what to do when the bank says 'no more money

© 2006 Tatum, LLC All rights reserved.

What to do when the Bank says

‘No More Money’Robert Tormey, CPA,CTP

Version 01.01.06What to do when the Bank says 'No More Money?"

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Robert Tormey, CPA, CTP

Partner in the Restructuring Segment of Tatum LLC

Certified Turn Around Professional

Turn Around Management Association

Association of Insolvency and Restructuring Advisors

Assignments

Portfolio companies of private equity groups

First Lien and Second Lien lenders

Private Owners of leveraged or troubled businesses

In short – I usually show up when the bank has said „no‟.

© 2006 Tatum, LLC All rights reserved. Version 01.01.06What to do when the Bank says 'No More Money?"

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What we’ll cover tonight

How the work-out process used to work-

Company‟s options

Lenders‟ options

Legal Considerations

Why it is so different this time-

The Credit Crisis

The Current Recession

The Political and Economic Outlook

Who will survive and how-

What techniques will work-

What opportunities for success may exist-

What to do when the Bank says 'No More Money?" Version 01.01.06© 2006 Tatum, LLC All rights reserved.

4© 2006 Tatum, LLC All rights reserved.

How the Work-Out Process Used to work

Company’s Options

The Bank has said „No‟ – Where do you stand?

Pending Default

Actual Default?

Zone of Insolvency?

Capitalization Alternatives - The Three “R‟s”

Refinance? (Same Lender, Alternate Lender)

Recapitalization? (Change Capital Structure below first lien position)

Reorganization (Chapter 11 – Someone takes a haircut/new equity)

Gather Information Required (financial data collection)

Market and close alternate structure (Legal process).

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Lenders’ OptionsStrategy – Push Company to the Three “R‟s”

“Freeze” advances on Revolving Credit Facility.

Reserve Loan to Company for Regulatory purposes.

Move Company to „Special Assets‟ department

Request Company hire professional advisors.

Support Company in refinancing with new lender.

Sweep Company Bank Accounts to reduce exposure.

Notice Company Customers to pay bank directly.

Sale of Company if stock pledge secures credit.

Foreclose on assets – Liquidation and sale.


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Legal Considerations - Lender

Well Secured Lender

The better secured, the stronger the credit of the borrower

Borrower should be able to refinance easily

Ironically, expect lender to be hawkish – i.e. push the first „R‟

Poorly Secured Lender

Lender will look to other sources of repayment – 2nd „R‟

2nd Lien Position Opportunity– new lender- 2nd „R‟

Ironically, Lender may move very slowly

Personal Guarantees - New Value Added by Owner/Equity „2nd „R‟

Foreclosure and Sale – 3rd „R‟


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Legal Considerations - BorrowerStrong Credit – Top Line Visibility – Earnings – Equity

Refinance with existing lender or alternate lender doable – First „R‟

Weak Credit – Uncertain Top Line – Earnings – No Equity

Refinance Difficult – move to 2nd „R‟s‟ – capital structure

2nd Lien holder/Mezzanine/new equity/new value

Bad Credit – move to 3rd „R‟

Zone of Insolvency

― Owners Fiduciary Obligations owed to lien holders in priority of claims

Options – Reorganization― Reorganization/Sale under Chapter 11

― Liquidation under Chapter 7

― Assignment for Benefit of Creditors


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Why it is so different this time?

The Credit Crisis

Subprime Lending has created losses for Lenders

CDS/CDO‟s (i.e. AIG, Lehmann) have created losses for Lenders

Lenders are now undercapitalized for their asset base

Ability to lend depends on adequate capitalization

Many banks do not know how well or poorly capitalized they are

Banks are struggling to conserve capital

Many Banks must reduce „Assets‟

Reducing Assets means not extending credit to customers

Hence – the Credit Crisis


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The Current Recession

Bankers, having failed to notice the risks in their own business, are

now more alert to the risks in yours!

Bankers feel losses are just beginning

Bankers feel recession has and will affect many segments-

― Housing, Home Improvement, Building Materials,

― Automotive and Related Supply Chain,

― Health Care,

― Consumer Discretionary, Specialty Retail, Restaurants, Consumer Electronics,

― Financial services, Professional services,

― Government Receipts and Expenditures,

― Many other segments.


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The Political and Economic Outlook!

New Government Spending!

Stimulus Package $1 Trillion (Porkulus 1)

Omnibus Spending Bill $400 Billion (Porkulus 2)

New Taxes Promised!

Spread wealth around!

New Regulation!

Healthcare Nationalization!

Carbon Credits and Global Warming - (taxed for exhaling!)

Card Check for Unions - (Unions worked for GM and Ford!)

State and Municipal Solvency Concerns – California, San Diego, Vallejo


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Who will survive and how?

Good Companies that may be with the wrong lender

Determine if your problems are with you or your lender-

Fix the problems with you before approaching any new lender-

― Visibility on Revenue and EBITDA, rationalize owner and management comp!

― Weaknesses in Management Team – It‟s a buyers market for talent!

― Enhance Credit and Collateral – Credit Insurance – „Puts‟ on appraisals, etc.

― Prepare new Lender Package – The Four „M‟s Mgmt, Market, Money, Model!

― Retain professional help in approaching new lenders.

Identify correct source of financing!

― Regional Banks – Foreign Banks not so impacted by subprime/CDS concerns.

― Industrial Credit Companies, Asset Based Lenders, „Hard‟ Money Lenders.

― Consider Sale Leaseback of Real Estate.

― Alternative Lenders – PEGs, Mezz Community, SBIC‟s.


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Who will survive and how?

Poor Companies sold to strategic acquirer-

Deeply in Debt, Flat to Declining Revenue, Low to No EBITDA.

Small or Niche geographic market.

