MELTDOWN: Chapter V

Continuing the fictional metals trading tale by Geoffrey Sambrook. The final chapters VI and VII will follow tomorrow and Friday.

V

The snow had continued falling all day and most of the next night, so instead of sitting in the back of the Mercedes limo to be driven up to Basel, Steiner sat up front in the Range Rover, next to the driver. It was autoroute most of the way, but it was best to be prepared. What it meant, though, was that instead of peace and quiet in the back to get on with the phone calls he wanted to make, he had to listen to an endless stream of chat from the driver. By the end of the two-hour journey, the man’s job was hanging by a thread.

Urs Gerber was not the archetypal Swiss banker; he was stocky, built like the farmer his ancestors were, bearded and without the smooth exterior of most of his peers.

Despite – or perhaps because of – that, he had risen to the top of the bank and held the position down for the last fifteen years. He still maintained direct relationships with many of the clients he’d been working with for years. Metal-Exx was one of those, and, CEO or not, he had the detail of the account at his fingertips. He welcomed Steiner with a broad smile and a firm handshake. A few pleasantries about family and mutual friends, and Gerber cocked a quizzical eye at Steiner.

“So, Jakob, you don’t normally come dashing up to Basel just for a chat. Although, of course, it’s always a pleasure to see you. What’s the problem, and how do you think we can help you?”

Steiner had thought hard about how much he needed to tell the banker; in the end, he’d decided he would have to be completely open and disclose his position entirely – although it went against the grain of the self-reliant Metal-Exx ethos to do so. Still, extreme situations needed clarity. So he set out the position as he had done the day before to his colleagues. Gerber sprawled back in his chair and listened.

“Well,” he said, as Steiner finished his explanations, “frankly, you seem to be in a bit of a mess. But you’re not the first, nor will you be the last. In simple terms, what you want me to do is tell you how to raise some cash from the market to tide you over.” He looked keenly at the other man. “I’m relying on your word that it is a short-term issue, and that there are no nasty surprises lurking in your forward commitments which would make the problem worse.” He waited.

“No, I’m happy that we have a profitable business. This is only a cash flow squeeze, nothing more.”

“Only? It could put you out of business; I don’t call that ‘only’. You know how serious this is, or you wouldn’t have come to see me. For all your market strength, you can’t solve this yourselves.

“Now, let’s see what we can discard immediately. Selling equity won’t work; the market is too jittery and your stock is right now highly unpopular. We wouldn’t be able to place anything. If we made a rights issue, I’m guessing the only ones who would take them up would be you insiders; the rest of the world wouldn’t touch it with a bargepole. You have no space in your bank lines, and I frankly think it highly unlikely that in your current position you would get anything new, either from an existing lender or a new one. We certainly won’t lend any more unsecured money, and I struggle to see where you have any unencumbered assets to collateralise.”

Steiner interrupted. “Borrowing more would be difficult anyway, because it would push us over our covenants and that would trigger an increase in borrowing cost, which I would be very reluctant to do.”

“Jakob, you may be reluctant, but you may have no choice. Let’s leave the question of rates and cost until we have at least got an overall plan in mind. I don’t think we could go the bond route, either; the market’s got quite a lot of that already, and more in current conditions is not going to work. We wouldn’t be able to get it off.” He glanced at his watch. It was twelve thirty. “I’ve arranged for lunch here, in-house. That way, we won’t be disturbed. Let’s go through, then I’ll tell you what I think we can do.”

Basel eschews the Francophone fripperies of Geneva, and lunch in the BBV boardroom was typically hearty Swiss food and – of course – top echelon Burgundy. As they settled in to the meaty venison main course, Gerber outlined his thoughts.

“OK, so we’ve rejected what we can’t do, which I think leaves us with only one place to go. It won’t be easy, but my feeling is that with your assurances about the forward profitability – and some supporting evidence, of course – we could probably sell a tranche of commercial paper. That will only buy you a maximum of sixty days, but I think that will cover the problem period.”

“Sixty days will be enough. Are you prepared to underwrite the offering?”

