Speyside Equity, the equity fund that bought Pacific Steel Casting in 2014, only put $2.5 million of its own money into the once-thriving business but took out $11.25 million in distributions during its four years of ownership, according to Pacific Steel’s former vice president of finance.
A subsidiary of Speyside, the Speyside Fund, did lend the business $3.95 million in 2016 but charged the then-struggling West Berkeley business 10% interest at a time the bank prime loan rate was 3.5%. The bulk of the loan was repaid in 2018. On Jan. 25, Pacific Steel Casting Company filed for Chapter 7 bankruptcy.
The information about the relationship between Speyside Equity and Pacific Steel Casting Company came out during a 2.5-hour hearing Friday in bankruptcy court of the casting company’s creditors. Jerry Johnson, the company’s former vice president of finance, answered questions from Sarah Little, the bankruptcy trustee, whose role is to see if there is any money left to pay the company’s creditors.
Pacific Steel Casting, which made customized metal parts for industry, started operations in Berkeley in 1934. Until 2014, it was a family-owned business and was last run by Catherine Delsol. The company filed for bankruptcy in 2014 and Speyside Equity, acting as Pacific Steel Acquisition LLC, a Delaware company, acquired it for $11.3 million.
The company, which shut down operations in late 2018, has about $1.9 million in assets but $3.4 million in debts, according to its bankruptcy filing. The only secured debt is the $823,963 Pacific Steel owes to the Speyside Fund. The company also owes $845,746 in severance payments to about 70 employees, $88,712 to the city of Berkeley for unpaid business taxes and other fees, $129,000 to Alameda County for unpaid property taxes, and $518,000 to PG&E, among other debts. Those debts are not secured against property, however, which means those creditors are last in line to collect any money.
Little had Johnson explain the finances behind Pacific Steel Casting Company, the limited liability company Speyside spun the company into.
Johnson said that Speyside Equity partners and other investors, which included Alcast Company of Peoria, Ill., borrowed a large portion of the $11.3 million purchase price from Siena Lending Group, an independent commercial finance company. Siena has said it lent $8.5 million for the purchase.
The 2014 purchase price was less than the value of the old company, so the purchase generated a tax gain, Johnson said. Pacific Steel Casting made $10 million in distributions to the Speyside partners and others in early 2015, in part to pay off taxes, he said. Johnson did not start working at the company until after that transaction was made, he said.
Little said she had noted the $10 million distribution in Pacific Steel Casting’s books.
“Bottom line, that’s what happened, $2.5 million in and 10 out?” Little asked Johnson, who answered in the affirmative.
Speyside Equity only put $2.5 million of its own money into the once-thriving business but took out $11.25 million in distributions.
The owners of Pacific Steel Casting Company include the Speyside Fund, which owns 41.65% of the company; Alcast Company of Peoria, Ill., which owns 41.65%; Jeffrey Stone, the managing partner of Speyside Equity, who owns 10% of the company; and Krishnan Venkatesan, the former president of Pacific Steel Casting, who owns 1.7%, among others, according to court documents.
In June 2015, Pacific Steel Casting swapped Siena’s loan for one with Wells Fargo Bank, said Johnson, who did not reveal the size of the loan. Pacific Steel used that opportunity to make another $1.25 million in distributions to the people who owned the company, he said.
As Pacific Steel Casting’s revenues plummeted with the drop in oil and gas prices, (it was a major builder of parts for oil platforms) the company went into technical default on the Wells Fargo loan in August 2016, said Johnson. So Pacific Steel Casting borrowed $3.95 million from the Speyside Fund LLC in 2016 at 10% interest. It is not unusual for financially stressed companies to have to pay higher interest rates to secure funding.
That money went to pay off the Wells Fargo debt and to infuse the company with some cash to operate, he said.
“We thought there was a chance to turn the business around going forward,” said Johnson.
That didn’t happen. While Pacific Steel Casting brought in $100 million in revenues before 2014, the revenues after that were significantly less: $19.45 million in 2016; $23.4 million in 2017; and $21.4 million from January 2018 to Oct. 31, 2018, according to court filings.
In 2018, Pacific Steel Casting Company repaid $3.8 million of the $3.95 million it owed to the Speyside Fund. During this period, Pacific Steel Casting also paid Venkatesan and Johnson around $615,000 in salary.
The bankruptcy hearing was technically a hearing for the creditors, so many came to ask questions. The first up was Conchita Lozano-Batista, representing the board of the pension plan for CMTA Glass, Molders, Pottery, Plastics & Allied Workers. Her law firm, Weinberg, Roger & Rosenfeld, battled Pacific Steel Casting in court when it stopped paying into the workers’ pension and health funds in 2017.
Lozano-Batista tried to ask questions of Johnson that might have revealed more information about Speyside Equity and its partners, as the pension fund had tried unsuccessfully to get them to assume responsibility in court for health and pension contributions. But Little did not allow that line of questioning, both because Johnson did not work for the Speyside Fund, and because it was not relevant.
