Volume 46, Issue 8 - September 2011


"It Still Keeps Me Up at Night"

Leon Silverstein Opens Up about the Arch Bankruptcy and His Future in the Glass Industry
by Debra Levy

When USGlass magazine first interviewed Leon Silverstein eleven years ago (see “Anatomy of a Pusher, February 2000 USGlass, page 58), he was riding his family-owned business, Arch Aluminum & Glass Co. Inc., through a wave of rapid expansion and success. Silverstein has never been shy about saying what he thinks and that interview was no exception. “Some of our competitors may be smoother, they may be more polished, but they can’t do what we can do and they can’t do it as quickly,” he asserted during that interview.

Everything is different today. Silverstein and his family no longer own Arch, it having been purchased in a bankruptcy sale not by the “stalking horse” they had so carefully cultivated but by the private equity firm Sun Capital. That bankruptcy sent a collective chill throughout the industry with effects that are still being felt today. And whether the result of a push or a jump, Silverstein is no longer there. In an exclusive interview, he spoke with USGlass in mid-June about the bankruptcy, how he is doing and his plans for the future.

USG: How are you doing?
LS: Oh, I can’t complain. One of the first things I did when I left Arch is I got an office outside of my house. So I do have a place to go everyday in an office—and a staff of one—and I get to do the things I do out of here. My pattern hasn’t changed too much.

USG: Well they say that keeping a pattern, a routine, is very good. Let’s start by talking about the economic climate in the glass industry.
It’s hard to fathom, when you look back on the period from 2000 to 2008, that you could think that anything like this could ever have happened. But I lived it and have a lot of thoughts about it.

USG: Well then could you explain how you see the market now?

LS: Oldcastle is the big winner in this. They are in the building products business; they understand it. They plan to be there for the next 10, 20, 30 years to build the Oldcastle or the CRH brand. They are well-positioned to take advantage of the turmoil of other players.

USG: I would expect that what you went through leads to a lot of introspection. When we did our last interview years ago you told me you weren’t a bully and that this wasn’t an industry that you could bully. Do you still feel that way?
I can be an aggressive, tough businessperson. I’ve never considered myself a bully. Business is about helping your partners—customers, employees and vendors—succeed. There’s no room for being a bully in that equation.

The thing that hurts me the most about everything that went down is what happened to the employees and the suppliers. I mean, that kills me a little bit every day.

USG: Take me through what happened.
LS: What happened with us started in April 2009. We had just come off a great year, by the way. 2008 was the best year Arch ever had. By April of 2009 sales were starting to fall off. Since our buyout by a private equity firm, we had always been heavily leveraged. Our loan was syndicated to a seven-member bank group.

USG: There were seven different banks involved?
LS: Yes, and all seven later took TARP money. Four of them have changed hands or disappeared since then. So we had a bank group that had more issues than we did. Our issues weren’t as if a company was failing; our leverage ratios were going down, which was normal. But they put pressure on the company and we cut costs very aggressively. We just couldn’t do it fast enough.

Well, the banks came and talked to us about the problems they had and what was going on. They said that it was a Well, the banks came and talked to us about the problems they had and what was going on. They said that it was a sign of the times, across every industry, not necessarily just the glass industry. So they said, “Okay, fine. We’ll work with you, but you need to put more equity in.”

USG: Right. There were a lot of people getting those visits.
LS: Okay, so put in more equity. Well, the problem is the Silverstein family had most of the family’s equity in the business. The only person we could go to and ask for more equity was our private equity partner. But they were in the process of exiting and getting the last of their portfolio companies out of the fund. They were more interested in liquidating. I wasn’t involved in the discussions between our banks and the private equity firm, but the banks ended up feeling very angry towards the private equity firm.

USG: The bank got mad?
LS: The bank got mad. So by summer, we were tripping covenants. They were giving us 30-day threats, 30-day forbearance agreements and then they just started to kill us with fees.

Also during the summer, we started to worry that if the bank gave us a hard time and threatened us, we would have to file for bankruptcy. When you’re a CEO of a company—and this is something I don’t think a lot of people know—you have a fiduciary responsibility that extends to all constituents. This includes the banks, but also the vendors and the employees. If you don’t do things right, you can end up with a serious problem.

