Even though it’s been said that we’re out of the recession and banks have begun to start lending, it can still be tough for a borrower, especially one in a cyclical industry, to find adequate financing.
However, when one does, and the work it takes for both parties to close the deal spells success, it shows how a little teamwork, a lot of communication and a host of other variables can get the job done. This was the case in the closing of a $350 million asset-based loan for O’Neal Steel Inc., led by U.S. Bank Asset Based Finance.
O’Neal Steel was founded in 1921 as a small steel fabricator in Birmingham, AL by Kirkman O’Neal. The company, built around a strong foundation of superior customer relationships, soon gained a reputation as the go-to source for steel products used during World War II and beyond. Soon after Kirkman’s son Emmet joined O’Neal Steel in the late 1940s, the company opened its first satellite office in Jackson, MS, and the growth continued from there.
Over the years, the company expanded through the acquisitions of Metalwest, Aerodyne Alloys, Leeco Steel, TW Metals, Timberline Steel, Ferguson Metals and AIM International to name a few. The acquisition of Metalwest in 1997 marked the first time that O’Neal left an acquired company with its own market identity and name, according to Michael Rowland, CFO and EVP of O’Neal Steel. “The acquisition of Aerodyne Alloys in 2004 was the first of several acquisitions that really diversified our product categories and our revenue base, moving us into high-performance metals. O’Neal now serves a wide variety of industries, everything from industrial OEMs to manufacturers in the aerospace industry and very sophisticated technology companies with very high-precision metal requirements.”
O’Neal remains privately held — a rarity for a company of its size in its industry — Rowland says, “We’re the largest privately held service center business in the country. We’re probably the sixth largest overall, and today we have about 86 locations, in at least 30 states in the U.S. and we’re in eight countries outside the U.S.”
Today, O’Neal’s leadership team is made up of Kirkman’s grandson Craft O’Neal who is chairman of the company, along with Bill Jones, vice chairman, with the company since 1976; Holman Head, president and CEO, who joined the company in 1980 and Rowland, who joined O’Neal in 2009.
O’Neal + ABL = Perfect Fit
As a “high-volume distribution company,” and because O’Neal is a distributor of “vast quantities of material around the world,” Rowland notes, it is a natural fit for asset-based lending “because we’re fundamentally a working capital business. We buy inventories, then turn them into receivables and collect the receivables to generate cash, which is reinvested in inventory and the cycle begins again.”
What makes the business challenging in accessing financing, he says, is that like other distributors, the company’s cash flows are counter-cyclical to its revenue stream. “As we’re growing and expanding, we’re consuming huge amounts of working capital, but then as we go into a downturn, we throw off a lot of cash and are able to pay off all that working capital. The problem is that we can’t turn those things around on a dime, so when the economy goes into a trench like is has in the last couple of years, it’s very difficult to keep all those things in sync,” Rowland explains.
“In today’s environment, we’ve got pretty high working capital needs, but our margins have been squeezed. As business has contracted for our manufacturing customers, that pressure is being transferred onto us. So it’s kind of hard to fit into a traditional corporate lending profile. At the same time,” he adds, “all of our fixed assets have declined in value so there’s not a lot of other alternatives for funding either, so we’re focused pretty much exclusively on the asset-based lending market, which is how we got involved with the folks at U.S. Bank.”
Teamwork Brings the Deal Home
Getting involved with U.S. Bank was a new direction for O’Neal Steel. The company wasn’t even a customer of the bank before they first starting speaking in the fall of 2009. For U.S. Bank, the transaction was a true team effort with members from various departments collaborating in the process. It came to the attention of U.S. Bank Asset Based Finance through a referral of an advisory board member who knew of a metals company that was “thinking about refinancing.”
According to Sam Philbrick, president of U.S. Bank Asset Based Finance, the opportunity then moved onto the large corporate group, which quickly identified it as an ABL deal. “We started joint calling — our marketing folks and the large corporate team for almost nine to 12 months before the deal actually happened. We had a pretty extensive, fairly long-term calling effort just getting to know the company and them getting to know us, because, obviously changing banks is not something any company does without a whole lot of thought.”
The resulting transaction, which closed in June 2010, was a four-year $350 million asset-based revolver led by U.S. Bank Asset Based Finance as administrative agent and lead bookrunner. The revolver, which replaced a previous ABL structure, will support O’Neal’s working capital and growth needs and includes eight other institutions including some members of the existing structure and three local Birmingham-based banks.
Philbrick notes that the bank is now in the process of working with O’Neal on several different ancillary services to determine if a need exists. “We’re going through a very methodical process of understanding all of their various banking needs, showing them how our product capabilities and services line up, and helping them make the best decision for the company,” he explains.
