The big guy at ISG must know something

THE BALTIMORE SUN

THE calendar is Wilbur L. Ross Jr.'s friend. He split from his wife, Betsy McCaughey, and withdrew $2.25 million from her doomed New York gubernatorial campaign two months before she lost the 1998 election.

He set up a firm to invest in bankrupt companies on April 1, 2000, three weeks after the start of the worst bear market since the 1930s. He clinched a deal to buy LTV Corp.'s steel factories on Feb. 28, 2000, five days before President Bush moved to block cheap steel imports.

Last week, Ross disclosed plans to issue stock in International Steel Group, the company he formed by assembling the remnants of LTV, Acme Steel and Bethlehem Steel.

What does he know now that we don't?

Noting regulatory restrictions, Ross wouldn't talk about the ISG issue, the first public stock offering of a U.S. steelmaker in many years. But the fact that he's selling a chunk of the company he finished gluing together only three months ago has me craning to see his crystal ball. The timing seems a bit abrupt.

In April, during the war in Iraq, ISG chief executive Rodney Mott told Cleveland's The Plain Dealer that "this is a rough year to even consider" a stock offering. "It's kind of doubtful that anybody can pull one off."

Now they're trying to pull one off.

It's true that ISG needs to issue public stock someday to repay a portion of the money it borrowed to buy the Bethlehem assets, which include the storied Sparrows Point mill in Baltimore County.

But there's no hurry. The first layer of Bethlehem loans isn't due for another two years, and the second layer doesn't have to be paid back until 2007. The notes have largely been syndicated, and lenders aren't pressing for repayment.

The loans are cheap, too, with floating rates lately of less than 5 percent a year - for an American steel company! They're tied to short-term rates generally, which don't look like they'll be spiking anytime soon.

What's the rush?

Maybe Ross, Mott and their investors are encouraged by the measly economic recovery and stock market revival and want to quickly bolster ISG's balance sheet so they can make new acquisitions.

But steel prices are still in the toilet, economy notwithstanding. Lately hot-rolled steel has been selling for about $270 a ton, a third less than the $400 per ton some producers were getting last summer.

And ISG enjoys unused borrowing capacity and hundreds of millions of dollars in untapped existing credit lines - not enough to do another Bethlehem acquisition but possibly sufficient for the tactical, filling-around-the-edge kinds of deals that seem to be called for now.

By issuing stock instead of debt Ross will improve ISG's capital ratios and reduce future borrowing costs. But he's also giving up some of the precious ISG equity - which was the whole point of putting this company together in the first place.

ISG's owners aren't selling their own stakes yet. But if they didn't think they could get a better price now than later and didn't suspect problems on the horizon, why issue any shares?

Problems? Steel consultant Donald Barnett of Economic Associates in Great Falls, Va., sees three: the dollar, the economy and the World Trade Organization.

A plunge in the dollar against the euro, yen and other currencies starting in April 2002 has made American steel more competitive and, if sustained, could conceivably add hundreds of millions of dollars to Maryland's export account. Sparrows Point is the only U.S. mill making steel from scratch that has direct access to the ocean, and ISG said in last week's stock filing that it intends to transfer almost all its export business to Maryland.

But since early June the dollar has risen more than 5 percent against the euro, reversing earlier gains.

Neither is the economy a surefire ISG ally. Although U.S. output has shown signs of perking up, many analysts doubt the growth can sustain itself. And they worry that a recent spike in long-term interest rates will hurt the recovery and simultaneously add to the dollar's strength - a double whammy for steel.

Then there is the World Trade Organization. Last year Bush imposed tariffs of up to 30 percent to protect U.S. steel manufacturers from what he said was a flood of imports unfairly subsidized by their home governments. But the WTO has twice ruled the taxes illegal - most recently last month. Washington is appealing.

"The risks going forward are that the tariffs are removed and the dollar strengthens rather than weakens and that the market weakens" for steel, Barnett said. "You could have a very painful situation."

Is this as good as it gets for the rejuvenated American steel industry? Let's hope not.

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