USG: Even a criminal one, I believe.
LS: You got it. A CEO in a distressed company is in a very difficult position. You owe allegiance to all stakeholders in the company and have to do everything humanly possible to protect their positions, and you face the reality that any wrong move could lead to very serious personal consequences. You don’t want to have to worry about sharing a cell with Bubba down the road.

The bank made us put a chief restructuring officer (CRO) in place. Anybody who has to put a CRO in place should call me. They come in, they tell you how wonderful they are and how they’re going to help the company. But they don’t really care. They only care about two things: maximizing the return to the bank and lining their pockets with as many professional fees as they can … At the end of the day, CROs get their next work by what they did for the bank, not by what they did for the customer. The bank is their real customer.

USG: Did you know that at the time?
LS: Kind of but … look, I’ve gotten a very, very expensive education in the last two years. It’s not all bad … I mean, I’ve learned things that could help other people.

If you remember when this happened, it was the end of 2008, beginning of 2009. Everybody thought the economy was going to be better in the next six to nine months. So the banks, at the time, went along for the ride. But here is the other sad part about the banking industry: once your loan goes into workout or becomes an un-performing loan or however they reclassified a loan, they actually write that loan down. They discount it. Okay?

So these guys in their restructuring departments say, “Okay, that loan’s worth forty cents on the dollar, and anything we get over forty cents in an auction or a liquidation is a bonus.”

And once these people saw the recovery was starting to approach 60 percent or whatever, they were salivating. The bankers were happy. They were going to force this to the end anyway because there was money to be made. The whole ugly underside of the banking industry is that they don’t care and that people individually make more money on other people’s misery than elsewhere.

And think of the money. There was more than $6 million spent in professional fees from August of 2009 until the end of January 2010.

"A CEO in a distressed company is in a very difficult position. You owe allegiance to all stakeholders…"

USG: Oh my goodness, $6 million?
LS: If that $6 million had stayed in the business, it would not have had to go the way it went.

USG: Wow. How did you end up with Grey Mountain?
LS: Once all that happened, we figured that the best thing for the company was to hire an investment banker to go find a buyer. Which is what we did. But we also knew that if the bank was being difficult, we would have to file because we had to protect the best interests of the company. We didn’t want to go into a bankruptcy without having an exit plan, and the exit plan was to sell the company to somebody who we respected. We did our research on who we thought would be a good fit and that was Grey Mountain. Grey Mountain did the most work to prepare to make an investment and offered the best value for the company. The investment banker solicited over a hundred potential buyers to make sure that we maximized the value for all of our stakeholders, and Grey Mountain came out on top.

USG: So Grey Mountain became the stalking horse.
LS: They’re really good guys. They’re management-friendly, they’re good, smart operators and their motive is to be in the business and run the business. They make money by the success of the business, not through some financial manipulation or strategic liquidation or financial management. They believe in getting the money from the business side of having a well-run company.

We found the right buyers and they still had the best prices. I actually recused myself from picking the stalking horse because I didn’t want to be the one who ultimately made the decision, though obviously I was part of it.

USG: So you must have felt a bit of relief at this point.
LS: Yeah. It would be good for the business; it would be good for the employees. But the whole time this is going on, we thought we would run out of money.

USG: Run out of cash?

LS: Run out of cash. We thought we’d run out of money, but we never really did. The whole idea was that we would go in and get a debtor-in-possession (DIP) loan. The funny part is, if you remember any of the readings, a lot of the hearings in December and in early January were about the DIP financing.

We were doing an aggressive job of managing the company through November, December and January. So even though we asked for financing, we never needed it until closing. Wait until you hear why we needed it at closing.
Grey understood that they had to deal with the vendors. You don’t want angry vendors. If you don’t pay them or don’t work out a plan with them, they’ll sell you … but it’s going to be a COD or very restrictive terms and at premium prices. And, whatever they lost, they’re going to get it back. So if you don’t deal with the vendors, you’re going to be this big company at a competitive disadvantage because you cannot buy materials at competitive prices.

