House of Cards:  The Collapse of Demand Electric

Fueled by a high octane credit line, Demand Electric was a bright, soaring star among St. Louis specialty contractors. But when the credit ran out, Demand came crashing back to earth.

Dennis Daugherty, formerly a project manager at Guarantee Electrical Company, started Demand Electric in August 2003 with six employees. In an industry where it is rare for companies to more than double in size in five years, Demand Electric grew almost 20-fold in that time, reporting revenues of $22 million for 2007 and employing over 100 workers right before the company’s sudden collapse in August 2008.  Industry watchers described the company’s growth as “astronomical” or “extraordinary.” Demand’s growth was so rapid that Demand made the St. Louis Business Journal’s 2008 list of the 25 fastest growing private companies in St. Louis.

CNR has pieced together one version of Demand Electrics sudden ascent and subsequent crash from sources familiar with the company, all of whom demanded anonymity. The principals of the story – Dave Daugherty, his bank, and the leaders of Local 1 of the IBEW (International Brotherhood of Electrical Workers) – were unavailable for comment, as they had all agreed not to talk about the company.

By all accounts Daugherty was a go-getter and a risk-taker. He had a new vision of how to operate a commercial contracting business in St. Louis, a vision born of watching highly leveraged companies in other industry sectors, and he worked hard to make it a reality. He also was outspokenly critical of what he saw as the timid or conservative business practices of the local construction industry.

What made Daugherty so outstanding, however, was not so much his attitude, as the confluence of his attitude with a credit bubble that allowed him to put his ideas into practice using other people’s money. New contractors typically have to put up everything they own in order to get a line of credit that isn’t worth much more than their assets. Contractors like to say, with just a bit of exaggeration, that banks aren’t lending them any money that the contractors don’t already have. The failure rate for new companies is quite high and lenders generally want to make sure that there are sufficient physical assets pledged to the loan that they can recover their money if a business fails. Similarly, as contractors become established, they generally grow slowly because lenders still want to make sure there are sufficient assets pledged to cover the loan if the business fails. In effect, lenders are turning a contractor’s fixed assets into cash so he can operate.

Daugherty, however, found a banker during the inflationary period of the credit bubble willing to lend him much more than he was worth so that he could grow his business. That lender was The Business Bank of St. Louis. The result was that Demand Electric was incredibly leveraged with debt — observers say uniquely so.

Daugherty used debt to fuel Demand’s growth. His salesmanship convinced owners and general contractors to give him opportunities, but debt allowed him to take advantage of them. His growth was so rapid that income from completed jobs was not enough to fund new work. He was relying on his credit line to buy supplies and meet his ever expanding payroll.

Earlier this year, Demand Electric reported that revenues in 2007 reached $22 million. Times, however, were changing, and Demand Electric seemed unprepared for the backlash in the credit markets following the collapse of speculative mortgage lending. Federal bank examiners began telling banks to reduce their exposure in real estate and construction. Whether that is what prompted The Business Bank to take another look at Demand Electric’s account, we don’t know. In any event, the bank did look again at Demand credit line and its collateral, and did not like what it saw.

Some sources familiar with Demand Electric blame The Business Bank for Demand’s sudden demise. They say the bank’s decision in August 2008 to deny Daugherty access to the remaining money in his line of credit is what did him in.

But Demand was in trouble before that decision. A month before, Demand Electric’s landlord had filed suit to evict the company from its offices at 1846 Craig Park Ct. for nonpayment of rent. The first vendor lawsuit against Demand Electric was filed in July, too.

When The Business Bank told Daugherty that they were reducing his line of credit by one-third to the amount he had already borrowed, he reportedly told the bank that he needed the additional credit to meet payroll, and that he was relying on that line of credit exclusively for the capital for the jobs he had undertaken, sources said. That is when the bank became seriously concerned. They declined to give Daugherty any additional money. Daugherty reportedly shopped around for another loan, but could not find a willing lender. The following Monday The Business Bank took control of his office and all of his business records. In the meantime, he had laid-off all of his workers, because he lacked any ability to pay them.

“It was one of the most disruptive closings the industry has ever experienced,” one source said. St. Louis Community College’s district-wide science lab renovation program was one of the building programs affected by Demand’s collapse. The construction manager, S.M. Wilson & Co., was able to get Aschinger Electric on board to replace Demand in short order. Some of the other affected projects involved Peruque Station in St. Charles County, Duke Realty’s Maryville Centre, Charter Development Group, and Christian Hospital Northeast.

The bank’s takeover set in motion an avalanche of work for lawyers. IBEW Local 1 and NECA-St. Louis filed suit in federal court against Demand Electric, The Business Bank of St. Louis, and Providence Counseling, for contributions Demand Electric owed to electrical industry trust funds.  French-Gerleman Electric filed a mechanic’s lien; Graybar and Colorado Electric Supply each sued Demand for breach of contract. Liebert, Western Extralite, Rexel Electric Supply, Butler Supply Co., and Warren Sign Co. all followed with their own liens.

Demand Electric’s sudden collapse was met almost with glee in some quarters. “A lot of people were jealous of Daugherty,” one source said. “The extraordinary think was that he pulled it off for as long as he did.”

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