Happy Thanksgiving

 

As we begin the 2022 holiday season, all of us at Revitalization Partners want to wish the very Happiest Thanksgiving to our clients, partners and to those of you that follow and comment on our semiweekly blogs.

We are thankful for the incredible team at RP and those of you at companies that work with us to continue to improve both our service offerings and our informational writing. To those of you on our mailing list and who follow us on LinkedIn, thank you for your continued support and your continued comments. A very Happy Thanksgiving to you and your families.

Best,

Al & Bill

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Tales From the Receivership Trail #2

 

Revitalization Partners (RP) continues to see an increase in the number of inquiries and activity related to receiverships. 

We thought we would share another story as part of our ongoing series “Tales from the Receivership Trail” reflecting our experience serving as court-appointed receivers.

RP was referred to a company that owned and operated over thirty radio stations in Washington, Oregon, Idaho and Alaska.

The company had taken on significant debt to finance multiple acquisitions related to building a regionally based radio station portfolio.

 

INCREASED DEBT & DIMINISHING CASH FLOW …

Subsequent to making these acquisitions, the economy experienced a downturn and the company’s revenue declined.

While the company was generating marginal cash flow, it was not nearly sufficient to make the scheduled debt payments when due.

Over the course of a number of months, the lenders became concerned about the delay in repayments and were attempting to force the company to sell off its assets and self-liquidate.

 

ASSIGNMENT FOR THE BENEFIT OF CREDITORS …

After meeting with the board of directors and discussing options to move forward, the board of directors decided to execute an Assignment for the Benefit of Creditors and asked RP to serve as the General Receiver subsequent to court approval.

RP immediately took charge of the company and determined that it was feasible for the company to go forward as an operating company and that operations could be improved to a level that would generate additional cash flow.

RP developed and implemented a plan to improve operations and also to reduce the cost of operating the business. Additionally, RP put in place an individual to serve as the general manager who would report to RP during the receivership process.

 

UNIQUE ASPECTS OF A RADIO BUSINESS …

There were several unique aspects of operating radio stations, one of which related to managing the Federal Communications Commission (FCC) radio station licenses.

The FCC rules required that the licenses had to be placed in the name of RP, given that the assets, including the FCC licenses, had been assigned to the receiver.

As part of this process, the principals of RP involved in the receivership had to be subjected to FCC background checks prior to having the licenses transferred to them. RP took ownership of the FCC licenses as part of the process and held them pending a sale of the assets of the estate.

 

ONCE OPERATIONS STABILIZED …

Once RP stabilized the operations of the company, RP began researching alternatives to sell the radio stations as a group or in segments.

After exploring options to market the radio stations, RP decided to group the radio stations into geographic markets, instead of selling them individually.

We were told that the radio industry typically hires a broker to market the radio stations and sells them individually to whomever is the highest bidder.

We evaluated this option, but ultimately elected to market the radio stations in a different way.

 

PROFITABLE vs. UNPROFITABLE STATIONS …

The issue was that on balance some radio stations are very profitable due to ability to sell advertising because of higher ratings, while a number are not as profitable or even losing money.

Using the standard marketing approach, the higher-rated and most profitable radio stations would be sold first, and the least desirable radio stations would be sold at a substantially lower value, if at all.

We decided it would be preferable to sell radio stations based on those included in a particular market. The radio station portfolio included six different markets containing a mix of types of format and levels of profitability.

 

OUR NON-TRADITIONAL APPROACH …

Instead of hiring one broker to market a group of radio stations, we established bidding procedures that allowed for accepting bids for each market. All brokers were allowed to submit bids for a market, with the concept that the broker representing the winning bidder would receive an agreed-upon commission for the sale.

RP would then identify the best and highest bidder for each market, negotiate the final price and details of the sale, and subsequently submit it to the court for approval.

While this was not the accepted industry practice, we believed that this approach would provide a higher value for the creditors.

While a number of brokers initially expressed concern with this process, ultimately, they all agreed to participate.

Over a period of several months, RP received offers for all of the markets that had been identified and after a series of negotiations and court approval, they were sold to the best and highest bidder.

