Phoenix Services, a Radnor, Pennsylvania, company that keeps the largest U.S. steel mills running by recycling their molten slag, is in its sixth month of bankruptcy reorganization, as tons of waste pile up at its clients' plants.
But why? Was Phoenix forced to seek Chapter 11 protection by inflation, Fed rate hikes, the Ukraine war and other factors beyond its control that have made familiar business arrangements unsustainable?
Or did Phoenix and its financiers, led by its private-equity owner Apollo Global Management, use economic conditions as a pretext to rip up contracts and try to pass rising financial costs along to steelmakers, protecting profits of its billionaire investors at consumers' expense?
Since Phoenix filed for Chapter 11 reorganization in September, those are the rival stories lawyers have told in the fight over the future of the slag disposal company. Phoenix's fleet of 1,700 custom-built machines clears off hot waste at mills owned by Nucor, U.S. Steel, ArcelorMittal, Cleveland-Cliffs and other big steelmakers and sells it for construction and road material. Past buyers include PennDOT.
Phoenix is using the bankruptcy to force new terms on the steelmakers. Nucor, the largest U.S.-based steelmaker, is fighting back, refusing Phoenix's pricing proposals and demanding the court set up a detailed plan for removing Phoenix's bulky, specialized vehicles and on-site recycling facilities — or leave them so someone else can take over the work.
If there's not a plan soon, Nucor says a growing slag backlog at its large Southern mills may force it to cut production, threatening potential shortages or price hikes on the carmakers and other manufacturers who rely on American steel.
Phoenix has balked at Nucor's proposal and its claims, arguing there will be adequate steel available even if it pulls out, and that it needs flexibility to move its equipment to new clients at its own pace.
Bankruptcy and private equity
The Philadelphia region is home to a string of steel-mill service companies that handle the stony, metallic waste that steelmakers call slag. These include industry leader Harsco, a publicly traded company based in Philadelphia; TMS International, owned by Chicago's billionaire Pritzker family, which has offices in Horsham and Pittsburgh; and Phoenix, a major provider in both the U.S. and at mills in Europe, Brazil and South Africa. Only Phoenix's U.S. operations are in bankruptcy.
It's a cyclical business, to be sure. Harsco made a half-billion dollars in 2019, posted modest losses in 2020 and early 2021, then a small profit last fall. TMS doesn't disclose financial results.
In its bankruptcy filing, Phoenix blamed "inflationary pressure and rising fuel costs," the "operational challenges" at different plants, higher interest rates on its half-billion-dollar debt, and especially its own contracts with customers, which Phoenix now calls "unprofitable."
Bankruptcy reorganization and the contract-breaking relief it offers is a strategy that has been used by some troubled businesses, including those controlled by private equity companies such as Apollo.
"A very high percentage of large bankruptcies for the past few year have been private equity-sponsored firms," said David S. Skeel, a University of Pennsylvania law school professor and bankruptcy scholar.
"The usual story is they take on lots of debt, sometimes they strip the company's assets, and then something goes wrong," leaving the companies and their lenders to seek relief in bankruptcy protections, Skeel added.
Relief can include breaking agreements with customers and workers and imposing financial terms more favorable to the owners. In a recent essay, Skeel warned of "populist backlash" over such practices: "There's a lot of uneasiness at the current shape of bankruptcy."
Apollo, based in New York, raises billions to invest in firms like Phoenix from public investment funds such as the Pennsylvania teachers' (PSERS) and state workers' (SERS) retirement systems, in hopes of collecting big profits. Billionaire Sixers lead owner Josh Harris is a former managing partner.
Phoenix, with three Apollo executives leading its board, including the chairman, and with a half-billion-dollar debt load five times the current value of the trucks, movable buildings, and other assets it owns in the U.S., seemed headed for a similar escape from its own obligations — before Nucor balked.
Companies at odds
In a motion filed in January, Nucor said it could not accept Phoenix's "drastically above-market and anticompetitive pricing," nor negotiate acceptable new terms. Nucor called on U.S. Bankruptcy Judge Mary F. Walrath for the Delaware District to order Phoenix to conduct "an orderly wind down" of its operations at Nucor's mills so it could make other arrangements to process slag and keep them running.
Nucor said that Phoenix, during the period of Apollo's management, had provided "a lack of preventative maintenance," endangering workers. It said the owners had lost experienced managers and slowed the flow of slag, leaving waste to threaten operations at key Nucor plants in Mississippi, Arkansas and Kentucky, which together make about 7% of U.S.-produced steel, according to industry figures.
Nucor also cited what it said were a couple of dangerous incidents it sought to tie to poor maintenance — a Jan. 6 fire at its Arkansas plant in a vehicle carrying molten slag without a fire-suppression system and a slag-loader fire at a Mississippi plant "due to misuse."
In all, some 160,000 tons of unprocessed slag and metal residue piled up at Phoenix sites serving Nucor mills. Nucor blamed this on "Phoenix's equipment failures, manpower shortages, and underperformance." Nucor estimated that it will have to pay another company $5.5 million to clean it all up — if it can do so without breaching its environmental permits.
Phoenix attorneys called Nucor's claims "outrageous" and said it had provided scant evidence of its sweeping claims.
Tetris-like complexity
In a hearing Jan. 23, Phoenix lawyers said the company had invested $125 million in Nucor's plants, but instead of boosting profits, has been losing money because Nucor has not boosted production as promised.
The Nucor deal at the Arkansas plant "was very underpriced" — in fact, "our lead loss maker," Phoenix chief operations officer Robert Richard testified on Jan. 23.
Richard urged Walrath not to impose the detailed terms Nucor and some other customers sought. He compared the complexity of moving equipment to new customers to the computer game Tetris, in which puzzle pieces must be fitted within time limits.
Agreeing that Phoenix's services are "vital" to Nucor and that a shutdown would cost Nucor millions, lawyers for Phoenix in a court filing called Nucor's warning that the lack of its American-made steel would more broadly endanger national security "preposterous."
Lawyers for companies that own and finance some of the equipment used by Phoenix spoke in support of Nucor's demands. "This really has developed into some level of chaos," said Adam Hiller, a lawyer for the finance companies. He begged the judge for an "orderly" plan.
Walrath said she, too, was concerned by Nucor's complaints but has so far held off on ordering Phoenix to detail its exit plans, instead admonishing the two sides to continue discussions, slag piles or no.
