Bankruptcy and Turnaround Financing – Critical Points in Choosing a Lender
Insights into Bankruptcy and Turnaround Financing… What These 4 Experts Had to Say
In response to last month’s bankruptcy blog, I spoke to colleagues in the turnaround and bankruptcy industry who shared insights with me. It is always best to surround yourself with experts in the field whose extensive knowledge can help your company when it is going through difficult times.
Jil Mazer -Marino and Tom Slome are trusted colleagues who practice in the area of bankruptcy and creditors’ rights at the Law Firm of Meyer, Suozzi, English & Klein, P.C.
Their insights are invaluable for companies exploring bankruptcy options.
Here are Critical Points in Choosing a Lender:
- Ability to quickly and expertly respond to the needs of the borrower, the court and the other important parties in the case
- Lender sophistication
- Lender’s experience in bankruptcy court
- Lender’s ability to follow through on the financing that they have proposed for the client in bankruptcy.
As mentioned in last month’s blog, our Founder, President and CEO, Harvey Kaminski is a bankruptcy attorney and experienced in the bankruptcy forum. This is highly advantageous when seeking financing for the bankruptcy case. (“DIP financing”) As the points listed above mention, when your lender is experienced in bankruptcy law and has familiarity with the bankruptcy courts, that is a recipe for success.
As Tom explains, “Working with Prestige’s Founder, Harvey, we got to see firsthand the benefit of working with a factor who knew his way around the bankruptcy court. He was able to break down the terms of his factoring program in very simple terms to all parties in the bankruptcy court, enabling the process to move forward quickly. Every day that is spent in court, is expensive for the client, therefore having a financier who is also an experienced bankruptcy attorney creates a tremendous benefit for the client.”
Other Benefits of Working with a Firm Like Prestige are:
- Prestige is a well-known, experienced firm and a respected finance company in bankruptcy court. Therefore the client can minimize delay and expense in getting court approval.
- Prestige can explain their factoring process simply to all parties involved and it has the sophistication and wherewithal to provide the financing required.
Cynthia Romano is a Partner at CR3 Partners, an advisory firm which provides Performance Improvement and Turnaround/Interim Management services for middle market companies nationwide. During the course of our conversation, she shared with me the following nuggets:
Bankruptcy protection is one tool available for use when restructuring a company. There are benefits to restructuring and reorganizing out of court but a Chapter 11 filing (typically used to reorganize a company or sell its assets as a going concern) provides a company runway to operate and reorganize or sell, freed (albeit temporarily) from the constraints of prior claims. As a result, court protection can be beneficial under some of the following scenarios:
- Companies with lawsuits pending or judgements ordered that have been or are likely to be filed – the Chapter 11 will stay (i.e. halt) those claims.
- Companies with complex capital structures and/or many holders of debt where getting a consensual deal done is not possible – the Bankruptcy Code has lower thresholds for approval of a compromise than most debt indentures.
- Companies with contracts to perform that they are unable or unwilling to fulfill or contracts that are needed that the vendor is no longer willing or able to fulfill – in a Chapter 11, the company can assume or reject any contract at its sole discretion, which includes real property leases (particularly valuable for retailers who have filed recently), and, secondarily, damages from rejecting contracts and leases are capped by the Bankruptcy Code.
- Companies needing to be sold or needing to monetize claim laden assets – assets sold through a Chapter 11 process are able to be bought free and clear i.e. the new buyer cannot be held liable or responsible for problems of the past company.
As useful a tool as Chapter 11 protection can be, the benefits of restructuring out of court are worth consideration, particularly for small and middle market firms. Specifically, It is generally much less expensive and faster to reorganize or sell assets out of court due to the cash requirements of a Chapter 11 filing including retainers, professional fees, deposits, and the overall duration of a typical Chapter 11. This is particularly true for small and mid-sized companies. Therefore, there is not a right answer for whether to reorganize or sell in or out of court. Rather, the decision is dependent on a mix of factors particular to the company’s size and situation.
Speaking with my colleague, Mark Podgainy, Managing Director at the Financial Advisory Firm of Getzler Henrich & Associates LLC, I gained insight into topics related to trends in bankruptcy.
One of the Interesting Things that I Learned is that Bankruptcy is Often Affected by the Seasons, Due to the Following Reasons:
- In the third quarter, Financials are reviewed and that is the time when lenders will pull back on loans that are not performing well or clients who have breached financial covenants.
- If the clients are in the consumer space, and they did not have an active summer and third quarter, then they will be seeking advice on filing.
Certain Industries May be Affected As a Whole, Examples Include:
- The oil crash causing bankruptcy filings to rise in the oil and gas industry.
- Weak performance in retail stores are causing many retailers to file for bankruptcy protection as well.
- Healthcare can be another troubled sector, when there are changes to the reimbursement for certain services and that spikes problems for specific sectors in the industry, one recent example is laboratory testing facilities
Economic Factors can Affect Industries As Well:
- When there is a recession and there is a downturn that no one is expecting that can cause problems across the board.
- Additionally, when companies experience accelerated growth – at the same time that there is a working capital squeeze- that would be a reason to file, because they don’t have enough cash supporting that explosive growth.
In deciding whether or not to file, it is important to look at the complete picture: how big is the cash hole, what is the timing of the cash infusion. If you are able to obtain DIP financing, does it make sense to take the money? Will the company be able to get under control? Does the company still have reason to exist in the industry sector that they are in during this point in time?
The most important decision you can make in selecting a finance partner, is SPEED, RESPONSIVENESS and LENDER SOPHISTICATION.
Other important points are the advance rate that a client can obtain from their lender. Interestingly, cost is less of an issue than availability if you are in a tight spot. CASH is the most important thing. If you need to make payroll next week, can your new lender support or not. Like truth in advertising, …is there consistency in the term sheet and the way that the lender is operating and does that follow through to the end? “My experience with Prestige is that their speed and industry knowledge makes them best in class.”