The Bottom Line:
A secured lender was on track to accept a $2 million recovery on its $14 million loan to a computer refurbishing company via a forced liquidation of the company’s assets. As financial advisor to the multi-national company with operations in the U.S. and Mexico, Stapleton Group demonstrated the benefits of a going-concern sale instead, and successfully recovered $7 million for the secured lender. We achieved the net $5 million improved recovery by:
- Demonstrating the viability of a going-concern sale despite previous failed efforts by the company to close a sale.
- Developing good rapport with the company/debtor, resulting in a collaborative relationship with management as we pursued the common goal of a going-concern sale.
- Fixing flawed reporting processes and proactively communicating with the secured lender, providing more time to effect the going-concern sale.
- Overcoming challenges caused by company-owned maquiladoras and cross-border assets.
- Helping with due diligence and helping all parties stay on track during the sale process.
- When the target buyer required a 363 sale, provided the requisite financial reporting for the company’s chapter 11 filing and thereafter, until the sale closed.
The Business Issue:
After operating a profitable laptop computer refurbishment business for many years as a contractor to a major manufacturer/brand, the company decided to grow its core business by expanding into mobile phone refurbishment. The company’s headquarters were in Southern California and its computer refurbishing operations were conducted in company-owned maquiladoras in Mexicali, Mexico. To facilitate the growth plan, it built a new maquiladora in Tijuana, Mexico with financing from the secured lender.
The growth plan failed, resulting in operating losses, poor cash flow and stretched payables. The company’s accounting, reporting and cash management were sub-standard, and its relationship with the secured lender became severely strained.
The secured lender’s options appeared limited because the majority of the company’s $10 million in fixed assets were in Mexico (plants, assembly lines, etc.), resulting in little to no value due to the cost of repatriating the equipment or proceeds from their sale and NAFTA issues.
Genesis of Stapleton’s Engagement:
The company’s secured lender, with a $14 million loan outstanding, insisted that the company retain a financial advisor to improve financial reporting and position the business for sale. The secured lender’s lawyer recommended Stapleton Group due to our experience as a turnaround consultant and experience navigating NAFTA issues.
Obstacles & Stapleton’s Solutions:
- The secured lender did not trust its borrower.
- Stapleton took over communications with the secured lender on behalf of the company.
- Stapleton provided regular reporting to keep the secured lender informed.
- Stapleton developed cash flow projections to help facilitate the secured lender’s decision-making.
- The secured lender expected payment in full on its $14 million loan outstanding.
- Stapleton educated the secured lender on the company’s true financial condition.
- Stapleton demonstrated the likely recovery from a liquidation would be around 20% of the secured lender’s outstanding loan value.
- Stapleton demonstrated that the secured lender could achieve a higher recovery of 50% of its loan outstanding through a sale.
- The company’s plant equipment located in Mexico was governed under NAFTA’s maquiladora program, requiring significant duties and VAT charges if the equipment were to be sold or otherwise exit the program.
- Stapleton educated the secured lender on the NAFTA issue, contributing to the decision to sell the company as a going-concern rather than liquidate.
- Marketing and selling the company before it became completely insolvent.
- Stapleton worked with counsel, the ultimate purchaser and the secured lender to bring a $13 million deal together before the borrower ran out of cash.
- The secured lender received $7 million from the sale, which was $5 million (3.5x) more than it would have recovered through a liquidation.