Creditor Settlement – Case Studies

Creditor Settlement Before the Fact

A client had made the decision to sell his business since he had determined that the amount of capital to continue was prohibitive.  He approached his secured lender and asked that an agreement be put in place whereby he would undertake an orderly “wind down” of the affairs of the business, making a ratable distribution of the proceeds between the secured lender and the unsecured creditors.  The unsecured creditors were informed by us that while payment could continue for a defined period, the debt of the secured creditor would require the majority of payment through its priority lien.  An offer was made to the secured creditors of a settlement at substantially less than face value, but much higher than could be achieved through a bankruptcy petition.  This included several leasing companies who agreed to settle for far less than their balances.  The result of this initiative was the satisfaction in full of the debt of the secured lender, the settlement of all of the creditor debt at a substantial discount and the ability of our client to sell the name and customer base of his company for a stream of royalties that netted him well in excess of $1 million.  This would not have happened if settlement had not been achieved before the fact.

 

Bankruptcy – Case Studies

Bankruptcy as a Positive Tool for Working Capital

A client found itself in the awkward position of having had its secured debt sold to a third party that had subsequently made demand to be paid.  Even though we knew the notes had been sold at a substantial discount, legally the obligation had to be paid at its face value.The new note holder refused to negotiate a settlement and, in fact, caused the assets to be repossessed.  The only solution to forestall this action was to have the client file for protection under the bankruptcy court.  Once the petition was approved, we sought a new loan for the business which was operating as a Debtor-In-Possession (DIP).  This request was approved and we then had the leverage to negotiate a settlement with the note holder for less than 30% of its balance and were able to use the balance to fund the reorganization and successfully re-emerge from bankruptcy.  All of the other creditors including the unsecured creditors, were able to get paid in full and several years later, the client, with whom we continue to work, has paid all but a small portion of its secured debt used to emerge from bankruptcy.

Secured Party Sale – Case Studies

Secured Party sale

A client had “hit the wall” and had run out of options to keep his business alive.  To make matters worse, his lender had demanded that he sell his home (securing his personal guarantee) to satisfy the secured debt.  Recognizing a potential opportunity for the client, we approached the secured lender and requested that instead of using the proceeds from the sale of the house to pay off the note, we asked that the corporate note be “sold” to our client for the amount of outstanding debt.  The effect was making our client the secured lender, since the note and security interest in the assets of the business were transferred by the bank to our client in satisfaction of the balance.  The next step was to deal with a large number of angry and unyielding unsecured creditors.  Using the vehicle of a secured party sale, our client hired an attorney who in turn, notified the creditors of an impending sale of assets and providing them the opportunity to bid on them if they chose to do so.  Our client then identified a non-blood relative to purchase the assets in a bulk sale for the amount for the amount of the note.  The result was the shedding of unsecured debt but the ability of the business to continue and pay these same creditors on a COD basis.  Our client was able to negotiate a management contract with the buyer, not only giving him current compensation, but also the opportunity to re-acquire the business based on the achievement of profitability parameters.

Bank Demands Its Notes

Solution – We were contacted by a company that found itself in an adversarial position with its lender, following a period of two years of poor results.  We met with the company and spoke with the lender to get a sense of the problems.  Typical to many situations where staff has been reduced in a downturn, the company had not provided the bank with accurate or timely financial information.  At a meeting of all parties, we identified several objectives and a near term timetable to achieve them.  The company’s books had to be closed for two years, monthly reports generated, Borrowing Base Certificates completed, and a monthly forecast and cash flow generated.  In the process of helping our client complete these tasks, we also noticed that there had been considerable investment in tooling up for new programs.  All expenses associated with creating these tools and fixtures had been expensed; the expenses could have been capitalized, improving the financial results.

The company’s accountant agreed and nearly $700K of tooling assets were added to the balance sheet.  Providing the bank with timely financial information, together with the improved balance sheet as a result of the capitalization of tooling convinced the lender to enter into a forbearance agreement with the borrower, and also resulted in the lender providing some additional working capital by increasing the cap on the line of credit.

We work hard to improve the flow of information and the exchange of ideas with the lender.  This leads to better working relationships for our clients with their financial partners.

Cancellation of a Major Order Leads to Cash Flow Problems

Challenge – Cancelation of a Major Order Leads to Cash Flow Problems

Solution– A client had been working on a major project for over a year when it was determined that work could not continue unless the customer agreed to additional charges. When the customer declined, our client had to cease work on the project. Tremendous expenses had been incurred and, while some payment had been received, it was not enough to cover the expenses and disruption to the flow of business caused by repeated delays and unfunded rework on this project.

We assisted the client to identify the magnitude of the problem and establish a plan to move forward. We drafted a letter, explaining the situation to all of the key vendors involved with the project. We set aside the amounts due to the vendors for this program and it was paid out over a sixteen month period in equal installments. While not the normal commercial terms, all the vendors appreciated the information and being treated equally with other vendors. All went along with the program, allowing the company the time to earn sufficient profits and cash flow to meet these obligations. Not a single vendor was lost to the company in this process, nor did any vendor demand to be paid differently than the plan.

We have found repeatedly that objective assessment, development of a realistic plan, and active communication of the plan to all concerned parties is the basis of maintaining positive relations during a troubled time period.