And it seems this in-depth communication and ability to understand the business is what drew O’Neal Steel to U.S. Bank in the first place. As Rowland said in the press release announcing the deal, while the company discussed its financing needs with a number of both regional and national lending institutions, it was the team culture of U.S. Bank that served to be the best fit for the company.
“It’s the people. It all comes down to the individuals involved,” Rowland says. “The bank seems to have a culture that’s very flexible and easy to work with. They’re very smart and capable people, but at the same time, they take a pragmatic approach to customers like us. They were willing to take the time and energy to understand our business.” This included members of U.S. Bank looking over O’Neal’s facilities to get a first-hand look at the challenges the company faces both operationally and financially so “the financing that we came up with met our needs and it wasn’t a cookie cutter deal that anybody could do,” Rowland says.
He adds, “We were very impressed with the level of commitment from within the bank from the vice chairman who cared enough to visit us in Birmingham to … all of the people involved that were willing to come spend time with us and understand our business and just be very proactive in reaching out to us… It was a consensus among our leadership team that the U.S. Bank team was the best fit with our organization.”
For U.S. Bank and the Asset Based Finance group this is exactly the kind of relationship that it looks for in its borrowers. “I think in a lot of business today, we forget that when you do a financing like this, it’s not a company doing business with a bank, it’s people doing business with people,” Philbrick asserts. “One of things we’re trying to create here to differentiate ourselves is to bring seasoned, experienced asset-based professionals to a relationship like this that can create that kind of relationship this company was looking for.” He notes that it wasn’t only the teamwork between O’Neal and U.S. Bank but also the camaraderie within the organization itself that brought the deal to fruition. “What we’re trying to do is bring all the resources and expertise of our company into our relationships.”
Philbrick adds, “They knew that this was a very important relationship to us. They really felt that we were going to bring an intensity of focus in terms of managing the relationship and supporting their needs… I think that whole relationship side of it is very, very critical… We just couldn’t be happier to have a quality company like this choose U.S. Bank and specifically the asset-based finance group as we’re going through our evolution as a business. This is a real milestone for us to be able to lead this size credit and have it supported by our brethren in the marketplace.”
Understanding the Challenges
The support of not only a lead bank, but the rest of the syndicate, was key as O’Neal went through much of the same downturn that many other such commodity-based companies did in the last couple of years. Philbrick notes, “This whole marketplace, as well as others, went through a precipitous decline in underlying value of their commodity-based inventory as well as the level of sales. I think we have a pretty broad-based portfolio, and metals accounts for about 15% of our business, so we were very comfortable and understanding of what the company had been through in that time frame and had a real appreciation for how they very effectively managed through that big inflection point in the marketplace.”
That understanding, he says, is one aspect that ABL lenders need to bring to the table — “an understanding of the movements in their inventory value and the cyclicality of the markets that they deal with. That’s a perspective we were able to bring to this relationship that really helped the company feel comfortable that we would be a good partner for them over the long term.”
This focus is even more important because O’Neal is a family-owned company, Philbrick notes. When dealing with a family-owned company, at least from his perception, he says, “It’s really important to them that the relationship from a banker’s standpoint is as important to us as it is to them … and it takes on a very personal aspect. They are in this for the long term, versus just focusing on next quarter’s earnings, and they really need an institution that understands those dynamics and can really support them in the way they need to be.”
In looking at the challenges the company faces within the industry, Rowland notes, “The general world economy is continuing to grind very slowly out of a protracted downturn and in the metals business, we’re the building block. We’re the basic raw material for a lot of the industrial economy… As a consequence, our business tends to be cyclical and we tend to be driven by that global economy as opposed to being able to just work a little harder and sell a little better and improve our market.
“We’re very dependent on the success of our customers and we’re in a very competitive business. There’s a lot of surplus capacity around the world in our product categories and as a consequence, the competition continues to get more and more intense. We need to be able to have the flexibility to invest the way we believe that we need to invest in order to position ourselves to meet that competition. In order to do that, we’ve got to have partners that will work with us through that process.”
Rowland adds, “Thankfully, we’re a diverse company as well. Because of the various markets that we serve, we have a very diverse revenue base. But that brings challenges of its own. We’ve got to have capacity in a lot of places and we’ve got to have people that understand a lot of different businesses and can deal with a lot of different customers … because those customers demand more and more from us every day. It’s an interesting time to be in this business. We’ve been around for a long time and with partners like U.S. Bank and the rest of our bank group, we believe that we’re well positioned to be around for a long time to come.”
Amanda L. Gutshall is associate editor of ABF Journal.