“I will agree to take part; I have several funds in mind whom I believe I can persuade to take a good part as well. If that works, then the balance will be absorbed by the market. I can’t tell you what the rate will be until I have spoken to potential buyers, but it should not be too far away from your normal unsecured financing rate.” He looked seriously across at Steiner. “This is a big risk for us. You are in a bad position, and the very best we can offer is to buy some time this way to help you clean up. We’ve been friends a long time, Jakob, and I must say I would never have expected to have this conversation with you and Metal-Exx. I’m not going to try and teach you your job, but you seem to have taken your eye off the ball.”

Steiner took a mouthful of wine, and rolled it around his tongue. It really was very good. “Urs, I should be offended by that, but in truth I can only agree with you. The only reason I can offer is that we allowed ourselves to be seduced by the easy money in the financing business. It may be Congo Copper’s reluctance to pay that is the catalyst, but really what we did was abandon – albeit only temporarily – our tested business model of turning trades and money over. We let ourselves be weighed down by just one trade. It’s a great profit generator, don’t get me wrong, but it’s stopped us being as nimble as we need to be.”

He sat back. With the business deal sketched out, he was now talking to his old friend. “I wonder if I’m getting too old for this. You know, ten years ago I would have seen this well in advance. I got too comfortable.”

Gerber smiled. “Rubbish. I agree you should have seen it, but I don’t think age is anything to do with it. You know, and you will recall I said this to you and Philippe at the time, I think the problem stems from the public flotation. When you were private and it was your money, and you didn’t have to worry about shareholders, the game was easier.”

“Maybe. It’s been a mixed blessing.”

“Well, let me just say there is no way I would let BBV float; we value our independence of action far too much.”

They chatted on, and eventually Steiner took his leave. He was confident that he had bought some time to sort out the difficulties.

Gerber called one of his analysts and gave him an hour to produce a note on Metal-Exx, taking into account the position that Steiner had just outlined to him. He had exaggerated a little to his old friend; although BBV couldn’t take the entire issue, he was actually only anticipating sharing it with one fund, not the several he had indicated earlier. He knew the company, the people, the business; he was confident Metal-Exx wasn’t about to go down, and he knew he could price the paper at a level that would give him a healthy profit margin. He would keep as much as he could and share the deal with one fund, whom he was sure would share his view. But he didn’t intend to call them until his analyst had given him all the facts and figures. He would have one shot, and he would need to get it right.

He mused for a moment on what he’d said to Steiner about public ownership. When Metal-Exx – at that time run by Ertl, with Millault and Steiner poised to succeed him – had first approached him with their plan for a flotation, he had not been enthusiastic, and his view had not changed in the interim. Sure, Ertl had been able to get his money out, and Millault, Steiner and their other senior colleagues were all notionally extremely wealthy men, but they’d opened their whole business up to a far greater degree of public scrutiny. From the press barely knowing of their existence, they now featured heavily in any debate about the resource business. Instead of being able to run their operations in the shadows, they were now constantly in the full glare of the financial world.
In Gerber’s view, trading entities – and, given the entrepreneurial way in which he ran it, BBV also came within that category – were far better served by staying in private ownership. Why give yourself the added headache of outside shareholders if you didn’t have to? He knew Millault theses days spent as much time keeping investors happy as he did managing a trading business. And the moment you need to reduce the dividend payment because of a short-term hiccup, like Metal-Exx was now experiencing, the investors would punish your stock like there was no tomorrow.

In Gerber’s view, it made simple things far more complicated. Still, not his problem. BBV was a decent-sized shareholder in Metal-Exx, quite apart from one of its major trade financiers, and he was happy to put in more now. He shook his head to himself. If BBV were quoted, he wouldn’t have been able to take that decision so quickly and personally. That’s why he had no desire to be a rock-star banker, like Jamie Dimon. Sitting back in the shadows, that’s how he could get so wealthy. And that’s what the Metal-Exx team had lost. He shrugged his shoulders and looked at his watch: three thirty. He had an internal meeting which would take about forty-five minutes at three forty-five, and after that he should have been given the note he wanted on Metal-Exx. He was handling this deal himself; it wasn’t going to go through the traders.

The final chapters VI and VII will follow tomorrow and Friday.

Geoffrey Sambrook 
editorial@metalbulletin.com