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Longboat Key Wednesday, Jun. 6, 2012 5 years ago

My View: Bain Capital orchestrated financial disaster

by: R. James Beam

This is in rebuttal to the May 31 editorial entitled “Don’t fall for steelworker’ sob.”

The facts presented are from produced from Tampa Bay Times. There are two points I’d like to cover. First, the writer’s description of classic ’60s, sophomore, free-market economics theory and, second, facts regarding the Bain Capital purchase of GST Steel. Readers are encouraged to check facts and conclusions stated here at

During the late ’50s and early ’60s, as I emerged from college with a bachelor’s degree in business, we were taught that capitalism would rule and the weak would go away or survive only by forward-thinking management. This is akin to what we then called “the law of the jungle,” whereby the stronger lions, tigers and other predator animals prey on weaker, slower or sick animals such as baby antelope for food to survive. This has been going on for millions of years and is considered a natural phenomenon. Intellectual society based somewhat on global isolationism at the time has moved from this, rather simplistic, capitalist view to one that recognizes what happens worldwide can and will have an impact on the people of the United States, both economically and socially.

Remember, back in the ’60s our economics professors did not envision China becoming the importer of anything of importance: “ ... so they import rice; we don’t grow rice in this country.” How many of you remember seeing a neighborhood Oriental restaurant? How many of you remember a McDonald’s in 1969? How many remember when we had a thriving, manufacturing job market producing refrigerators and television sets? How many envisioned Detroit and Nagasaki, Japan as they are today? The world has evolved far beyond the textbook capitalism theory taught when we were much younger.

Now we come to Bain Capital’s acquisition of GST Steel, a Kansas City specialty steel maker, started in 1888. Having lived in Pittsburgh in the mid-to-late ’60s, working for an engineering company specializing in modernizing the steel industry, it was not hard to realize the steel mills were in trouble by not being able to modernize due to a chronic shortage of cash. Even Wall Street could predict the need for massive retrenchment. That was 25 years before the Bain purchase of GST Steel in 1993. By 1993, China had made significant inroads with cheap steel products, as well as setting the trend of imports of many other products.

So, in 1993 Bain bought GTS Steel for $75 million. Bain put up 11%, or $8 million of its own money. Less than a year later Bain borrowed $61 million. The next year — 1994 — Bain borrowed $125 million, paying $65 million to stockholders, which included themselves. Although we do not know the stockholders’ total investment, it is safe to conclude that stockholders received much of their investment, if not all, in the form of this dividend. Bain, as the majority stockholder (more than 50%) at the time, probably received the “lion’s share” of the dividend. There is no mention in the article of who the bondholders were, what the maturity date of those bonds was and the risk rating. But it is easy to think the bondholders were those loyal GTS employees interested in saving their company.

Bain announced a $98 million modernization program, investing $16.5 million of its own money, which was really from earlier dividends and issued another $125 million in debt. At this point in time, Bain now had no net cash investment in this company. To date, Bain had invested $24 million of its own money and realized a gain of $50 million. As for the $98 million modernization program, Bain used the money to purchase another steel company in South Carolina.

By 1995, the debt had risen to $378 million. Profit that year was $32 million. This is clearly a company now burdened with excessive debt. To put this into perspective, visualize a person earning $32,000 a year and having a mortgage and other debt totaling $378,000. This is totally an out-of-the-ballpark hit in terms of conservative credit management. As sophisticated investors, Bain was well aware of the direction steel and every other American heavy manufacturing industry was headed, yet they burdened this company with excessive debt to pay its fees and dividends. Bain’s business is financial management, so making decisions to increase debt far beyond what is considered prudent can only be culpable negligence and greed.

This is where the reality sets in: Bain misrepresented its intentions in taking over this company; it persuaded middle-class individuals, who had a heartfelt interest in this company, to invest in secured bonds rather than stock as Bain itself had done, which if done, would have, at least, kept the playing field somewhat even by giving those stockholders the opportunity to challenge Bain’s management decisions and also receive dividends. In addition, Bain underfunded the workers pension plan by $44 million, which ultimately had to be turned over to the U.S. Pension Benefit Guarantee Corp;, a rescue from U.S. taxpayers.

By the ’90s, the harsh reality of the steel-industry plight became well known to the general public.

Inflation, including increasing electricity and natural gas costs were skyrocketing. However, in the years from 1993 to 1999, little, if any, infrastructure investment was made with the now $554 million in debt financing. The company, strapped with enormous debt, continuing to pay a yearly $900,000 management fee plus dividends to Bain, is not in a cash position to restructure itself or even begin to pay off the bonds. Bain quietly walked away, untouched, from this orchestrated financial disaster via bankruptcy.

R. James Beam is a Sarasota resident.


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