Taking the Road Less Traveled: An Experienced Lender Choreographs a Borrower’s Turnaround
When a distressed company approaches a lender for financing, it usually comes down to a black-and-white decision: Will the company be able to repay the loan or not? In most cases, the lender doesn’t become involved in the turnaround of a borrower. But Robert Miller relates a more nuanced story, showing how a lender can take the road less traveled and provide more than financing to restore a failing company.
In business, it’s not uncommon for companies to experience cash flow issues linked to market conditions, declining sales, operational challenges or other complex factors. In most cases, lenders are tolerant of occasional disruptions. When cash flow stress borders on debilitating, many senior lenders rush to toss a company into workout, pursue a turnaround or even plunge into bankruptcy. But with a little creativity, a lot of flexibility and the ability to see beyond losses, a good lender can right the ship before it capsizes.
A recent deal Rosenthal & Rosenthal completed for Prestige Industries is an example of a situation that required a more creative approach. It turned out to be a road filled with twists and turns, but we learned a few important lessons along the way.
Prestige was looking to replace Wells Fargo, its current senior working capital lender. The company had been with the bank for several years, but Wells had recently transferred Prestige to its workout group and instructed the company to find a replacement senior lender.
After Prestige approached us, we quickly learned that finding a new senior lender was not the company’s only issue. Prestige was carrying significant debts with its mezzanine lender and its private equity owner and majority shareholder. With declining sales and a considerable drop in EBITDA, Prestige was no longer able to service its debt and remain in compliance with its senior lender.
Our initial analysis revealed adequate collateral coverage in both the company’s accounts receivable and capital equipment. As one of the premier commercial laundry companies serving the New
York City hospitality industry, many of Prestige’s receivables were from large, established hotel chains. The machinery used for washing, drying, pressing and folding linens for some of the biggest hotels in Manhattan provided extensive fixed assets.
We plowed ahead. Our first objective was to provide additional liquidity to help Prestige stabilize its operations. With a healthier cash flow, it could improve sales and profits and also deal with some neglected CAPEX and maintenance issues. But the company also needed more liquidity to manage larger, more fundamental problems with its capital structure, which clearly had far too much leverage given the significant reduction in EBITDA.
Working in tandem with outside counsel at the Otterbourg law firm, we determined the best course of action was for Rosenthal to support the company’s desire to recapitalize or sell itself via a 363 sale after filing Chapter 11. This scenario was perceived as a win for all parties because:
The senior lender would be able to shed a classified loan.
The mezzanine lender and private equity owner could work out their issues and be well positioned to sell the company.
Rosenthal would have a well-collateralized loan, with positive cash flow on a reduced level of debt — not to mention the full protection of the bankruptcy court to deal with the unsecured creditors and ensure that the subordination issues and priority lien status remained intact and under the court’s jurisdiction.
While negotiations were underway, Rosenthal was able to approve an initial debtor-in-possession (DIP) loan to allow the company to enter Chapter 11 with adequate working capital and enough runway to manage an estimated $1 million in professional fees. Things were moving in the right direction when the subordinated lender issued a “trigger” notice, requiring all parties to act within a stated 150-day standstill period to pursue either a recapitalization or a sale of the company.
With this added limitation, Rosenthal, along with attorneys at Otterbourg and turnaround consultants at Traxi, concluded that a bankruptcy filing would be the best solution for the senior lender and the company. Wells Fargo would provide the initial interim DIP loan, which would last approximately three weeks, and then Rosenthal would step in with a longer-term DIP loan to give the company adequate time to either sell itself or reorganize. Although a three-week timeline was challenging, it proved to be possible.
Along with the required bankruptcy documents, Prestige also filed Rosenthal’s already negotiated and approved loan documents, so the company and the court were assured of Rosenthal’s involvement with and commitment to the deal. At the same time, Traxi stepped in to assist the management team with the day-to-day operations and to oversee customer and supplier relations and cash management for the duration of the bankruptcy process.
Prestige filed for Chapter 11 on January 30, 2017 and, as anticipated, roughly three weeks later Rosenthal repaid the Wells Fargo DIP and replaced the bank as Prestige’s DIP lender. With the financing in place, the management team and Traxi worked diligently to reassure the company’s customers, suppliers and employees that business would continue as usual during this interim period. With Prestige now stable, a question remained. Should the company reorganize or sell in a 363 sale with the protections of court?
Prior to the Chapter 11 filing, Prestige, with the consent of its senior lenders, engaged SSG Advisors to help market the company for sale. Shortly after beginning this process, SSG asked if Rosenthal would be interested in backing the bid of a potential buyer. We had already done our due diligence on Prestige and the collateral, so we agreed to explore this option.
Sunrise Capital, a young and successful private equity firm, approached Rosenthal to request our support of its potential bid. After thorough due diligence on Sunrise — its partners, investors and projections — Rosenthal backed the firm in its ultimately successful bid for Prestige, providing a portion of the purchase price and ongoing working capital.
With a new owner, a fresh capital infusion and old debts extinguished, the company turned its focus to restructuring its management and existing workforce and, most importantly, to convincing new and existing customers that operations would continue uninterrupted and the business would be better than ever. With Sunrise’s expertise, Traxi’s ongoing involvement and Rosenthal’s commitment and vision, the company is not only stabilized but thriving.
In business, there will always be forks in the road and challenges that seem insurmountable. Often, companies must take the road less traveled to reach their destination. As a lender, it’s not always easy to find solutions to tough problems that affect a borrower’s bottom line — or your own. But more often than not, when we push ourselves to try something unconventional or pursue an alternative strategy, everyone benefits.
Robert Miller, Head of Asset-Based Lending, Rosenthal & Rosenthal