GAO-01-714R Emergency Steel Loan Guarantee Program

United States General Accounting Office

Washington, DC 20548

May 25, 2001

The Honorable John McCain

Chairman

Committee on Commerce, Science, and Transportation

United States Senate

Subject: Financial Management: Emergency Steel Loan Guarantee Program

Dear Mr. Chairman:

In a February 1, 2001 letter, you expressed concerns about repayments of federally

guaranteed loans by borrowers under the Emergency Steel Loan Guarantee Program

and the effect of the program on the U.S. steel industry. As agreed with your office,

we conducted a financial analysis of the program and an economic analysis of factors

relevant to the U.S. steel industry.

Our financial analysis covered program background; the status of program funding;

loan guarantees applied for, approved, and disbursed; the federal government’s

maximum potential loss for the program; the financial condition of approved

borrowers; and factors that affect the borrowers’ ability to repay loans on time. Our

economic analysis considered general factors that influence steel industry

production, capacity, consumption, pricing, and international trade, as well as

specific factors relating to the program. Our work was conducted in March and April

2001 in accordance with U.S. generally accepted government auditing standards.

On May 1, 2001, we briefed your office on the results of our analysis, including the

status of the Emergency Steel Loan Guarantee Program from its inception on

August 17, 1999, through March 31, 2001. This letter transmits the material from that

briefing showing that there has been only one guaranteed loan disbursed by a private

lender for $110 million. With an 85 percent guarantee, the federal government’s

maximum potential loss is $93.5 million, assuming no repayments and no recovery

from property pledged as collateral. We noted that the financial condition of program

applicants is not strong and repayments of loans depend upon many future factors.

Our economic analysis noted a flat demand for steel, moderate prices, and static

imports of foreign steel forecasted for 2002 and 2003. Due to the low loan amount,

the program through March 31, 2001, has had a minimal overall effect on the U.S.

steel industry. However, the program is currently accepting loan guarantee

applications through August 31, 2001, and may, by law, extend the application date

through December 31, 2001. As agreed with your office, this concludes our work on

the program at this time.
Page 2 GAO-01-714R Emergency Steel Loan Guarantee Program

We are sending copies of this letter to Senator Ernest Hollings, Ranking Member,

Senate Committee on Commerce, Science, and Transportation; Representative W.J.

Tauzin, Chairman, and Representative John D. Dingell, Ranking Minority Member,

House Committee on Energy and Commerce; the Emergency Steel Loan Guarantee

Board, and other interested parties. This letter will also be available on GAO’s home

page at http://www.gao.gov.

If you have any questions, please contact me at (202) 512-2600 or by e-mail at

steinhoffj@gao.gov or Jeanette M. Franzel, Acting Director, at (202) 512-9471, or by

e-mail at franzelj@gao.gov. Key contributors to this letter were Roger R. Stoltz,

Richard R. Kusman, and Stephen M. Brown.

Sincerely yours,

Jeffrey C. Steinhoff

Managing Director

Financial Management and Assurance

Enclosure
Emergency Steel Loan Guaran

 Loan Guarantee Progr

Financial and Economic Asses

Briefing for the Staff of the Senate C

Commerce, Science, and Trans

May 1, 2001
Introduction

• On August 17, 1999, the Emergency Steel Loan Gu

(Public Law 106-51) created a program to provide loqualified steel producing companies.

• On February 1, 2001, the Chairman of the Senate C

Commerce, Science, and Transportation requested program to address two specific questions:

• Will borrowers be able to repay loans on time o

likely to be needed?

• What is the effect of the program on U.S. steel p

and steel prices?
Modified Ob

The Board has approved very few loans for gtheir repayment depends upon future events. agreed to by Committee staff, the borrower’s and the financial implications for the federal gbeen addressed in our financial review as foll

• What is the status of program funding?• Since program inception, how many guaranteed 

applied for, approved, and disbursed?

• What is the federal government’s maximum pot

program?

• What is the financial condition of approved borro

program?

• What factors affect the borrowers’ ability to repa
Modified Ob

Also as agreed to by Committee staff, the effeprogram on U.S. steel production, capacity, ahas been addressed in our economic review 

• What are some general characteristics o

industry production, capacity, and consu

• What are some general characteristics o

industry prices?

• What are some general factors of intern

affect the U.S. steel industry?

