Lend leash

Battered by the economy after its biggest deal, Insteel Industries also had to battle its bankers.
by Irwin Speizer

H. O. Woltz III was on top of the world — or about as high as he could get in Charlotte. A gaggle of bankers was feting him in a private dining room on a top floor of Bank of America’s 60-story downtown skyscraper. As CEO of Mount Airy-based Insteel Industries Inc., he had just inked a career-making purchase of a Florida competitor and — here was the reason for the bankers’ glee — borrowed $140 million to finance it. Even BofA boss Ken Lewis showed up to shake his hand that April afternoon in 2000.

The deal dwarfed all others in Insteel’s history. Woltz imagined that it would propel his company to the top of its industry — specialized steel parts for concrete construction — and let him step out of the shadow of his father, who had run the company for more than three decades before him.

But if that day belonged to Woltz, choices that would shape his company’s future now belonged to the bankers. By taking on so much debt, he had given them the right to comb through his books and second-guess his decisions. When times got tight, they could even tell him how to spend money. During the next three years, they would show Woltz that bankers are buddies only if your payments arrive on time.

Within months of that all-smiles gathering in Charlotte, the construction boom on which Woltz had bet went bust, and the backslappers were threatening to force Insteel into bankruptcy. Woltz scrambled to save the company, ditching divisions and laying off workers. Then, just as suddenly as commercial construction had collapsed, it rebounded. Insteel’s profits soared, enabling the company to refinance the loan that had nearly killed it.

“We had a dysfunctional bank group,” Woltz says. “We found ourselves with a lender group incapable of distinguishing between a downturn in business and a bad company.” The construction industry routinely endures booms and busts, and his company’s plight was never as woeful as the lenders believed, he insists. Yet while Insteel was waiting out the slowdown, the bankers’ relentless nitpicking and extra interest and fees nearly wrecked the company, he contends.

Insteel’s clash with BofA is a cautionary tale of how some lenders handle — and occasionally manhandle — borrowers during economic downturns. When Insteel stumbled, its bankers tried to claw back as much of their money as possible in case the company crashed. They did nothing illegal or immoral. They just did their jobs, protecting their shareholders and, because of federal deposit insurance, even taxpayers. The hand they offered, they could argue, was steadying. But for this company struggling to stay afloat, it felt like one pushing a drowning man’s head under water.

Bank of America executives, of course, would tell this tale differently. But they aren’t talking. A spokesman for the Charlotte-based giant, the leader in Insteel’s group of lenders, declined comment, saying that the bank staff cannot discuss clients or individual loans.

If its staff members were willing to talk, they might say the dysfunctional partner in the relationship wasn’t BofA. Sure, Woltz and his managers deserve credit for reviving their company, but they also steered it into trouble, perhaps letting their enthusiasm for the deal cloud their judgment. The ink on the loan documents was barely dry before Insteel began to falter. Its financial performance fell so far so fast that the company ended up violating terms of its loan agreement, which was, after all, a legal contract. Loan agreements stipulate financial-performance minimums that big borrowers must meet.

BofA, like any bank, had to adhere to regulations. Banks must report problem loans and, sometimes, make costly adjustments to their books by setting aside funds to cover potential losses. What’s more, they face criticism when they fail to rein in the spending of sputtering companies. Several lenders — BofA among them — have settled lawsuits contending that they were too lax with Enron before its failure. And while Woltz still bristles over the demands made by the bankers, they could’ve been harsher. In fact, they could have pushed his company into bankruptcy.

“We leveraged our balance sheet up a good bit. Things needed to work without much of a hitch.”

Tony Plath, an associate professor of finance at UNC Charlotte, says that banks’ approaches vary when confronted with troubled borrowers. Insteel’s mistake, he says, was hooking up with BofA, which he says doesn’t have a reputation for being among the most patient. “The real art to this business is knowing when to cut your borrower off,” he notes. “Bank of America is just tough.”

Rick Rayburn, a Charlotte lawyer who represented Insteel in negotiations with the bank, concedes that Insteel’s status as a victim depends on your perspective. “I’m sure if you interviewed the bankers, their position was that they were protecting their own interests,” he says. But his perspective is clear: “From the company’s standpoint, all the banks ever had to do was continue to monitor the situation because none of the actions that the banks took had any effect on the ultimate outcome. The same management group that was there at the beginning is there today. So every additional dollar they had to spend, every demand they had to deal with, was totally unnecessary.”

Insteel board member W. Allen Rogers II, a Charlotte-based senior vice president in Allen C. Ewing & Co. investment bank, says the lenders “kind of went over the top.” But he also points out that no one forced Insteel to do such a big deal or to borrow money from BofA. “I have seen some banks that seem to be a little more willing to work with you, cut you a little more slack. But I can’t criticize. This was of our own making.”

Insteel’s wrangle with its bankers may have been aggravated by a culture clash. Increasingly, BofA, which has grown into the nation’s second-largest bank holding company, is leaving behind its Southern roots. Insteel, in contrast, remains a business with some of the low-key folkways of the sleepy town where it’s based — the boyhood home of actor Andy Griffith and the model for Mayberry in his famed TV show.

