Steal industry
Feb 1st 2001 | NEW YORK
From The Economist print edition 

ON THE face of it, the bankruptcy of a steelmaker, LTV, is another sad story 
about a once-dominant company in a once-mighty industry. Though its $2 
billion of debts are not trivial, the case would have got little attention 
but for a nuance in LTV,s bankruptcy filing in an Ohio court that has alarmed 
some of the world,s biggest lenders.
The crux of the issue is whether a desperate plea for money that the court is 
hearing this week will undermine one of the great acts of financial alchemy 
in recent years: to wit, cheap financing for bad creditors. Reams of papers 
have been filed by two of LTV,s main creditors, Chase Manhattan Bank (now 
merged with J.P. Morgan) and Abbey National, a British bank. An adverse 
ruling from the court would be a blow to plenty of other banks.
Behind the litigation are LTV,s efforts in the early 1990s to fund a 
capital-intensive business as cheaply as an earlier bankruptcy in 1986 and 
difficult operating conditions would allow. The solution, which has been 
applied by too many other American companies to count, was to create a couple 
of special-purpose vehicles*essentially, independent legal entities. These 
were supposedly insulated from the risk of their parent going bankrupt. The 
first of these vehicles contained LTV,s receivables (what it was owed by 
customers), and the second its inventory (piles of steel). LTV would inject 
assets into these entities, paid for by attractively priced asset-backed 
loans. The size of these loan facilities last year, according to Standard & 
Poor,s, was about $650m, or equivalent to slightly more than half of LTV,s 
total long-term debt.
When LTV filed for bankruptcy on December 29th, everything seemed normal (if 
normality is an empty till and 18,000 employees wondering whether they have a 
job). Alarms started ringing at the commercial banks when it became clear 
that LTV was going to argue in court that it could use as it liked (ie, not 
necessarily to repay interest and principal on the asset-backed loans) the 
money got from receivables*since, it claimed, the original transfer of the 
receivables to the special-purpose vehicles was not a sale but a &disguised 
finance transaction8. The alarms rang louder when the judge appeared to be 
sympathetic to LTV,s arguments. The case continues. If the judge rules in LTV,
s favour, there will be intense pain and embarrassment at many banks.