The Department of Commerce has prepared these results of redetermination in accordance with the instructions of the U.S. Court of International Trade in its Decision of May 29, 1997, in the above-captioned proceeding. Saarstahl AG v. United States, Slip Op. 97-67 ("Saarstahl IV"). Both the Department and the Court have described the procedural and factual history of this proceeding extensively elsewhere, including in Saarstahl IV, the Court's May 29, 1997 decision ordering the present remand.
As the Court stated in Saarstahl IV, the Department requested this remand to reconsider the issue of whether Saarstahl Volkingen GmbH ("Saarstahl") was creditworthy in 1989, the year in which the company benefitted from government and private bank debt forgiveness. Specifically, the Court ordered the Department to "reconsider the issue of Saarstahl's creditworthiness and make a finding as to whether a risk premium should be included in the calculation of the discount rate." Id. at 25. That determination is set forth below. We note that the Department's analysis has been revised from that contained in the draft determination, in addition to responding to respondent's comments.
When the Department examines whether a company is creditworthy, it is essentially attempting to determine if the company in question could obtain commercial financing. The analysis of whether a company is creditworthy examines whether the company received comparable commercial loans and, if necessary, the overall financial health and future prospects of the company. See, e.g., Certain Laminated Hardwood Trailer Flooring (LHF) from Canada, 62 FR 5201, 5203 (February 4, 1997).
In this case, Saarstahl did not receive any commercial financing in 1989. Therefore, we must turn to an analysis of other indicators of the company's overall financial health. An evaluation of Saarstahl's financial information for the years 1986, 1987 and 1988 indicates that the company was experiencing substantial financial difficulties. The company experienced massive losses in 1986 and 1987 and earned only a small profit in 1988. The losses in 1986 and 1987 nearly wiped out the company's entire equity balance, and at the end of 1988 the company had nearly 300 times as much debt as equity on its balance sheet. This means that at the end of 1988, for every 100 marks of equity on the balance sheet, the company had 30,000 marks of long-term debt.
Despite the company's return to profitability in 1988, its
profit margin as a percentage of sales was not indicative of a
financially healthy enterprise. The company's return on sales
rose from negative 4.76 percent in 1986 to only positive 0.06
percent in 1988 and averaged negative 2.73 percent for the years
1986 - 1988. If a firm is profitable, it will be able to make
its debt payments out of earnings and attract additional capital
to refinance principal payments as they come due and to expand operations. Saarstahl's poor performance by this measure indicates that the company was unable to make debt payments out of earnings, and would have had difficulty attracting the capital needed to make loan payments. The company's quick ratio, a measure of liquidity, slid from 1.06:1 in 1986 to 0.61:1 1988, averaging 0.72:1 over the period in question.
Saarstahl's inability to cover interest expense from current earnings over the period in question also demonstrates that the company was in very poor financial health. Over the period 1986 to 1988, the company earned slightly less than 70 percent of its interest charges. This inability to cover interest expense from current earnings meant the company's financial condition was significantly deteriorating; when a company cannot meet its debt payments from current earnings, it must reduce its asset base or seek out new capital to finance its interest payments.
These and other key financial ratios are listed in the table
|Net Income (Loss)||(100,998)||(63,312)||1,182||(54,376)|
|Debt to Equity||30:1||1,881:1||299:1||736:1|
|Profit as a Pct. of Sales||-4.76 %||-3.48 %||0.06 %||-2.73 %|
|Times Interest Earned||49%||60%||101%||70%|
(amounts in 000's of DM)
Based on the above, we determine that Saarstahl was uncreditworthy in 1989.
Given our findings above, we have recalculated the benefit provided to Saarstahl from the government and private bank debt forgiveness using the same methodology and discount rate we used in our preliminary determination. See Certain Hot Rolled Lead and Bismuth Carbon Steel Products from Germany, 57 FR 42971, 42972 (September 17, 1992). Because we have determined that Saarstahl was uncreditworthy in 1989, the discount rate employed includes a risk premium.