So Lozano-Batista concentrated on how Pacific Steel used its available funds after the late fall of 2017 after it first announced it would be shutting down and during a time when it said it could not pay its workers’ health and pension benefits. She got Johnson to tell her that his salary went from $204,750 to $300,000 in the last few months of 2018 as he oversaw the bankruptcy process. In that time, Venkatesan was promoted from COO to president with a pay bump from $200,000 to $250,000.
Eric Nyberg, the attorney for Little, the bankruptcy trustee, asked about the timing of the repayment of the loan to Speyside. Pacific Steel Casting made $3.8 million in repayments from June to December of 2018, said Johnson. Much of the money came from the auctions Pacific Steel Casting held to sell off the equipment and machinery it had accumulated in its 84 years of business, he said. Those generated about $1.175 million, he said.
Workers want to know if they will collect severance pay
While the hearing was made up mostly of lawyers (and Venkatesan and Johnson) dressed in business suits, a group of seven former workers also came. They all had worked for Pacific Steel Casting for decades and said they had not been able to find comparable work since the plant shut down.
“It’s difficult to find anything in manufacturing,” said Edward Flores, a welder who was with the company for 13 years. He suffers from Raynaud’s Syndrome, an affliction common for welders, he said. The disease narrows small arteries in the hands and feet, cutting off circulation and making them feel numb. He no longer has any health insurance, and the severance pay would be helpful, he said.
The workers had come to the hearing to learn if they would ever see their severance pay. Pacific Steel Casting did pay out $35,000 in severance, according to bankruptcy documents, but that is a fraction of what is owed. Little told them that she did not know yet if there would be any money, and if there was it would take a year or even longer to distribute it.
The bankruptcy filing states, though, “After any administrative expenses are paid, no funds will be available to unsecured creditors.”
Berkeley to hold a community meeting Tuesday to discuss the property
While Speyside Equity purchased the assets of Pacific Steel Casting in 2014, it did not buy the land. Now that the casting company has ceased operations, the owners of the land, which spreads out on almost two acres in West Berkeley, are trying to sell it. They are marketing it as Gilman Gateway.
Berkeley officials are convening a meeting tonight to solicit input about what should be done with the property on Second Street, right next to Interstate 80. The land is zoned for manufacturing but city officials said they believe the zoning could be changed to include maker spaces, light industrial manufacturing, or other 21st-century uses. The area can also accommodate car dealerships. The meeting is from 6 to 8 p.m. at 999 Harrison St., in the administrative offices of Berkeley Rep.
The ownership of the land is complicated. An LLC called Second Street Properties, owned largely by the family that once owned the casting company, has a wholly-owned subsidiary called Berkeley Properties, LLC, which holds title to the property. The owners of Berkeley Properties include “many local businesses that supplied goods and services to Pac Steel, former workers, and a wage and hour class action claim,” said Michael Lauter, the attorney for Arch and Beam, the plan administrator that was appointed during the 2014 bankruptcy proceedings. The owners are owed about $15 million, he said. Pacific Steel Casting Company had been paying its rent to Berkeley Properties.
Once the holders of Berkeley Properties are paid off, the remaining assets will revert to Second Street Properties, said Lauter. That group is still obligated to pay more than $24 million in pension payments for Pacific Steel Casting. The majority owner of Second Street Properties is Tri-Pacific Inc, a corporation owned by the Delsol family. Other owners include the descendants of Joe Emmerichs, who worked at Pacific Steel Casting for 45 years and eventually became the president. Calvin E. Wong also owns two LLCs, Camlee Corporation and Westridge Capital, with ownership interests. They were listed in a 2015 bankruptcy filing:
Lauter said that he expects the property to be sold before Berkeley finishes its visioning plan. But any potential owner knows that the zoning will probably be loosened, providing an opportunity for many uses, he said.
Site cleanup continues
Pacific Steel Casting did some environmental clean-up of the site as it vacated the premises but doesn’t have the finances to do much now, Tracy Green, the bankruptcy attorney for the company, said at the bankruptcy hearing. Pacific Steel paid $350,000 to the National Response Corporation to clean up the site in the summer. NRC put some unused resins into barrels for disposal, she said.
There was also a spill of PCBs during the closure process, according to the bankruptcy filings. A “rigger spilled transformer fluid that contained PCBs [polychlorinated biphenyls].” The clean-up cost is estimated at $33,848.
Pacific Steel Casting has not yet met all the terms of the closure plan it has with the city of Berkeley, said Johnson. Matthai Chakko, a spokesman for Berkeley, said: “we are going to continue to do enforcement to get them to do the clean-up.”
Pacific Steel must not only satisfy Berkeley but the San Francisco Bay Regional Water Quality Control District. During the recent spate of rains, water leaked into some of the buildings and Venkatesan, assisted by people working at Berkeley Forge, put out sandbags to prevent any of the water from reaching the Bay, he said.
“We are strapped in terms of resources from doing much,” said Johnson.
Arch and Beam is finishing up an environmental evaluation of the site. Lauter said he expects that it will be shared with the city of Berkeley.