Financial Management: Emergency Steel Loan Guarantee Program	 
(25-MAY-01, GAO-01-714R).					 
								 
This report discusses the Emergency Steel Loan Program. GAO found
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 potential loss is $93.5 million,	 
assuming no repayments and no recovery from property pledged as  
collateral. The financial condition of program applicants is not 
strong and repayments of loans depend upon many future factors.  
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.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-714R					        
    ACCNO:   A01067						        
  TITLE:     Financial Management: Emergency Steel Loan Guarantee     
             Program                                                          
     DATE:   05/25/2001 
  SUBJECT:   Financial management				 
	     Government guaranteed loans			 
	     Steel industry					 
	     Loan repayments					 
	     Emergency Steel Loan Guarantee Program		 

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GAO-01-714R
     
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.

GAO- 01- 714R Emergency Steel Loan Guarantee Program Page 2 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

1

Emergency Steel Loan Guarantee Board Loan Guarantee Program

Financial and Economic Assessment Briefing for the Staff of the Senate
Committee on

Commerce, Science, and Transportation May 1, 2001

2

Introduction/ Objectives

* On August 17, 1999, the Emergency Steel Loan Guarantee Act of 1999 (Public
Law 106- 51) created a program to provide loan guarantees to

qualified steel producing companies.  On February 1, 2001, the Chairman of
the Senate Committee on

Commerce, Science, and Transportation requested that we review the program
to address two specific questions:

 Will borrowers be able to repay loans on time or is a federal bailout
likely to be needed?

 What is the effect of the program on U. S. steel production, capacity, and
steel prices?

3

Modified Objectives

The Board has approved very few loans for guarantees and their repayment
depends upon future events. Accordingly, as

agreed to by Committee staff, the borrower?s ability to repay and the
financial implications for the federal government have

been addressed in our financial review as follows:

 What is the status of program funding?

 Since program inception, how many guaranteed loans have been applied for,
approved, and disbursed?

 What is the federal government?s maximum potential loss for the program?

 What is the financial condition of approved borrowers under the program?

 What factors affect the borrowers? ability to repay the loans on time?

4

Modified Objectives

Also as agreed to by Committee staff, the effect of the program on U. S.
steel production, capacity, and steel prices

has been addressed in our economic review as follows:

 What are some general characteristics of U. S. steel industry production,
capacity, and consumption?

 What are some general characteristics of U. S. steel industry prices?

 What are some general factors of international trade that affect the U. S.
steel industry?

 What specific factors of the program affect U. S. steel industry
production capacity and pricing?

5

Scope and Methodology

In order to meet the modified objectives, we

 interviewed the program?s executive director, general counsel, and
officials representing the three board members from the Department of

Commerce, the Federal Reserve Board, and the Securities and Exchange
Commission;

 reviewed and analyzed program legislation, applications and requirements
for loans, and board minutes;

 reviewed the consultant?s model for estimating subsidies consistent with
the Credit Reform Act of 1990;

 prepared schedules on the status of program funding and loan applications
as of March 31, 2001;

 assessed the federal government?s maximum potential loss for the program;

 identified factors affecting loan repayment; and

 obtained and analyzed economic information on U. S. steel production,
prices, and international trade issues.

6

Scope and Methodology Scope Limitations

 We did not perform detailed analysis of approved loan applicants?
financial condition.

 All forecasted amounts are dependent upon future events.

Board Comments

 We received comments on a draft of these briefing slides from board
officials. These comments are discussed on

the last page of this briefing.

Government Auditing Standards

 Our work was conducted in March and April 2001 in accordance with U. S.
generally accepted government

auditing standards.

7

Background

 The Emergency Steel Loan Guarantee Program is headed by a three member
loan guarantee board. The board?s staff consists of an

executive director, executive secretary, a general counsel, a receptionist,
and consultants.

 The program provides for loans by private lenders to qualified steel
companies with up to $250 million to a single company. The total

amount of loans outstanding may not exceed $1 billion and federal guarantees
may not exceed 85 percent of loan principal. Interest is not

federally guaranteed.

 The first application window was from October 27, 1999 to February 28,
2000, and a second window from November 1, 2000 to August 31, 2001.

 The act provides that the board may not make commitments to guarantee
loans after December 31, 2001, and all loans must be repaid

by December 31, 2005. The act does not provide a termination date for the
board.

8

Results in Brief

From program inception through March 31, 2001:

 14 loan applications totaling $924 million have been received; 7 loans
have been approved for $544 million*; and

1 loan has been disbursed for $110 million.