Respondent argues that the Department should examine Saarstahl's financial information in 1989, the year in which it received the debt forgiveness, in addition to the three years prior to 1989. If the Department were to conduct its creditworthiness analysis on this basis, according to respondent, it would have no reason for finding Saarstahl uncreditworthy. The basis for respondent's conclusion is that after privatization the net worth of the company rose substantially.
Respondent also maintains that the Department, when making a creditworthiness determination, must take into account the company's future financial prospects. Respondent points out that the Department in its August 19, 1996 remand found that the post-privatization entity was the same entity for all intents and purposes as the pre-privatization entity. Therefore, the Department should not create artificial distinctions and should consider the impact of privatization on Saarstahl's future financial position.
While a company's future financial prospects can be a factor in a creditworthiness determination, respondent never provided for the administrative record any market studies, country or industry economic forecasts or any other information regarding the company's prospects after privatization. Although an excerpt from an asset appraisal was provided at verification, the purpose of this appraisal was to value the assets of AG der Dillinger Huttenwerke ("Dillinger") and Saarstahl prior to their combination. The appraisal does not meaningfully address the future financial prospects of either Saarstahl or DHS-Dillinger Hutte Saarstahl AG ("DHS"), the post-privatization entity.
Furthermore, the mere fact that the net worth of the company rose after privatization does not make the company creditworthy. Specifically, net worth is not one of the critical financial indicators the Department normally relies upon when making a creditworthiness determination. See, e.g., Memorandum from Anne Murphy to Marie Parker re: Creditworthiness of Saarstahl, dated September 8, 1992. In any event, standing alone it does not provide sufficient evidence that Saarstahl was creditworthy, especially in light of the other evidence to the contrary.
With respect to the specific years we examined when making our creditworthiness determination, consistent with our established policy, we examined the three years prior to the receipt of the subsidy. See Notice of Proposed Rulemaking, 54 FR 23366, 23380; Section 355.44(b)(6)(i). As a practical matter, this normally means that the Department examines the last three completed fiscal years of the company in question.
In a footnote, respondent states that the Department found that the Government of Saarland's 1989 equity investment in DHS (the post-privatization entity) was not countervailable because it was consistent with commercial considerations and that this was tantamount to a finding that DHS was equityworthy. Therefore, respondent argues, because the test for determining equityworthiness is almost identical to that for determining creditworthiness, there can be no real dispute that DHS was creditworthy.
Unlike the creditworthiness analysis in this remand, the Department's determination with respect to the Government of Saarland's equity investment in DHS was not based on an analysis of DHS's financial health or future prospects. The Department found that the Government of Saarland's equity investment in DHS, the post-privatization entity, was consistent with commercial considerations because other investors made equity infusions at the same time and on the same terms. See Certain Hot Rolled Lead and Bismuth Carbon Steel Products from Germany, 58 FR 6233, 6236 (January 27, 1993). Furthermore, the determination regarding the Government of Saarland's equity investment is not necessarily relevant to the question of whether a commercial bank would have made a loan to Saarstahl, the pre-privatization entity. If pre-privatization Saarstahl had received commercial loans in 1989 which were not guaranteed by the government, respondent's analogy might be appropriate. However, as the record demonstrates, Saarstahl had not been able to obtain commercial loans absent a government guarantee for many years. Finally, we note that a company may be found to be equityworthy but not creditworthy. See, e.g., Certain Carbon Steel Flat-Rolled Products from Argentina, 49 FR 18006, 18023 (April 26, 1984).
Respondent maintains that the Department committed an error in its calculations by not deducting from the subsidy received the annual fee paid by Saarstahl.
We agree and have corrected the error.
For the reasons specified in this remand determination, and in accordance with the Court's instructions, the Department determines that the total estimated net subsidy (including the Worker Assistance Program) for Saarstahl is 18.23 percent ad valorem. Our calculations are attached.
Robert S. LaRussa
Acting Assistant Secretary
for Import Adminstration
Date: June 30, 1997