Often mistaken for a steel maker because of its name, Insteel began, under a different name, in 1953 as a producer of concrete and concrete blocks. Howard O. Woltz Jr., a lawyer by training, became president and chairman of the then-private business in 1958. In the ’60s, he added the manufacture of precast concrete items and, in the ’70s, the production of the welded-wire fabric that reinforces precast concrete.

His son — friends call him “H” to distinguish him from his dad — grew up around the business, doing odd jobs at the plant while in high school in the early ’70s and in the summers when home from college at UNC Chapel Hill. After graduating in 1978 with a bachelor’s in business administration, he went to work there full time. Early on, he understood that a path to the top was open. “It was clear to me that I would be considered for increasing responsibilities as opportunities developed, provided that I performed my prior assignments.”

In 1981, Insteel built a second wire-mesh plant in Virginia, and the younger Woltz moved there to manage it. It opened a third one in Texas in 1984. Insteel also bought small steel-products makers while selling its concrete operations. The elder Woltz decided that longtime investors, both family members and outsiders, needed to be able to cash out, so he took the company public in 1985. His son, meanwhile, continued to advance, becoming president in 1988 and chief operating officer in 1989. He replaced his father as CEO in 1991, though the elder Woltz remains nonexecutive chairman. One of his first big projects as boss was the launch of another product line, steel-wire strand, in 1994. Both mesh and strand are used to reinforce concrete, but they function differently. Mesh — sold in sheets, rolls and custom orders — strengthens such structures as highway median barriers and floor slabs. Strand is braided cable that supports precast concrete components such as bridge girders.

Strand turned out to be a winner, and Insteel expanded production. Then, in 1999, the largest producer of strand for concrete construction put itself up for sale. Jacksonville, Fla.-based Florida Wire and Cable made 50,000 tons of strand a year at two plants. It had $105 million in sales. Woltz knew Insteel would have to stretch to buy Florida Wire but figured it was worth the risk: The combined company would be the largest strand maker in North America. Insteel had $270 million in annual sales and nine factories: one in Mount Airy, two in South Carolina, two in Tennessee and one each in Texas, Virginia, Delaware and Kentucky.

As big deals often do, the bid entailed a measure of overconfidence. Insteel had size, but it wasn’t a standout performer; margins were decent but not remarkable. In fiscal 1999, its gross margin hit 13.2%, up from 5% the previous year. Nucor, the Charlotte-based steel maker long considered one of America’s most efficient heavy manufacturers, had a gross margin of about 21%.

Woltz decided to gamble, buying Florida Wire for $66 million. In the multibillion-dollar world of corporate finance, the deal was Mount Airy-sized. But for Insteel, it was a big gulp — “far larger than any acquisition we had done,” Woltz says. Insteel didn’t have that kind of cash on hand, so it had to shop for a loan. The best offer came from BofA, which, in typical fashion, brought in a group of banks to share the risk, including Winston-Salem-based BB&T, Charlotte-based First Union (now Wachovia) and Montreal-based National Bank of Canada. In January 2000, the month the deal closed, they agreed to lend Insteel $140 million: $80 million to finance the Florida Wire deal and related costs and a $60 million line of credit. The debt-to-capital ratio spiked from 38% to 58%. Compare that to Nucor, which then had a debt-to-capital ratio of 8% and a policy of keeping it below 30%. “We leveraged our balance sheet up a good bit,” Rogers says. “Things needed to work without much of a hitch.”

Signs of trouble had begun to bubble up even as Insteel was eyeing the acquisition. Had executives paid attention to the American Institute of Architects index of commercial and industrial construction, they would have seen their market softening. A rating above 50 indicates a healthy economy; one below 50 points to a slowdown. The index didn’t dip below 50 from 1995 to ’98. In 1999, it began to bob around 50, the first sign of weakness. In December 2000, it fell well below 50 and would remain there 33 of the next 34 months.

Insteel’s timing could hardly have been worse. In early 2000, the Internet bubble burst and both the Dow and Nasdaq peaked. The subsequent downturn deepened after terrorist attacks on Sept. 11, 2001. “We almost immediately hit a downdraft in our market,” Woltz recalls. “It was real clear to us that we had an unfortunate situation developing. We found ourselves in a position where we really weren’t going to comply with our loan covenants. And we had no solid relationship with the lender group. In the first year, we had either four or five different relationship managers with the lead lender.”

Asian imports of steel and construction supplies aggravated the pinch, undercutting the sales of Insteel’s domestic suppliers. Some went bankrupt, disrupting the flow of metal Insteel needed to make wire. Low-cost Asian alternatives to its wares further slackened demand from customers. Insteel filed anti-dumping complaints with trade regulators, which would result in sanctions against Asian producers. Meantime, the company struggled to survive.

Insteel refused to follow some of the recommendations. “Those actions would have benefited only the banker group.”

