STEEL
Keep Calm and Carry On
June 2019
Or, to paraphrase the words of British narrator Nigel Lambert: “What is Brexit? We just don’t know.” The idea, of course, is simple—but the reality is far from it. The inability of anyone, from businesses and pundits to the government itself, to provide a clear timeline on the UK’s exit from the European Union—or even to confirm whether it will exit—has worried industries across the UK. Now, as a result of a simple but significant regulatory decision resulting itself from Brexit delays, British Steel has entered insolvency after failing to secure a government loan to pay its debts.

Insolvency does not mean a collapse, however. The company continues to operate normally, paying wages and shipping product, but the threat of liquidation now looms on the not-too-distant horizon if the company cannot find a buyer to pay off its debts and restructure its operations for the second time in three years. Much of the blame has been placed on the company’s current owner, Greybull Capital, but—despite the finance company’s reputation for buying ailing businesses and largely failing to revive them—the blame does not lie with it alone.

Much of British Steel’s ongoing trouble appeared to start earlier in March of 2019, when the company found itself unable to use carbon credits to mitigate a looming EU bill for carbon emissions. The EU has a tightly-controlled Emissions Trading System that, ordinarily, would have allowed the company to be freely allocated carbon credits and offset its emissions. These are not ordinary times, however. Now, we have an unfinished and uncertain Brexit.

Due to the lack of a finalised Brexit deal, the EU has suspended the free issuing and trading of carbon permits for all UK companies in 2019—meaning that British Steel was forced to make an emergency purchase of carbon credits to the tune of £120m. If the company had failed to secure these credits, it would have been liable for a fine of more than £600m. Making the company’s position worse, however, was the fact that British Steel had previously sold a large allotment of its additional 2018 carbon credits, gambling on the finalisation of literally any kind of Brexit deal—an eventuality that has not yet come to pass.

 

 

The UK government was prepared to loan the company its initially-required £120m, in large part under the rationale that, if unpaid, this debt would more than quadruple. However, British Steel’s second request for a loan, this time of £30m, was a bridge too far. There was no debt set to grow exponentially if left unattended, and current-owner Greybull Capital has not had the best of relationships with rescuing UK companies.

Other steelmaking companies in the UK, such as Tata Steel—Britain’s biggest steelmaker—appear to have been better prepared, and no other insolvencies are yet predicted as a result of difficulties with carbon credit issuing or trading. That is not to say that Tata, and other steelmakers, do not face ongoing potential difficulties—but that may be a long-winded matter for a future time, when the marching orders for Brexit are more well-established.

 

Tata Steel, Britain’s biggest steelmaker, appear to have been better prepared than British Steel. Pictured: Tata Steel's Scunthorpe Steelworks in Lincolnshire, England. 

 

There are numerous factors that point to risky mismanagement by Greybull Capital. Since acquiring the steelmaker in 2016, the company loaned British Steel money at a 9.6% interest rate in addition to charging it millions of pounds in administrative fees—although some sources working at British Steel have said that these fees are below industry average. Others said that it was simply extracting as much value as it could from the steelmaker before retreating.

Greybull has had some successes, purchasing and maintaining the operations of companies like Constar UK—a plastics manufacturer—and Plessey—a semiconductor company—but its overall record carries some large black marks. Greybull purchased airline Monarch in 2013, saving it from collapse—but then wound the company up without warning at 4am on a Sunday in late 2017, stranding more than 100,000 passengers overseas and cancelling 750,000 bookings.

Greybull purchased the pub chain Rileys in 2012 but placed it into administration just two years later after failing to either turn a profit or find a buyer. It backed a private takeover of the convenience store chain M Local—but that chain went into administration nine months afterwards. One of Greybull’s former partners invested in a buyout of the retail chain Comet—but that company also fell into administration within a year of the purchase.

Regardless of intent or ability, British Steel is now insolvent. It cannot pay its debts, and if no buyer steps up, its future is uncertain. Some hope that a larger company—such as Liberty Steel—could step in and save it. Others have called for nationalisation. Pessimistic predictions—and pessimism, as always, abounds in the UK—fear a liquidation of the company and its assets.

Given the uncertainty that surrounds the UK’s future trading position, both in the EU and the wider world, a buyer may simply not eventuate.