The Globe & Mail
Thursday, August 20, 1998

Philip Services running out of credit

Struggling scrap metal recycler reveals
just $15-million left of $1.2-billion borrowing line

by Janet Mcfarland

Philip Services Corp. has used up almost all of its available borrowing under its $1.2-billion (U.S.) line of credit, leaving just $15-million remaining.

The struggling Hamilton-based company, which is in default on the loan, said yesterday that it has $60-million of available cash and $15-million of unused capacity under its line of credit, a small cushion for a company as large as Philip.

The credit facility is available for general working capital spending at Philip, one of North America's largest scrap metal recyclers. Philip has been drawing from the $1.2-billion line since August, 1997, and has used $45-million of borrowing capacity since early July.

Philip spokesman Darren Richarz said yesterday that the company has adequate available financing to continue operations: "There's plenty of cash on hand to operate the business."

But the rapid decline in borrowing capacity does not leave a generous operating line for a company with revenue of $1.8-billion annually and 14,000 employees. In the first half of the year, Philip used $53-million in cash for operating activities and reported a loss of $73.6-million.

"To operate the business costs a lot of money", said investment adviser James Sbrolla of Canaccord Capital Corp. in Toronto. "There are still a lot of people on the payroll and bills to pay, and they're operating at a deficit."

Also yesterday, new details emerged about changes to Philip's borrowing capacity.

The unused portion of the line of credit was at $101-million at the end of June, plus Philip had $30-million in cash.

Then, on July 8, Philip announced its lenders had approved a $60-million "draw" under its "existing credit facility", which it called a strong show of support from the lenders.

Yesterday, Mr. Richarz said the July agreement actually froze all borrowing under the lending facility, but allowed Philip to draw from an additional $60-million that was added to the fund. A new filing by Philip with the U.S. Securities and Exchange Commission reveals that the additional $60-million were proceeds Philip gave its lenders on July 7 from the sale of its steel distribution centre.

The filing shows that Philip had to turn over the full $93-million in proceeds from the sale to its lenders. The lenders used $33-million to pay down debt, and agreed to make the other $60-million available to Philip on July 7 for future borrowing.

When Philip revealed the new borrowing capacity on July 8, it did not disclose that the additional funds came directly from the sale of its steel distribution centre, nor did it reveal that no other borrowing would be allowed under its line of credit as part of the deal.

Philip's share price fell 19 cents (Canadian) yesterday to $2.20 on the Toronto Stock Exchange. The shares slid each day this week from their close of $3.15 on Friday.

Philip issued a press release yesterday saying there have been no material changes to its finances or operations since it issued its second-quarter financial results on Aug. 11. The company also said its operating units are cash flow positive.

But Canaccord's Mr. Sbrolla said he is not surprised by the share price decline this week because the bad state of Philip's affairs are still sinking in for investors. He said some investors were also spooked by word that Graeme Hoey, Philip's senior vice-president of finance, has resigned. Philip did not announce his departure, but confirmed it yesterday.

As well, Morgan Stanley analyst Bradley Galko dropped coverage of Philip this week, adding to the stream of analysts who are backing away from the company.

"It [the share price] has slipped every single day this week", Mr. Sbrolla said. "There are support levels and once you break support levels, it will drop like a stone."

Philip also said yesterday that it is on schedule with its program to sell assets to pay down debt, and said it has the support of its lenders for its reorganization.

But the new filing with the SEC reveals for the first time some of the tight controls demanded by Philip's lenders in June, including a one-percentage-point increase in its borrowing rate, raising it to 8.2 per cent from 7.2 per cent.

Philip is in default on financial covenants of its borrowing agreement because the company has incurred large losses for 1997 and the first half of 1998, partly the result of writedowns from a copper trading scandal. As a consequence, the company's nervous lenders have stepped in to demand changes.

For example, the SEC filing shows that Philip agreed not to buy or sell any assets until Sept. 30 without prior permission from the lenders, giving the lenders a great deal of control over the company's current program to sell its entire metals division, which has a book value of $950-million (U.S.). All the proceeds will be used to pay down debt.

The company also agreed to provide its lenders with monthly financial statements and biweekly cash flow reports.

Philip also agreed to set up a $250,000 fund to pay the costs of its lenders' legal and financial advisers at Blake Cassels & Graydon and KPMG. The amount owed is not revealed, but Philip set up a $250,000 escrow account and agreed to top it up whenever it falls below $50,000.

According to the SEC filing, there are 40 lenders in the syndicate holding Philip's $1.2-billion debt. The largest lenders are: Canadian Imperial Bank of Commerce at $68.2-million, Royal Bank of Canada at $66.4-million and Bankers Trust at $61.1-million.

Copyright © 1998 by The Globe & Mail. All Rights Reserved. Reprinted with permission.