I also felt a personal loyalty to vendors who had done so much to support Arch through the years. They were a critical part of Arch’s past success.

"Anybody who has to put a CRO in place should call me. They come in, they tell you how wonderful they are and how they’re going to help the company. But they don’t really care."

USG: Do you think Sun Capital had you on its radar at this point?
LS: Up until the point where you pick your stalking horse, everybody calls you, everybody wants to be your best friend. Who you choose is a big deal because the stalking horse gets to have an advantage in the bidding.

USG: Kind of set the price, if you will.
LS: …and breakup fees and all that. So I was getting heavily solicited by Sun Capital to pick them, which I wasn’t going to do unless they offered the best value.

USG: It sounds like you were concerned about the vendors.
LS: Yeah, and Grey was looking to take care of the vendors. You can go back and look it up. They were looking to assume some of the contracts. Obviously the PPG certified fabricator program (CFP) contract was one. There was a Guardian CFP contract. There was a Bonnell supply agreement. In other words, Grey would have put a significant amount of money aside to pay the vendors and the only people who would have gotten upset because of that would have been the bank. The bank would have gotten less recovery but, in the end, the banks had already exceeded the recovery expectation.

USG: Now do you or the family have any stock left or any ownership at all?
LS: Zero.

USG: Was that the worst day of your life?
LS: There were two. One was the day of the auction and the second was April 26.

USG: The day you separated from the company then?
LS: Separated, yeah, separated from the company. I had some fairly fundamental disagreements with the new owners about how to run the business and told them so.

USG: That must have been very hard to say.
LS: That’s what still keeps me up at night. I have a really hard time with what happened to our employees and our vendors.

USG: So how are you doing?

LS: I’ve been away for the most part of the year. I’ve done some consulting; I work with some in the industry, so I actually feel pretty good. The biggest issue I struggled with this past year is whether or not I want to be in the industry. I could very well get out. I could probably make, personally from an annual income standpoint, a lot more money out of the industry using my CEO skills. I’m a CEO. I’m very much an operational guy …

USG: There’s opportunity out there, isn’t there?

LS: Yeah there is, I see a lot of opportunity.

USG: Don’t you have a new company formed and aren’t you getting ready to roll?
LS: I have a company called SMI, which is an impact aluminum system company, and we recently bought a small local temperer in Florida about four weeks [Editor’s note: now two months] ago. We’ve named it Architectural Glass Products. I’ve got something else, but I’ll give you that later.

I want to do it more for the challenge. But I do know there are certain things out there that I’m never going to do again. I am never going to leverage the company again.
still go back to the history of when Arch really grew and was successful. A lot of it was by adding the right pieces and making sure we didn’t add too many pieces. I also don’t want to get that big again.

USG: This has got to be just so incredibly difficult on many levels. One of them, I’m sure, is having had so many members of your extended family who worked there for so long. Then all of a sudden they’re feeling it in two ways then too and everybody’s keying on you. That had to be very difficult.
LS: They recovered. My sister ended up with a very good job. My brother-in-law ended up with skills from being the CIO. My brother is actually the one who really runs and manages and is really the president of SMI. I don’t even have an office there.

We learned a lot from my dad, so we’re a pretty resilient bunch. People might have forgotten that when my dad went back in ’78, it was with sweat equity. So we really weren’t a family of money and means, we’ve always just been hard workers. We put a lot … in the business, but we came from the philosophy: you did it once, you can do it again.

USG: How do you feel your relationship and SMI’s relationship is with vendors at this point?
LS: It’s funny, the ones who put my dad in business in 1978 are the ones that are actually very good. Those guys know a little bit more of the story. And number two, the vendors don’t love some of our competitors and, at the end of the day, they need someone to sell their products to. If nothing else, we were really honest and straight with all of them except for the things we couldn’t tell them. One vendor is still angry to this day because we didn’t tell them early what was going on so they could protect their interests better. In reality, I couldn’t. It’s illegal.

