increased short-term liquidity by tens
of millions of dollars based on improved
advance rates against assets afforded
by financial institutions experienced in
the industry and with the company.
From a legal perspective, the company’s
actions prevented widespread
defaults under its various financing
arrangements, allowed the business
to obtain a clean audit from its
independent public accounting firm,
and established a new covenant
framework with significant flexibility.
One critical aspect of the plan involved
negotiating the new financial covenants.
Banks sometimes fail to account for
the differences between cash and
non-cash expenses and the fact
that proceeds of dispositions match
against secured equipment balloon
payments. They also sometimes fail
to grasp how the conversion from
owned to leased equipment can affect
technical covenant compliance, even
though economic results are materially
unchanged. By explaining those issues
to its new lender and agreeing to specific
contract language, the company was
able to position itself for the future.
Case Study 2:
Following the global financial crisis,
a regional trucking company faced
tight liquidity and financial covenant
violations due to a dramatic drop in
freight volumes. Prior to the crisis,
the company's underlying customer
relationships were sound, and its
margins had been better than average.
However, the company was unable to
cut fixed costs fast enough to keep up
with its covenants and fixed vendor
payments, and it lacked sufficient
stockholders' equity and revolving
credit capacity to make it through
the bottom of the recession.
The company's capital structure included
a senior secured revolving credit facility
collateralized by substantially all assets,
a subordinated term loan secured by a
second lien on substantially all assets,
and a substantial number of equipment
and real estate notes and leases. The
company was in default under the first
and second lien facilities, as well as on
at least one mortgage financing. There
were various cross-defaults as well.
The company believed that it had a
viable turnaround plan if it could raise
adequate liquidity for the near term.
The plan included temporarily deferring
specific capital expenditures for assets
with long lives, reducing personnel and
locations to reflect a smaller revenue
base, and improving the efficiency
of specific operating departments.
To raise liquidity, the company
considered approaching its equipment
financing providers to discuss deferrals
of loan and lease payments. The
company believed a short-term deferral
of payments to achieve a longer-term solution would be beneficial to
all parties. The key was to coordinate
the effort so that all similarly situated
counterparties shared in the risk and
reward. In addition, the company needed
covenant relief from its bank group in
both the short term (to waive violations)
and the long term (to afford runway,
assuming successful negotiation).
As a precursor to obtaining lender
and lessor cooperation, the company
sought an external evaluation and
affirmation of its plan. The company
engaged three types of consultants.
First, it hired an expert in its industry
to validate the operating department
goals, personnel ratios, and certain
other operating plans. Second, a
turnaround/financial consulting firm
was engaged to evaluate the expected
financial results of the plan and to
assist with its presentation to vendors
and vendor negotiations. Third, a legal
team was retained to coordinate the
forbearance, waiver, and amendment
process with numerous counterparties.
Together with the company's specific
knowledge of its own operations, this
approach provided a sound basis for
approaching the lenders and lessors.
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