Cash Management, Cost and Spending Control
Money makes the world go round, especially in times of trouble. Distressed businesses often find themselves with dwindling cash reserves and a capital structure inconsistent with their scope of operations. And unfortunately, many businesses don’t recognize they have a problem until it erupts into a full-blown crisis. When we enter a crisis situation, typically our first task is to bring clarity and control to the company’s real cash position as well as provide cash flow forecasting and cash management. We engage in tactical planning and negotiation with lenders and vendors to ensure lines of credit remain open and supply chains continue to perform without interruption.
With the near-term cash situation addressed, we concentrate on cost and spending controls to ensure that only essential goods and services are purchased until the company is stable.
Balance Sheet Restructuring
We engage in longer term debt and equity restructuring to make certain that the company’s financial configuration accurately reflects its business situation. It’s not only about money, but until your financial house is in order, it’s hard to think about anything else.
As customers and companies change and markets shift, many companies go through periods of time when their capital structure does not match their business model; in which the the debt they need to service or refinance cannot be served by their existing cash flow. Something has to give, and there are several choices: reduce debt, increase the revenue, or shed some assets.
The interpretation and implementation of such choices, however, can be very complex. How do we achieve the debt reduction? Will our current capital providers serve as allies or enemies? How long will it take? How do we effect the changes while best protecting the company as a going concern? If selling assets, which ones, how, why, to whom, and how we realize the best price in our circumstances? Do we benefit from filing for court protection?
- In one situation, a client was being pressed by its banks to reduce its leverage. The owners did not want to sell assets, and other alternatives would take longer than the banks were willing to wait.
- We looked at their business, and realized that their method of looking at their operations was distorting their position. They looked at lines of business, versus geographical market segments. When we took their data and arranged results by market segment, it was immediately clear that their most profitable markets were ones in which they were both market dominant and their services fully integrated, and obvious, too, that they had unprofitable units that were not in market dominant areas, and not integrated. These business units would, however, be complementary to other companies.
- Once the board recognized this, the sale of the assets less valuable to them was easy to accomplish, as the buyers were obvious and well known. The much debated and dreaded asset sales ended up taking only a month; the debt related to them was paid down, and the balance sheet was back in harmony as earnings actually increased. No investment bankers were needed, nor would they have wanted to be involved.
Special Situations Capital Raising
Sometimes holding on to the assets is mission critical, and finding the funds to allow to that to happen means the difference between life and death. The market for capital has changed radically in the last ten years. Familiar and conventional sources of financing may no longer lend at all, while new specialty lenders lend on collateral once not even imagined. We can often access new sources of debt and equity from sources that make good partners.
- In one situation, Solon was able to use its knowledge of company holdings to sell an asset that had never been seen as marketable before, thus obtaining funds required to keep the company going long enough to effect a prepackaged Chapter 11 plan of reorganization.
- In another, the company had borrowed funds on an unsecured basis and new borrowings were precluded. By filing for Chapter 11 protection, Solon was able to bring new specialty lenders to the table, ready to lend $700 million within days on a secured basis. Operations were thus able to continue, and the original unsecured lenders as well as the new lenders were paid in full.
- In another instance, incumbent lenders were insisting on the fire sale of assets as a condition of further financing inside of Chapter 11. The documents defined success, however, as including either a sale or a financing. Though we lined up a stalking horse buyer, we worked furiously to find a source of financing. We knew a hedge fund with a broken deal and the need to put the related money out quickly, and were able to, within 4 days, present a proposal acceptable to the court and to the banks. The company, in a deep cycle industry, was able to preserve the assets long enough to catch the next positive cycle. All the lenders were paid in full, with quite handsome returns to the private equity firm that had acted so fast.
Transactions in Bankruptcy Court
The notion of a chapter 11 filing is not as scary as it once was, but court supervised proceedings can still seem like a different world. Whether to put a company into a Chapter proceeding or not depends on each situation’s nuances, but the key questions are as always: who benefits, and from what, and does that serve the interests of the parties in position to make the decision? Boiled down to the essential, the use of Chapter 11 to bring new money into a situation not otherwise attractive can be compelling, as can the use of its mechanisms, such as sales under Section 363 of the Bankruptcy Code, which allow sales to proceed on an as is basis. Though Solon often works quietly in out of court matters, the bankruptcy process and its nuances and practitioners are quite familiar to us.
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