This sort of meltdown makes bankers edgy. A downturn lasting less than a year might call for patience. One that looks like it could stretch three or four years, as this one did, prompts a tough response, with bankers trying to salvage their money before a borrower sinks too far. In that climate, Plath says, few banks would have been very lenient with Insteel.

Under the terms of its loan, Insteel had to hit financial-performance targets. It began missing them. Though the company reported net earnings of $2.1 million for fiscal 2000, income had plummeted from the previous year, when it was almost $10 million. Then in fiscal 2001, Insteel reported a loss of $23.7 million, followed by an even bigger one — $25.7 million — in fiscal ’02.

Even before the losses, the bankers were insisting that Insteel hire turnaround consultants. To the lenders, they were a team of EMTs; to Insteel’s managers, vultures. The consultants recommended a raft of actions, including selling key assets. Woltz hated having to pay their fees and heed their recommendations, but he realized that he had to act quickly to save his company. If that meant ditching some of Insteel’s businesses to husband cash, so be it.

In September 2000, Insteel had 1,270 employees and six product lines. Its largest — wire for concrete reinforcement — accounted for nearly two-thirds of sales. It also made wire for bedding and furniture springs, nails, communication-tower supports and tire beads. In the scramble to survive, Woltz jettisoned everything except wire for concrete reinforcement.

By 2003, he had cut employment nearly 50%, to about 700 people. He resisted pressure to sell the rest of the business, insisting that Insteel would rebound when the cyclical construction sector sprang back. “We drew the line and refused to pursue the consultants’ recommendations that would compromise the future competitiveness and growth opportunities of the company. Those actions would have benefited only the bank group.” In fairness to the bankers, he adds, they allowed him to keep his remaining plants when he pushed back.

The banks also forced Insteel to accept changes in the loan agreement, which resulted in even more fees and a higher interest rate. Though they appear opportunistic, these charges recoup more of the original loan proceeds before a borrower ends up in a drawn-out bankruptcy proceeding and prevent desperate managers from squandering precious cash. Insteel’s life became so chaotic that it failed to meet U.S. Securities and Exchange Commission deadlines for filing its 2001 financial reports. Its market capitalization fell below requirements for listing on the New York Stock Exchange, and in February 2002, the NYSE dropped the stock. Even Woltz began to worry whether the company could hold on until a construction rebound arrived.

The bankers had started prodding him to find new lenders in 2001. But credit, he says, had dried up for companies in steel and affiliated businesses. Plus, Insteel’s SEC filings had laid bare its woes: No one wanted to hand money to a company that seemed headed for bankruptcy. For two more years, Insteel arm-wrestled BofA and its consultants.

Business finally began to revive in late 2003. The AIA index broke through 50 that October. Demand for Insteel’s products climbed with it. After two years of losses, the company reported net income of $6.7 million for fiscal 2003. Earnings would surge to $31.5 million the next year. “I don’t know whether we could have survived if the downturn had lasted a year or two longer,” Woltz says. “We were lucky when the pendulum finally swung in the company’s favor.”

Along the way, Insteel had gotten listed on Nasdaq, and its shares, which had traded as low as 27 cents, roared back, passing $50 last March. Jim Cramer, host of CNBC’s Mad Money, touted the stock, saying it was “in its own personal bull market.” It jumped $4 the next day and reached a record high of $60 in early April. An investor with the foresight — and guts — to have bought $10,000 worth at the bottom and sold at the peak would have made well over $2 million. The reversal of fortune came so quickly it surprised even Woltz and board members such as Rogers. “It was just incredible,” Rogers says. “Cash was just being pumped into the company.”

The recovery enabled Insteel to refinance the loan that shackled it to bankers whom management had come to despise. The company lined up a better deal last summer with GE Commercial Finance, but a last-minute snag delayed the closing. When Woltz asked BofA for a 30-day extension, he received one last blow. The bank would grant it but charge a fee: $1 million. “When we asked for justification for this outrageous amount, they implied that they knew we had the resources to pay, and nothing else mattered. We won’t forget this disgusting gouge.”

With no choice, Insteel ponied up. A month later, with GE’s money in hand, it repaid most of its prior debt. Now, with no long-term debt, it can better weather another downturn. “They have been through the wringer,” says analyst Jeremy Hellman of Thompson, Davis & Co. in Richmond, Va. “I don’t think they will get caught unawares again.”

To Woltz, his company’s resurgence, based in a large part on strand production, vindicates the Florida Wire deal, which strained Insteel but then let it ride the recovery to even greater profitability. With his company healthy, he’s pondering expansion again, including acquisitions. “We certainly have restored our balance sheet. We have a lot of options now.”

As for his smackdown with the banks, Woltz chalks it up to the gyrations of the always jittery free market. “You may have heard the old saying, ‘Markets make asses out of geniuses and geniuses out of asses.’ We have never harbored the illusion that we are geniuses, but neither were we the asses that our bankers thought we were.”