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Liquidator who won bid for Sparrows Point has ties to Cerberus

The New York private equity firm has connections to the group that won the Baltimore steel mill at auction. Was the bid an arms-length transaction?

Above: Stephen Feinberg is CEO of Cerberus, which purchased a stake in RG Steel last January.

The buyer and seller of RG Steel Sparrows Point have a financial connection, according to public records.

The common thread is Cerberus Capital Management, a $20 billion Wall Street private equity company whose roster of players includes former U.S. Vice President Dan Quayle and former Treasury Secretary John Snow. The group is headed by reclusive financier Stephen A. Feinberg.

A review of court documents and incorporation records by The Brew shows that Cerberus not only holds a 24.5% stake in RG Steel Sparrows Point, but has longstanding ties to the parent company of the successful bidder, Hilco Industrial.

The parent, Hilco Trading, lists Cerberus Hilco Investments LLC as a member, or part owner, of the company in electronic documents currently on file with the Illinois Secretary of State.

Unlike other Hilco enterprises based in Northbrook, Ill., the business address for Cerberus Hilco is 299 Park Ave, New York – the same as Cerberus’ headquarters.

According to Crane’s Chicago Business and others, Cerberus and Goldman Sachs acquired a third of Hilco Trading Co. in 2006. Cerberus Hilco was incorporated in Delaware on September 25, 2006. Cerberus and Goldman Sachs also purchased a 33% stake in Hilco UK for strategic overseas alliances, according to a 2011 published report.

Yesterday a Hilco official categorically denied that Hilco had any connection with Cerberus.

Gary C. Epstein, who was named Hilco’s chief marketing officer last month and was designated the spokesman for the group, said Cerberus did not hold, directly or indirectly, any stake in the liquidating company.

He would not say if Cerberus had sold its stake in Hilco or even confirm if the private equity firm ever owned a part of Hilco.

A current filing of affiliates of Hilco Trading Co. lists (on the first line) Cerberus Hilco whose address is the same as the hadequarters of Cerberus Capital Management. (Downloaded from Illinois Secretary of State website)

Hilco Trading lists Cerberus Hilco Investments as a “member,” or part owner, in the liquidating company. Cerberus Hilco’s business address is the same as the Park Avenue, New York, headquarters of Cerberus Capital Management. (From Illinois Secretary of State website)

Because the entities involved are privately owned, disclosure of their ownership is not publicly available.

As of this morning, RG Steel has not released any details of Wednesday’s private auction on the bankruptcy court docket. Nor has any court papers from Cerberus disclosed its business relations and apparent financial interest in Hilco.

Arms-Length Transactions Required

Federal law calls for the sale of Chapter 11 bankrupt firms, such as RG Steel, to be “arm’s length transactions.” The code prohibits so-called “insiders” with a financial stake or control over a bankrupt company from participating in the purchase of its assets.

An “insider” is defined in Section 101 as an entity that directly or indirectly owns, controls or holds 20% or more of the securities of the debtor.

In the case of RG Steel, Cerberus has a 24.5% stake in the company, according to filings at the U.S. Bankruptcy Court in Wilmington.

This stake was given to Cerberus last January by RG Steel owner Ira Rennert in exchange for emergency loans to the struggling steel company.

Court records disclose that Cerberus made substantial loans to RG Steel in two tranches – for  $128 in January 2012, and for $91.9 million in March, or two months before the company filed for Chapter 11.

The first loan, which allowed RG Steel to restart the “L” blast furnace at Sparrows Point, was hailed by the United Steelworkers Union and Maryland Gov. Martin O’Malley as a turning point for the company.

Cerberus was portrayed as a “white knight” who rescued Sparrows Point and restored steelmaking to the plant.

Now Cerberus stands to indirectly gain a windfall through the low-ball price offered by Hilco for the same property.

Hilco’s bid of just $72 million for the 2,400-acre facility came as a shock to industry observers.

It compares to the mill’s assets of nearly $1 billion, according to court records, and the $1.2 billion that Renco Group paid for Sparrows Point and several other properties in March 2011.

Inventory Alone Worth $200 Million

In an unusual arrangement, Hilco has reportedly agreed to wait six months before disassembling the steel mill to allow unsecured creditors – including the United Steelworkers Union – time to try to find an operator of Sparrows Point.

USW officers from Sparrows Point Local 9477 are scheduled to meet with District Director David McCall and attorneys from the International union on Monday to discuss strategy.

Sparrows Point currently has $203.3 million in inventory, according to court records, including $55 million in finished slabs and bands, and more than $45 million in iron ore, coke, scrap and special alloys.

Sold on the spot market, these products would fetch considerably more than Hilco’s $72 million purchase price and would stay within the agreement not to destroy steelmaking assets, such as rolling machinery and now-idled furnaces.

Bids before Court next Week

Approval of the sale of Sparrows Point to Hilco – as well as RG’s Warren steel mill for $18 million to an obscure demolition company in western Pennsylvania –  is expected at a hearing scheduled next Wednesday (Aug. 15) before U.S. Bankruptcy Court Judge Kevin Carey in Wilmington.

Crane’s has described Hilco as “a hard-edged, high-pressure financial conglomerate built on corporate calamity.” The company won its spurs a decade ago when it liquidated Montgomery Ward & Co. and has since grown into a global powerhouse, selling everything from used equipment for car manufacturers to high-end yachts for Mexican millionaires.

Its website describes Hilco as “the leading international provider of services to identify, monetize and enhance the value in tangible and intangible business assets.”

During the auction process, another Hilco subidiary, HRE Mingo, submitted a bid for the assets of RG’s Mingo Junction mill, but lost out to Frontier Industrial Corp., a demolition company in Buffalo, N.Y.

Judge Carey signaled at a court hearing this week that he would approve Mingo’s sale to Frontier.

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