Article 9 Sale of Insolvent Naval Shipbuilding Subcontractor
Chief Restructuring Officer (CRO), Sellside M&A
The Bottom Line:
A secured lender at risk of losing most of its $5 million loan to a 50-year old naval ship restoration company referred Stapleton Group to serve as CRO of the insolvent company, assess operations, and design and implement a recovery plan. We quickly identified new sources of cash flow and operated the company through its successful Article 9 sale for $2 million, 2x the initial offer received and 4x the projected forced liquidation value of the company’s assets. The successful recovery preserved jobs for certain employees and was achieved in 4 months by:
- Creating demand among the company’s competitors, resulting in competitive auctions for the company’s assets and business as a going-concern.
- Generating new sources of cash flow by leasing idle equipment to subcontractors to complete outstanding contracts using the company’s installed equipment at naval yards.
- Reviewing contracts, conducting forensic accounting and completing requisite compliance activities to identify and collect aged accounts receivable to fund operations.
- Recommending and delivering an Article 9 sale due to its expediency, cost, and resulting clean title for the buyer.
- Providing accurate reporting for, and communicating with, the secured lender.
- Managing various crises and litigation to keep the company afloat until the Article 9 sale closed.
The Business Issue:
The company, a specialty subcontractor on large marine restoration projects, had been sand-blasting, cleaning, preserving and applying protective coatings to the exterior body, equipment, super-structure and interior spaces of naval warships since 1969. It provided similar services on the exteriors of real property for industrial and commercial customers. Its strong reputation for quality and dependability created substantial demand via increasingly large contracts. Lacking sufficient infrastructure and protocols to manage the company’s rapid growth and saddled with a $5 million loan to support operations, the company became insolvent, couldn’t make payroll and got thrown off of jobs.
Genesis of Stapleton’s Engagement:
Stapleton Group was retained by the company when it was down to $100,000 in cash and about to miss payroll. The company’s books and records were in extremely poor condition and management had failed to provide accurate and timely financial statements to its secured lender, which was at risk of losing its $5 million loan.
The company and its lender were negotiating a stipulated receivership. A buyer had been identified, however, it was unwilling to wait through the stipulated receivership process. We recommended an Article 9 sale for its expediency, cost and resulting clean title for the buyer.
Obstacles and Stapleton’s Solutions:
- The company and its secured lender’s relationship was extremely strained.
- Stapleton developed cash flow projections demonstrating the business was not viable, facilitating the secured lender’s decision-making process.
- Stapleton proactively communicated with the secured lender, providing timely and accurate reporting.
- Stapleton managed the secured lender’s recovery expectations by explaining the depth of insolvency and providing an accounting of the company’s depreciated assets, which had an estimated liquidation value of $500,000 to $800,000.
- The Company, on the verge of missing its weekly payroll obligations, was insolvent:
- Stapleton worked with management to aggregate the company’s assets, understand the state of its receivables and payables, and manage its cash flow.
- Stapleton created a revenue stream by leasing in-place equipment to new subcontractors, minimizing interruptions and delays for general contractors and customers and preserving the company’s cash flow through the going-concern sale process.
- Stapleton worked with customers to resolve compliance issues and collect outstanding accounts receivables.
- The Company’s industry and services provided were unique, resulting in uncertainty as to asset valuations and overall recovery:
- Stapleton and the Company engaged the Company’s customers and direct competitors to advertise a bulk sale of the Company’s assets.
- After weeks of advertising and bidding, Stapleton and the Company obtained an offer for more than $2 million (compared to the liquidation value of $500,000 to $800,000) and closed a deal with the buyer.
- The successful Article 9 sale exceeded expectations for the secured lender. For the buyer, the Article 9 sale resulted in free-and-clear title to the assets and provided immediate market share, and facilitated continuing employment for certain employees.