• What specific factors of the program aff

industry production capacity and pricing
Scope and M

In order to meet the modified objectives, we• interviewed the program’s executive director, gene

officials representing the three board members from Commerce, the Federal Reserve Board, and the SExchange Commission;

• reviewed and analyzed program legislation, applica

requirements for loans, and board minutes;

• reviewed the consultant’s model for estimating sub

with the Credit Reform Act of 1990;

• prepared schedules on the status of program fundi

applications as of March 31, 2001;

• assessed the federal government’s maximum pote

program;

• identified factors affecting loan repayment; and• obtained and analyzed economic information on U

prices, and international trade issues. 
Scope and Me

Scope Limitations• We did not perform detailed analysis of ap

applicants’ financial condition.

• All forecasted amounts are dependent upoBoard Comments• We received comments on a draft of these 

from board officials. These comments are the last page of this briefing.

Government Auditing Standards• Our work was conducted in March and Ap

accordance with U.S. generally accepted gauditing standards.
Background

• The Emergency Steel Loan Guarantee Program is h

member loan guarantee board. The board’s staff co

executive director, executive secretary, a general coreceptionist, and consultants.

• The program provides for loans by private lenders to 

companies with up to $250 million to a single compaamount of loans outstanding may not exceed $1 billguarantees may not exceed 85 percent of loan princfederally guaranteed.

• The first application window was from October 27, 1

2000, and a second window from November 1, 2000 

• The act provides that the board may not make comm

guarantee loans after December 31, 2001, and all loby December 31, 2005. The act does not provide a the board.
Results in B

From program inception through March 31, 2• 14 loan applications totaling $924 million ha

received; 7 loans have been approved for $1 loan has been disbursed for $110 million.

• The federal government’s maximum potent

one disbursed loan is $93.5 million assuminrepayments and no recovery from property collateral.

• The financial condition of program applican

and repayment of loans depends upon man

• Flat demand for steel, moderate prices, and 

foreign steel are forecasted for 2002 and 20

• The program has had minimal overall effec

steel industry due to the low loan amount.

*The Board expects that at least 4 approved loan applications will not be updated by the lenders.
Part I - Fina

Table 1: Status of Program Funding from I

March 31, 2001 (Dollars in millions)

 Budg

Guaranteed loans $1,00Estimated credit subsidy* $14Administrative costs Total costs $14One-half percent guarantee fee revenue** $* The Credit Reform Act of 1990 requires all federal direct and guaranteed loan programs to estimate a credit 

Management and Budget (OMB) estimated a credit subsidy rate for this program of 14 percent for principal o11.7 percent.

** P.L. 106-51 provides for a fee to cover costs of the program not to exceed 0.5 percent of the principal amo
Part I - Fina

Key Documents for Guarantee Loan 

1. Application for loan guarantee.2. Environmental assessment.3. Loan documents to be signed.4. Borrower certification, which includes granting GAO 5. Lender underwriting analysis.6. Lender certification that its underwriter analysis is t

nonfederal guaranteed loan and the borrower is a q

7. Description and appraisal of collateral.8. Audited borrower financial statements for the previ9. A 5-year history and projection of revenue, cash flo

production costs.

10. Documentation that credit was not otherwise availa

sources.
Part I - Fina

Table 2: Current Status of the Loan Guarafrom Inception (October 27, 1999) Through (Dollars in millions)Board Activity: AppliTotal loan guarantee applications received Adjusted loan guarantee application amounts* Loan guarantee applications denied or withdrawn Total loan guarantees approved Lender Activity on Board Approved Guarantees:Loans pending lender update of loan materials** Loan disbursed by lender Loan pending lender disbursement Total loan guarantees approved * Difference between the application amount and the approved amount by the Board.**The Board expects that at least 4 of the 5 approved loan applications will not be updated by the lenders.
Part I - Fina

Interest Rates on 7 Approved Loan G

• Interest rates are prime rate plus basis poin• Most loans cite LIBOR** prime rate as the a

cost of funds for lenders worldwide.

• Interest rates are variable and adjust freque

cost of funds change.

• Interest rates for the 85 percent federally gu

lower due to no lender risk.

• Interest rates for the remaining 15 percent v

lender risk assessment.

• Basis points range from 100 to 2,200.*100 basis points equals 1 percent interest.**London InterBank Offered Rate (LIBOR).
Part I - Fina

Table 3: Use of Proceeds on 7 AppGuaranteed Loans

Amount 

• Debt refinancing $216.0 • Capital expenditures 191.0 • Bankruptcy financing and other 95.9 • Working capital 41.4 

Total $544.3 
Part I - Fina

Balloon Payments on 7 Approved Guarantees

• Repayment schedules call for quarterly inte

principal payments that result in $423 millioballoon payments due by December 31, 20

• If the balloon payments are not made, the l

and the lenders most probably will seek imof the 85 percent federal guarantee.