 The federal government?s maximum potential loss for the one disbursed loan
is $93.5 million assuming no

repayments and no recovery from property pledged as collateral.

 The financial condition of program applicants is not strong, and repayment
of loans depends upon many future factors.

 Flat demand for steel, moderate prices, and static imports of foreign
steel are forecasted for 2002 and 2003.

 The program has had minimal overall effect on the U. S. 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.

9

Part I - Financial Review Table 1: Status of Program Funding from Inception
to

March 31, 2001

(Dollars in millions) Budget

Actual Guaranteed loans $1, 000. 0 $110.0

Estimated credit subsidy* $140.0 $12.9 Administrative costs 5.0

2.0 Total costs $145.0 $14.9

One- half percent guarantee fee revenue** $5. 0 $. 6 * The Credit Reform Act
of 1990 requires all federal direct and guaranteed loan programs to estimate
a credit subsidy. Accordingly, the Office of

Management and Budget (OMB) estimated a credit subsidy rate for this program
of 14 percent for principal only and the Board re- estimated the rate of
11.7 percent.

** P. L. 106- 51 provides for a fee to cover costs of the program not to
exceed 0. 5 percent of the principal amount of the guaranteed loan.

10

Part I - Financial Review Key Documents for Guarantee Loan Applications

1. Application for loan guarantee. 2. Environmental assessment.

3. Loan documents to be signed. 4. Borrower certification, which includes
granting GAO audit access.

5. Lender underwriting analysis. 6. Lender certification that its
underwriter analysis is the same as for a

nonfederal guaranteed loan and the borrower is a qualified applicant. 7.
Description and appraisal of collateral.

8. Audited borrower financial statements for the previous 3 years. 9. A 5-
year history and projection of revenue, cash flow, and price and

production costs. 10. Documentation that credit was not otherwise available
from other

sources.

11

Part I - Financial Review Table 2: Current Status of the Loan Guarantee
Program

from Inception (October 27, 1999) Through March 31, 2001

(Dollars in millions)

Board Activity:

Applications Amount Total loan guarantee applications received 14 $924. 3

Adjusted loan guarantee application amounts* (50.7) Loan guarantee
applications denied or withdrawn 7

(329.3) Total loan guarantees approved 7 $544. 3

Lender Activity on Board Approved Guarantees:

Loans pending lender update of loan materials** 5 $415. 0 Loan disbursed by
lender 1 110. 0

Loan pending lender disbursement 1 19.3

Total loan guarantees approved 7 $544. 3 * 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.

12

Part I - Financial Review Interest Rates on 7 Approved Loan Guarantees

 Interest rates are prime rate plus basis points*.

 Most loans cite LIBOR** prime rate as the accepted index of cost of funds
for lenders worldwide.

 Interest rates are variable and adjust frequently as lender cost of funds
change.

 Interest rates for the 85 percent federally guaranteed are lower due to no
lender risk.

 Interest rates for the remaining 15 percent vary based upon lender risk
assessment.

 Basis points range from 100 to 2,200. *100 basis points equals 1 percent
interest.

** London InterBank Offered Rate (LIBOR).

13

Part I - Financial Review Table 3: Use of Proceeds on 7 Approved

Guaranteed Loans

Amount Percent

 Debt refinancing $216.0 39.7

 Capital expenditures 191.0 35.1

 Bankruptcy financing and other 95.9 17.6

 Working capital 41.4 7. 6

Total $544.3 100.0

14

Part I - Financial Review Balloon Payments on 7 Approved Loan

Guarantees

 Repayment schedules call for quarterly interest and minimal principal
payments that result in $423 million (78 percent) of

balloon payments due by December 31, 2005.

 If the balloon payments are not made, the loan is in default and the
lenders most probably will seek immediate payment

of the 85 percent federal guarantee.

 After federal payment to a lender, the amounts become a government claim
with three options for recovery:

--- sell the loan to another financial institution, --- negotiate a
repayment schedule as a direct loan, or

--- foreclose and sell the property pledged as collateral.

15

Part I - Financial Review Table 4: The Federal Government?s Maximum
Potential

Loss on the Emergency Steel Loan Guarantee Program

Based upon the one guaranteed loan disbursed as of March 31, 2001, the
government?s maximum potential loss for the

one disbursed loan is $93.5 million assuming no repayments and no recovery
on property pledged as collateral as follows:

(Dollars in millions) Loan disbursed $110. 0

85 percent federal guarantee $93.5 14.0 percent credit subsidy estimated by
OMB $15.4

11.7 percent credit subsidy re- estimated by Board $12.9 If the loan is
repaid $0

16

Part I - Financial Review Financial Condition of 7 Approved Borrowers

We did not perform detailed analysis of the 7 approved borrowers? financial
condition. Applicants are not in strong

financial condition because to qualify for a guarantee loan they must

 have experienced layoffs or production or financial losses since January
1998 and

 be unable to obtain credit from other sources on reasonable terms and
conditions.