No new product development capability.

― 80% of Current Revenue comprised of products over 3 years old.

Aging or weak management team.

Decent Customer List or target market access.

Local supply chain expertise.

Expect to carry back paper on acquisition.

Look for employment agreement or earn-out consideration.


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What techniques will work? - Operating Techniques

13 Week Cash Flow Discipline – Rolling Forecast Discipline

Tax Minimization

Overpayment of Estimated Taxes – Form 4466

Carry-back of Net Operating Losses to prior years – tax refunds

Minimize Nexus to High Tax States - Avoid California Unitary Tax

Expense Reduction – (see PPC.thomson.com)

Reductions in Force

Plant Rationalization

Landlord negotiations (weak commercial real estate markets)

Customer Initiatives

Credit and Collections, Credit Insurance, Customer Profitability & Rationalization

Demand Visibility, SKU Rationalizations and Inventory Planning

Vendor and Supply Chain Initiatives


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What opportunities for success may exist?

Align with mezzanine/equity sources around a distinct vision.

Buy Poor companies and reduce costs through consolidation.

Work with SAD of Lenders to be acquirers of troubled credits.


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Questions I’m asking. . .

RBT-The Credit Freeze has caused bank workout departments to have few

options to move troubled credits out of the portfolios. I‟m seeing work out

departments. No one eager to foreclose, attempt a sale, sweep accounts.

Endless cycle of keeping the bank informed, 13 week cash flows, no one

really expecting new money and everyone praying visibility improves. I‟ve

had one instance in which the workout guy pretty much told the company

„don‟t call me and I won‟t call you – I‟ve got bigger issue to worry about‟.

What are you seeing?


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. . . and answers I’m getting . . .

A rolling loan gathers no loss. We are seeing some of this.

Henry Owsley, Managing Director, Gordian Group, NYC.


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Bob - I‟m not seeing that -Banks seem to be ignoring realities of

the market and calling defaults and taking aggressive action – I

have a client in bankruptcy owner has new money offered to

buy part of business real estate and equipment at FMV… bank

flipped him off -I have a prospect auto dealer no outstanding

debt except term loan that comes due 4-2 -No defaults bank

has announced they are not renewing their loan …will not

negotiate we are planning a Chapter 11 filing –

Bill Maloney, CTP, Tatum LLC, Tampa, FL


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I think you are both right. Bank decided to Keep Alix Partners in

a company at $200 K per month and keep it on life

support rather than take a PEG friend of mine's offer of $25

million for the company. Bank‟s debt is north of $100 million. It

reminds me of the late 80's when a banker friend of mine at

Bank of Boston was telling me that a former employer of mine

was her worst credit. Six months later it was her best credit,

because it was still paying the interest. My view is that bankers

are doing whatever it takes to keep from getting fired. No one

wants to be a hero without a job.

Bill Cadigan, CTP – Tatum LLC - Philadelphia


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Successfully sold this building supplies and materials company

to out of state strategic acquirer. Company was in workout with

Bank for over one year. Owner in his 70‟s, no real management

depth. Nice customer list though and acquirer wanted a West

Coast sales office. Bank got paid off, owner got out from under

debt, got some cash and a nice earn out.

Tatum Partner, CTP – Los Angeles, California. (confidential)


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Secured additional 2nd lien financing from local private equity

group for this aerospace manufacturing company. Developed

decent financial model and reengineered business processed to

increase profitability and secure price increases from

customers.

Tatum Partner, CTP, - Los Angeles, California. (confidential)


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Successfully refinanced this consumer products and services

company. Marketed to over 20 commercial banks. Received 3

decent proposals, accepted one from strongest bank. Financial

model was critical to success of this effort.

Tatum Partner, CTP, Los Angeles, California (confidential)


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Successfully refinanced this financial services company with

local „hard money‟ factor. Massive clean up of accounting

records necessary before package could be matured, but once

in place, financing was do-able. New financing supported

additional growth with major existing customer, returning

company to profitability within six months.

Tatum Partner, CTP, Los Angeles, California (confidential)


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Bank agreed to amend credit facility and renew for this specialty

publishing company. Insuring the accounts receivable with

credit insurance got us additional collateral cash value we

needed. Banks partners in deal love the Tatum Financial Model.

New Chief Financial Officer has added tremendous value

Tatum Partner, CTP, Los Angeles, California, (confidential)


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Banks continues to give us forbearance. Cash remains tight but

financial and business model is allowing us to survive and find

opportunities for improvement. Equity sponsor not willing to add

new capital at this time. Keep fingers crossed.

Tatum Partner, CTP, Boston, Massachusetts (confidential)


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From what I can tell, they‟ve been pretty focused on larger

cases which has been good for FTI and A&M. We‟re starting to

see work but not at the level expected. But with that said, we

are bringing on new people to support what should be the

beginning of the cycle for more workouts, restructurings and

bankruptcies.

George Blanco

Partner BDO Consulting Los Angeles, CA 90067


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. . . and answers I’m getting . .

Robert - We are seeing various degrees of what you describe

below. Banks are unsure whether to take their losses now or

hold on longer with the hope that the market will stabilize and

the impact of the Fed bailout will provide them with a better

recovery outcome. Workout groups are also overwhelmed with

credits.

Rick

Ricardo S. Chance - Managing Director and Group Head

Special Situations Advisory Group

KPMG Corporate Finance LLC


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Bob, thanks for dinner last week and for your kind thoughts.

Wish I‟d called you a few months ago. Bank foreclosed today

but has asked me to hang around and assist trustee in

collecting from customers. I should be done in a few weeks

here, do you have any thoughts for me?

Controller, Manufacturing Company, Orange Country


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Questions and Discussion

For copies of this presentation email me at

[email protected]

Or call 909-214-2236


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