southern plants could force the company to cut production, threatening potential shortages or price hikes for automakers and other manufacturers that rely on American steel are.
Phoenix has resisted Nucor’s proposal and claims, arguing that sufficient steel will be available even if it pulls out and that it needs flexibility to move its equipment to new customers at its own pace.
bankruptcy and private equity
There are a number of steel mill service companies in the Philadelphia area that handle the rocky, metallic waste that steelmakers call slag. These include industry leader Harsco, a public company based in Philadelphia; TMS International, owned by the Chicago billionaire Pritzker family, which has offices in Horsham and Pittsburgh; and Phoenix, a major supplier both in the US and with plants in Europe, Brazil and South Africa. Only Phoenix’s US business is bankrupt.
It’s a cyclical business, sure. Harsco made half a billion dollars in 2019, posted modest losses in 2020 and early 2021, and made a small profit this past fall. TMS does not report financial results.
In its bankruptcy filing, Phoenix blamed “inflationary pressures and rising fuel costs,” “operational challenges” at various plants, higher interest rates on its half-billion-dollar debt, and most notably its own contracts with customers that Phoenix now considers “unprofitable.”
Bankruptcy recovery and the associated facilitation of breach of contract is a strategy employed by some troubled companies, including those controlled by private equity firms such as Apollo.
“A very high percentage of the big bankruptcies in recent years have been private equity sponsored firms,” said David S. Skeel, a University of Pennsylvania law professor and bankruptcy scholar.
“The usual story is that they take on a lot of debt, sometimes wipe out the company’s assets and then something goes wrong,” Skeel added, leaving companies and their lenders to seek relief from bankruptcy protection.
Remedial action can be to break agreements with customers and workers and impose more favorable financial terms on owners. In a recent essay, Skeel warned of a “populist backlash” against such practices: “There is a lot of unease about the current form of bankruptcy.”
New York-based Apollo is raising billions to invest in companies like Phoenix from public investment funds like the Pennsylvania Teachers’ (PSERS) and State Workers’ (SERS) pension schemes in hopes of making big profits. Billionaire Sixers’ principal owner, Josh Harris, is a former managing partner.
Phoenix, with three Apollo executives at the helm of the board, including the chairman, and a half-billion-dollar debt burden, five times the current value of the trucks, moveable buildings, and other assets it owns in the U.S. seemed on the fence similar goal of escaping its own commitments—before Nucor balked.
companies at odds
In a January filing, Nucor said it could not accept Phoenix’s “drastically above-market and anti-competitive pricing” or negotiate acceptable new terms. Nucor asked US Bankruptcy Judge Mary F. Walrath for the District of Delaware to order Phoenix to conduct an “orderly liquidation” of its operations at the Nucor mills so it could make other arrangements to process slag and keep them running .
Nucor said that during Apollo’s management, Phoenix offered “a lack of preventative maintenance,” which put workers at risk. It said owners lost experienced managers and slowed the flow of slag, causing waste to threaten operations at key Nucor plants in Mississippi, Arkansas and Kentucky, which together accounted for about 7% of steel produced in the US, according to industry figures.
Nucor also cited a couple of dangerous incidents it wanted to link to poor maintenance — a Jan. 6 fire at its Arkansas facility in a vehicle transporting molten slag without a fire suppression system, and a slag loader fire at a Mississippi plant.” for abuse”.
In total, approximately 160,000 tons of unprocessed slag and metal tailings accumulated at the Phoenix sites that supply Nucor plants. Nucor blamed “Phoenix’s equipment failures, staff shortages and poor performance”. Nucor estimates it will have to pay another company $5.5 million to clean everything up — if it can do so without violating its environmental permits.
Phoenix lawyers called Nucor’s claims “outrageous” and said it offered little evidence to support its sweeping claims.
In a hearing on Jan. 23, Phoenix attorneys said the company invested $125 million in Nucor’s facilities, but instead of growing profits, it lost money because Nucor didn’t ramp up production as promised.
The Nucor deal at the Arkansas plant “was very undervalued” — in fact, “our lead loss maker,” Phoenix chief operations officer Robert Richard testified Jan. 23.
Richard asked Walrath not to impose the detailed terms that Nucor and some other customers wanted. He compared the complexity of moving devices to new customers to the computer game Tetris, where puzzle pieces have to be put together within time limits.
Phoenix attorneys agreed that Phoenix’s services are “vital” to Nucor and that closing it would cost Nucor millions.
Lawyers for companies that own and finance some of the equipment used by Phoenix supported Nucor’s claims. “It really has turned into a bit of a mess,” said Adam Hiller, an attorney for the financial firms. He asked the judge for an “orderly” plan.
Walrath said she, too, is concerned about Nucor’s complaints but has so far refrained from ordering Phoenix to detail its exit plans, instead urging the two sides to continue discussions, slag pile or not.