Additionally, 6 of 7 approved applicants have either been through
bankruptcy, are currently in bankruptcy, or are

emerging from bankruptcy.

17

Part I - Financial Review Some Factors that Affect Ability to Repay Loans

Factors are heavily dependent upon future events and include:

 Generating cash flow to pay loan principal and interest when due.

 Ability to maintain short- term liquidity to pay suppliers and employees.

 Ability to generate sales and profits, particularly in a declining market.

 Extent of dependency on major customers for sales and profits.

 Stability and commitment of top company management.

18

Part II - Economic Review Some General Characteristics of U. S. Steel

Industry Production and Capacity

(See figure 1)

 U. S. consumption of domestic and foreign steel rose from about 94 million
tons in 1990 to about 120 million tons in 2000 for an increase of

about 28 percent, or about 2.5 percent annually.

 Forecasts are for relatively flat consumption levels in the next few
years.

 U. S. steel industry production reached a near- record level in May 2000,
but has generally been flat since then.

 U. S. steel industry capacity has increased from about 108 million tons in
1994 to about 130 million tons in 2000 for an increase of about 20

percent, or about 3 percent annually.

 Recession concerns about the current and near term economy.

 Some growth in new ?mini- mill? production relative to traditional ore
based production.

19

Part II - Economic Review Figure 1: Domestic Steel Capacity, Production, and
Consumption

by Year from 1990 Through 2003

60 80 100 120 140 160

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

domestic capacity domestic production domestic consumption

Source: Standard and Poor's DRI. Million s o f shor t ton s

Forecast Actual

20

Part II - Economic Review Some General Characteristics of U. S. Steel

Industry Prices

(See figure 2)

 Standard and Poor?s composite of 8 carbon steel product prices was $317
per ton in February, 2001-- a record low since 1980.

 Current prices for almost all types of carbon steel are well below a low
of $350 per ton which occurred in the first quarter of 1999 at the height of

the Asian financial crisis.

 Forecasts are for prices to increase modestly over the next few years, but
they are likely to remain below 1997 levels.

 Large inventory build- ups at mills and distributors are still being
worked off.

 Low steel prices can negatively impact cash- flow and profits.

21

Part II - Economic Review Figure 2: Spot price Per Ton of Eight Carbon Steel
Products by

Quarter from 1990 Through 2002

(In nominal and constant dollars) 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, rebar, cold finished bars, and wire
rods.

$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 2000 :

1 2000:3

2001:1 2001:

3 2002: 1

2002:3

year and quarter

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

$ pe r s hor t ton

22

Part II - Economic Review Some General Factors of International Trade

that Affect the U. S. Steel Industry

(See figure 3)

 Significant growth in foreign steel (expressed as a percentage of total
domestic consumption): about 1 percent of consumption in 1950, about

18 percent in the early 1990s, to about 33 percent in 2000, peaking at about
34 percent in 1998 at the height of the Asian financial crisis.

 Over the next few years, forecasts are for steel imports to be about 28
percent of domestic steel consumption.

 Internationally, there are issues of government involvement in steel
production in many countries, which distort market signals and add to

global over- capacity in the steel industry.

 U. S. companies have referred many below cost ?dumping? of foreign steel
and other import relief practice cases to the Department of

Commerce and the International Trade Commission.

 Lower foreign labor costs and some new technology issues.

23

Part II - Economic Review Figure 3: Foreign Steel as a Percent of U. S.
Consumption by Year

from 1990 Through 2003

Source: Standard and Poor's DRI. Per c ent age of d o m e sti c cons umpti o
n

0% 10% 20% 30% 40% 50%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

imports as share of total consumption

24

Part II - Economic Review Program Factors that Affect U. S. Steel Industry

 Currently, the program has had minimal overall effect on the U. S. steel
industry as only one loan for $110 million to a

diversified product producer with no significant segment of the market has
been disbursed through March 31, 2001.

 However, loans may have significant local or regional effect and may
affect the quantity of certain steel products.

25

Agency Comments

We provided a draft of these briefing slides to officials of the Emergency
Steel Loan Guarantee Board for their review

and comment. They agreed with the contents of the briefing slides and
provided comments that we have incorporated

where appropriate. 194029
*** End of document. ***