Receivership – Case Studies

Receivership as a Successful Tool

Our client found itself under a substantial amount of debt with its secured creditor. Over 30% of all operating costs were going to pay for interest expense and the debt load was crushing. The “Line Lender” transferred the loan to the bank’s workout department. We became an advocate with the workout officer and negotiated a substantial reduction of the balance by convincing him to consider an amount that was comparable to the liquidation value of the assets securing the note(s) including the cost of collection. In a situation comparable to that in Problem/Solution #7, the lender was convinced to “sell” the note for a mutually agreed upon value to a member of the management group but someone unrelated to the ownership structure. This individual then became the secured lender and the old company was thrown into a receivership. The assets were then sold to the highest bidder by the receiver through the process of a “credit bid”. Since the note was well in excess of any single obligation then remaining, the “secured lender” was able to acquire the assets at a substantial discount and in the process, eliminated all of the unsecured creditors. Even though the business had to then pay for goods and services on a COD basis after the transaction was concluded, an investment of less than 10% of the overall liabilities, enabled the business to regain its footing and become competitive in a challenging economy and competitive marketplace.

Tax Advantaged Recapitalization – Case Studies

How to use the vehicle of a sale/leaseback to undergo a tax advantaged recapitalization

We had a client that prior to our involvement, had suffered major losses from the departure of three major accounts that had taken their business overseas.  The owner had advanced large sums to keep the business going, since no bank was willing to take a chance on the company after three years of losses and an overleveraged and undercapitalized financial condition.  Since no lender was in the picture, we advised him to consider selling some of the company’s production equipment to him and leasing it back to the company, particularly since the company had rebounded from its earlier difficulties and was now making profits.  The result was an arm’s length sale at the appraised value of the equipment which was significantly higher than its depreciated book value.  A capital gain was incurred but that tax was offset by the cumulative losses of the business.  The owner entered into a sale/leaseback contract with the company and for the first time in three years, was able to receive some compensation in the form of lease payments, the majority of which were, in turn, shielded from tax because of the increased depreciation of the equipment he purchased in exchange for his original debt to the company.  The result was a tax advantaged recapitalization of the company and the road to fiscal health.


Negotiated Settlements – Case Studies

Negotiated Settlements

Three and one half years ago, we met members of a family owned business in severe financial distress, caused by the downturn in the economy and the carrying of heavy debt.  Bankruptcy was not an option.  The business had earlier moved to a new location in a like kind exchange of property.  It had also taken on a substantial mortgage despite the full knowledge of the bank of the existence of environmental contamination.  It has purchased a similar business and owed to the sellers a high interest bearing obligation that was then in default.  Add to this a substantial amount of unsecured debt that was way past normal credit terms and it was no wonder that the family felt discouraged and hopeless.

We analyzed the components of the situation and determined the critical piece was the satisfaction of the secured debt to the lender.  Taking advantage of an acknowledged mistake of advancing against contaminated property, we were able to achieve a settlement on a renegotiated mortgage that was both affordable and reduced overall debt by $900,000.  Next, we were able to negotiate a settlement with the junior secured creditor representing the seller of a business purchased earlier.  To effect this, we secured a commitment from a quasi-public finance agency that provided a additional amount for the first mortgage lender and sufficient funds for the negotiated settlement of the balance of the junior creditor as well as some critical working capital which was partially used to negotiate some long outstanding unsecured debt.  The net effect of this extended effort was the elimination of over $1.5 million of debt, the restructure of the remaining bank debt on affordable terms and the embarkation on a slow progression back to financial stability.  Recently, a competitor contracted with our client to produce on a private label basis, all of its output.  The competitor provided all of the requisite equipment for production and this current year, revenue will more than double, providing for meaningful economies of scale and the potential for significant profitability.

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.