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Athird-generation, $20 million meat processing company was struggling in mid-2012.
It had virtually no liquidity and was
overleveraged, cash-flow negative,
and in default with its senior lender.
By any stretch of the imagination, it
looked like bankruptcy was inevitable.
Yet the company didn’t file and not
only survived but has also thrived. A
unique, entirely out-of-court resolution
achieved many of the economic
benefits that a bankruptcy filing would
have offered while allowing the family
owners to maintain substantial equity
and control of operations. That led, in
turn, to a successful turnaround and
ultimately to the owner reacquiring
100 percent of the company’s equity.
The company was founded in 1983
by a 30-year meat industry veteran.
Over the years it had grown its
product line to include more than
50 premium specialty meat products
sold across most of North America.
The company’s troubles dated to
around 2009, when it acquired another
meat company along with a second
processing facility. To accommodate
additional storage and prepare
for planned growth, the company
expanded its recently acquired facility.
However, instead of the steady
growth anticipated by its business
plan, the company encountered
many unanticipated obstacles.
First, the company overspent on the
facility expansion by $1.5 million.
Integrating and scaling up the two
operations led to many operational
inefficiencies. Meat input costs
rose substantially higher than
projected, further squeezing margins
because price increases were hard
to pass on to customers. Finally,
the continuing recession lessened
consumer demand and substantially
reduced projected sales growth.
After several years of declining or
negative profitability, by March 2012
the company found itself with an
overleveraged balance sheet, depleted
liquidity, and in default with its senior
lender. By then overall debt had grown
to $7.2 million, while EBITDA had
fallen to just $729,000, resulting in a
leverage ratio of almost 10 times.
The senior lender held $4.2 million of the
debt in the form of two commercial real
estate loans, a term loan and a revolver.
In addition, there was a $945,000 Small
Business Administration (SBA) 504
second lien loan on the commercial
real estate, $500,000 of SBA 7A loans
on equipment, $460,000 of local
development loans, and $1.1 million of
unsecured loans from private lenders.
EBITDA was clearly inadequate to meet
the $1.3 million of required principal
and interest payments on the debts.
It was only because of a long-term
relationship with a meat vendor that
the company was able to get extended
payment terms, which allowed it to
stretch its limited liquidity. The owner
of the company mortgaged his home
to provide funds to meet expenses and
payroll and to plug the gap between
receipts and disbursements.
With the company in default, the senior
lender moved the loan to its workout
group and in March 2012 required the
company to hire a financial advisor1
and bankruptcy counsel. The company
entered into the first of what was
ultimately three forbearance agreements.
The senior lender was willing to give the
company some time to operate and to
find either additional capital or a buyer.
However, the lender was unwilling
to advance any additional funds.
With a fully drawn revolver, operating
the company only with liquidity
from operations was challenging.
Thus began a journey to either fix
the company and its balance sheet
or file for bankruptcy. The company