USG: I think I can guess who that is.
LS: In truth, I don’t blame the vendors for being angry. They got a raw deal. Every day I wish there was something I could have done differently to spare them their losses. If you don’t mind my taking a moment, I’d like to personally apologize to all of the vendors who supported Arch who ended up suffering losses. It was a personal failure on my part to have ended up there and I’m very sorry to have let my business partners down.

"It was a personal failure on my part to have ended up there and I’m very sorry to have let my business partners down."

USG: You made a couple of different statements that if you have time I would love to go back to. One of them was: “We made money every year except for one year.” When I hear that I think “Man, the punishment for that surely doesn’t fit the crime.”
LS: It didn’t have to. We actually had positive EBIDTA the year that the company went bankrupt. The problem was between the private equity partner and the seven-member bank group, everyone had their own agenda. If the same scenarios were playing out now the banks would not be as quick to shut down businesses as they were then. I’ve gone into some other companies in other industries and looked at the books and said: “Why us?”

USG: Let me ask you, if you were running a glass company right now and you got a call from a bank that said “Okay, hey we’re going to do this and we want to send this CRO over,” what general advice would you have?
LS: Stop. Think about who they’re sending and why. They give you their suggestion list and the impression that you have to pick one of them. You don’t. You can go out and find your own.

Just because the bank tells you to, doesn’t mean you have to. If you pick a qualified person and it’s not theirs, they might not like it, but you did your fiduciary duty to try to improve the company. So stop and figure out where you’re going to go and get your own professional advice. Most of the time, the bank is worried about their best interests, which is eliminating risk and maximizing recovery, not your business.

USG: Unfortunately they don’t have to care about your business.
LS: They do from the standpoint of they can maximize the recovery and eliminate the risk, but they’re looking at it along those lines … I just wouldn’t roll over with the CRO. I think you need to go and figure out what kind of help you want and how to get the help, but to do it on your terms.

USG: The thing is that lots of times the banks are putting such time pressure on the CEOs that it’s difficult.
LS: Well, tell them if they want to send me over a confidentiality agreement so they know I won’t say anything, I’d be more than happy to help. I would love to help. And a lot of it is just because I really care more about people. I probably have a bigger problem with institutions now than I do with people.

USG: Is there anything in your experience that you can look at and you say, “Gee, if I had done this one thing differently maybe it would be really different?”
LS: If I had a better crystal ball, I think we definitely would have slowed down the expansion in 2006 and have opened in two or three places instead of six and seven.

Here’s the other thing I think people probably miss. They think I was driving the boat and making all of the decisions on my own to grow the company. I basically was a shareholder, an employee and board member, but I didn’t have a majority of the board. I didn’t make any or all those decisions on my own.

Anything we did was approved by the board and I was only one member of the board. The goal was to grow the company successfully. The reason we brought in seven banks was that the company had more borrowing ability, even though we didn’t need it. In hindsight, that was a mistake.

USG: So do you ever say “how could this happen?”
LS: We were always a leader. We just happened to be unfortunate enough to lead in this area too. Look at how many companies have gone out after us without nearly as much fanfare. We were first and we were big, so we got a lot of attention.

USG: How are people going to grow with the banks the way they are now?
LS: I think you have to do things differently. You can’t rely on the idea that you’re going to leverage a company up. I think it’s got to be a niche. You need to be nimble and you need to have a broad product line.

USG: What do you think happened with U.S. Aluminum? I mean, nobody even stepped up to the plate for those guys. They’re just gone. (Editor’s note: this interview was conducted before the purchase of some U.S. Aluminum assets by C.R. Laurence.)
LS: I don’t know what the hell they were doing to be honest. Part of it was that the U.S. Aluminum metal side probably had something that could be rescued, but the International Window side, [not so much]. And I don’t think today you want to be an extruder … it’s tough.

USG: Right, but as you know it’s the best time to start something, right?
Like I said, every day I go home and ask myself: “Do I want to be in this industry or not?” And every time, I think the smart thing is not to be. I have a disease.

USG: Anything else you’d like to tell the readers?

LS: I wish everybody luck. I root for the small independent. The independents are also going to have room to grow their business. I not only root for them, I want to be one of them.

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