• After federal payment to a lender, the amou

government claim with three options for rec

 ---sell the loan to another financial institutio ---negotiate a repayment schedule as a dir ---foreclose and sell the property pledged a
Part I - Fina

Table 4: The Federal Government’s MaximLoss on the Emergency Steel Loan GuaranBased upon the one guaranteed loan disburs31, 2001, the government’s maximum potent

one disbursed loan is $93.5 million assuming and no recovery on property pledged as colla

Loan disbursed 85 percent federal guarantee 14.0 percent credit subsidy estimated by OM11.7 percent credit subsidy re-estimated by BIf the loan is repaid 
Part I - Fina

Financial Condition of 7 Approved B

 We did not perform detailed analysis of the 

borrowers’ financial condition. Applicants a

financial condition because to qualify for a gthey must

• have experienced layoffs or production 

losses since January 1998 and

• be unable to obtain credit from other so

reasonable terms and conditions.

Additionally, 6 of 7 approved applicants havthrough bankruptcy, are currently in bankruemerging from bankruptcy.
Part I - Fina

Some Factors that Affect Ability to 

Factors are heavily dependent upon future 

include:

• Generating cash flow to pay loan princ

when due.

• Ability to maintain short-term liquidity to 

and employees.

• Ability to generate sales and profits, pa

declining market.

• Extent of dependency on major custom

profits.

• Stability and commitment of top compa
Part II - Eco

 Some General Characteristics of U

Industry Production and Capacity 

• U.S. consumption of domestic and foreign steel rose 

million tons in 1990 to about 120 million tons in 2000 about 28 percent, or about 2.5 percent annually.

• Forecasts are for relatively flat consumption levels i• U.S. steel industry production reached a near-recor

but has generally been flat since then.

• U.S. steel industry capacity has increased from abo

1994 to about 130 million tons in 2000 for an increapercent, or about 3 percent annually.

• Recession concerns about the current and near term • Some growth in new ‘mini-mill’ production relative to 

based production.
Part II - Eco

Figure 1: Domestic Steel Capacity, Production, aby Year from 1990 Through 2003

6080

100120140160

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 

Year

domestic capacity domestic production dome

Source: Standard and Poor's DRI.

Millions of short tons

Actual 
Part II - Eco

 Some General Characteristics of U

Industry Prices (See figure 2)

• Standard and Poor’s composite of 8 carbon steel pr

$317 per ton in February, 2001-- a record low since 

• Current prices for almost all types of carbon steel ar

$350 per ton which occurred in the first quarter of 19the Asian financial crisis.

• Forecasts are for prices to increase modestly over t

but they are likely to remain below 1997 levels.

• Large inventory build-ups at mills and distributors ar

off.

• Low steel prices can negatively impact cash-flow an
Part II - Eco

Figure 2: Spot price Per Ton of Eight Carbon SteeQuarter from 1990 Through 2002 (In nominal and con

Source: Purchasing Magazine and Standard and Poor's DRI.Note: The 8 steel products are: hot rolled sheet, cold rolled sheet, galvanized sheet, plate, structurals

$200$300$400$500$600

 1990:1

 1990:3

 1991:1

1991:3

1992:1

 1992:3

 1993:1

1993:3

1994:1

1994:3

1995:1

1995:3

1996:1

1996:3

1997:1

1997:3

1998:1

 1998:3

 1999:1

 1999:3

 200

year and quarter

actual, nominal $ forecast, nominal $ actual, constant $ fo

$ per short ton
Part II - Eco

 Some General Factors of Internatio

that Affect the U.S. Steel Industry (

• Significant growth in foreign steel (expressed as a p

domestic consumption): about 1 percent of consum18 percent in the early 1990s, to about 33 percent in about 34 percent in 1998 at the height of the Asian f

• Over the next few years, forecasts are for steel impo

percent of domestic steel consumption.

• Internationally, there are issues of government invo

production in many countries, which distort market sglobal over-capacity in the steel industry.

• U.S. companies have referred many below cost ‘dum

steel and other import relief practice cases to the DeCommerce and the International Trade Commission

• Lower foreign labor costs and some new technology 
Part II - Eco

Figure 3: Foreign Steel as a Percent of U.S. Consfrom 1990 Through 2003

Source: Standard and Poor's DRI.

Percentage of domestic consumption

0%

10%20%30%40%50%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2

Year

imports as share of total consumption
Part II - Eco

Program Factors that Affect U.S. S

• Currently, the program has had minimal ov

U.S. steel industry as only one loan for $11diversified product producer with no significthe market has been disbursed through Ma

• However, loans may have significant local o

and may affect the quantity of certain steel 
Agency Com

We provided a draft of these briefing slides Emergency Steel Loan Guarantee Board foand comment. They agreed with the conteslides and provided comments that we havwhere appropriate.

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