Fayette County, Pa., commissioners voted 2-1 today to sponsor a $15 million federal loan application on behalf of 84 Lumber--a vital first step toward freeing itself from the rest of a $195 million, 18% interest loan that 84 president Maggie Hardy Magerko says has kept the LBM giant from plugging significant cash losses.
The county's sponsorship clears the way for Commonwealth of Pennsylvania to request the Community Development Block Grant from the federal Department of Housing and Urban Development (HUD). Neighboring Washington County, Pa., will be asked by 84 on Friday or this coming Monday to sponsor a similar $5 million block grant, an 84 official said. That county's commissioners are expected to act on the request by Sept. 30, he added.
Those $20 million in grants under HUD's Section 108 program would then be applied to the final $55 million of the $195 million loan that an arm of 84 called Pierce Hardy Limited Partnership entered into in the spring of 2008 with Cerberus Capital Management. 84 plans to pay the rest through a new private loan with Wells Fargo worth about $20 million, $10 million from property sales expected to close before the rest of the refinancing is put together, and $5 million from Magerko.
84 has said it needed the commissioners' sponsorship because Wells Fargo's loan was contingent on the federal loan, which lasts 17 years and requires only interest payments in its first two years.
On Wednesday, 84's vice president of marketing and public relations warned that the company--America's fifth-biggest LBM operation--could close more stores and lay off more workers if it cannot get out from under the Cerberus loan's terms. Today, Magerko delivered a letter to Fayette County's commissioners that provided more details on the company's financial travails.
The housing market crash of recent years prompted 84 in April 2008 to enter into two new loan facilities, Magerko wrote. One was the $195 million secured real estate loan that, along with the 18% interest rate charged, requires that all assets sales must be used to pay down the debt. The other was an asset-based loan (ABL), secured by 84's operating assets, that had a commitment of $340 million and funded debt in April 2008 of $191 million.
"Since April of 2008, 84 Lumber Company has sustained significant cash losses," Magerko added, noting that three major competitors made bankruptcy filings since then. "The real estate assets sales since April of 2008 have been $155 million. However, due to the restrictive terms of the term debt, none of the asset sale proceeds are able to assist in offsetting the cash burn at 84 Lumber Company, as instead, they have been required to pay off the term loan.
"The cash burn has effectively been subsidized by the ABL loan, a reduction in debt by reducing inventory and other short term assets, and cash infusion by me," Magerko continued. "Our ABL loan has certain advance rates and requires that a certain asset theshold be met prior to the loan advancing money on additional assets beyond the threshold. At this point, we do not have satisfactory cushion against this threshold, and, the only answer is to refinance the term loan, so as to allow our ongoing asset sales to be applied to the cash burn of the operating company."
Magerko noted the company has closed more than 200 locations, cut staff by nearly two-third staff from its peak of 10,000 workers, and sold real estate assets in the midst of "the worst real estate market in history." And now comes winter, a time when 84 experiences great pressure on its liquidity, she noted.
"Therefore, it is critical to restructure our debt and secure the HUD Section 108 financing, along with outside financing to eliminate the burdensome terms of the existing real estate term debt," her letter continued. "With the HUD Section 108 loan and restructuring of our real estate term debt, 84 Lumber Company is confident of our long term viability and believes that the HUD Section 108 loan will clearly save jobs and in the recovery of the housing industry will provide us the ability to create new jobs."
Magerko attended the meeting with her father, 84 Lumber founder Joseph Hardy--a former county commissioner. They didn't comment on the vote, the Pittsburgh Tribune-Reviewreported.
84's $1.35 billion in sales last year put it sixth on the latest ProSales 100 list of top LBM operations. A merger higher up the list has since moved it to fifth place. (See updated list.) At the start of this year it had just over 300 locations and 4,000 employees; it has about 280 locations now.