The Bottom Line:
As CRO of an illiquid specialty lender, Stapleton Group achieved a full recovery for the company’s secured lender and a partial recovery for its subordinated creditors. Highlights of Stapleton’s successful strategic plan included:
- Renegotiated the bank’s forbearance agreement;
- Resolved litigation between the bank and subordinated creditors;
- Sold the company in a competitive process (asset sale, net of aged receivables);
- Designed and implementing a plan to collect $30MM in aged receivables and $20MM in charge offs; and
- Established a capital distribution plan for the subordinated creditors.
The Business Issue:
The 20-year-old company buys and services auto loans from dealerships. It was capitalized with senior bank debt and subordinated notes held by various investors. The company’s liquidity deteriorated after it loosened its credit and its loss ratio doubled. However, the depth of its cash flow challenges were masked by incremental subordinated notes funded during its performance slide.
Optimizing Cash Flow:
By the time Stapleton was retained as CRO, the company’s bank had lost confidence in its CEO and CFO. The company had breached its debt service coverage ratio a few months earlier and had ceased payments on its subordinated notes. Complicating matters, certain subordinated noteholders were in litigation with the bank over priority.
We quickly took control of the company and:
- Paid back the bank loan:
- Our financial forecasting demonstrated we could operate the company on 12% of cash flow from operations by reducing headcount and moving to a less expensive office.
- Renegotiated the bank’s forbearance agreement, applying excess cash flow to pay down the bank loan.
- Repaid the bank loan in full within 18 months of our engagement with proceeds from portfolio collections.
- Optimized cash flow:
- Collaborated with company management to establish an aggressive collections strategy for dated receivables.
- Implemented an incentive compensation package to retain key personnel to service outstanding loans and collect aged receivables.
- Collected over $800,000 to date from A/R aged 60 days or more, charged off loans, repossessions and liquidations (ongoing).
- Sold the remaining portfolio once it was too small to manage cost effectively.
- Sold the company in a competitive process:
- Without a strong CEO and CFO and source of funding, the company was not sustainable as a standalone going-concern. However, its strong market reputation and current-pay portfolio made it attractive to competitors.
- Offered the company for sale; negotiated aggressively with prospective buyers, driving up bids by demonstrating the portfolio’s value.
- Closed the sale to a competitor, generating sufficient funds to achieve a recovery for the subordinated noteholders.
- Achieved a recovery for the subordinated noteholders:
- The company’s CEO and CFO, who were investors in the business, each owed the company $1.8MM. Negotiated settlement agreements that will return 25% – 75% of their notes outstanding.
- Assessed the priority of liens held by certain subordinated noteholders, interest paid to date, and principal outstanding, then established a distribution plan.