 

THE ULTIMATE OUTCOME …

The ultimate outcome was that the secured lender was paid the majority of the funds loaned, while they elected to sell a portion of their loan to a station operator who was then able to credit bid for the stations in his area.

The main takeaway of this story is that operating a company as a going concern typically provides a higher return to the creditors and enhances the value of the assets in a subsequent sale. In addition, it’s vitally important to evaluate all available options to maximize the value of the assets for sale and not just accept a standard industry approach without challenging the logic behind it.

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Are Lenders Acting Fast Enough to Mitigate Risk?

 

A recent survey conducted by SRS Acquiom reveals that lenders are becoming increasingly concerned about the impact of higher interest rates on their portfolios.

The survey included investment banks, law firms, bank and non-bank lenders and was completed in late September.

The survey was conducted to gauge the participants’ views on the impact of the five interest rate increases made by the Federal Reserve in 2022, on the economy, lenders’ loan activity and their portfolios.

 

SOME KEY TAKEAWAYS …

Some of the key takeaways from the survey include:

  • At least one-third of the respondents indicate that more debt facilities are becoming distressed as a result of interest rate increases
  • The Federal Reserve’s actions have also increased the risk profile of many debt facilities resulting in nearly 60% of respondents finding it more difficult to assess risk
  • One-third of respondents (33%) indicate that they have some, but not many, credit facilities that require loan restructuring.  Almost a quarter (24%) state that some loans in their portfolio require restructuring review
  • Lenders are exploring a wide array of options with their borrowers to avoid bankruptcy filings, with most (69%) looking at multiple approaches including covenant revisions, more flexibility in payment options, rate adjustments and more

 

PAST VS. CURRENT PERFORMANCE …

While lenders are becoming increasingly concerned about the potential for rising loan losses, there is a risk that lenders are not acting fast enough to mitigate current risk.

The main concern is that lenders have a view of their borrower’s performance based on past financial results. Lenders typically receive borrower’s financial statements on a monthly or quarterly basis.

This provides a financial snapshot of their past performance, however, it does not reflect current or future performance.

With the pace and size of the Fed’s interest rate increases, along with the anticipation of likely additional rate increases to come, there is no question that the negative impact will only accelerate and impact future earnings.

 

 

SOME BETTER INDICATORS …

In order to get a better handle on their borrower’s performance, lenders should ask for financial projections for not only the income statement, but also for the balance sheet and cash-flow statements.

Some lenders receive annual financial projections at the beginning of each year, however, in the current environment, it’s extremely important to discuss the borrower’s performance with management on a quarterly basis.

Updated projections should also be requested frequently for companies that are starting to show signs of stress.  If lenders are not receiving financial projections, they should start requesting them at least for companies that are showing year-over-year declines.

 

3rd PARTY PROFESSIONALS …

Lenders can use these projections to track current performance compared to what the borrower had anticipated and use them as a basis for a frank conversation about what is being done to improve performance.

Lenders should understand that borrowers tend to put a positive spin on the future regardless of what the numbers suggest.

Lenders should be very concerned about a borrower’s response that suggests that business will improve soon.

This typically indicates that management is not taking the operational problems seriously enough and the lenders should dig deeper.

If the borrower does not provide adequate answers consistently, the lender should consider bringing in a third-party professional to help them assess the situation.

 

A PROACTIVE APPROACH IS BEST …

The lender’s attorneys can also be helpful in providing advice. Attorneys are typically involved in creating loan documentation as well as preparing forbearance agreements when borrowers violate their financial covenants. Attorneys can be helpful in suggesting that lenders have the right to request financial projections in the initial loan documents.

If the attorney is asked to prepare a forbearance agreement, particularly if there is a history of multiple forbearance agreements, they can provide insight into what the lenders might do in the future to mitigate risk if future covenant violations continue.

Now is the time for lenders to be more cautious as interest rates increase and the high rate of inflation continues to take its toll on companies.

Taking a proactive approach in dealing with potential risk will help mitigate future loan losses and allow the lenders to retain borrowers instead of asking them to find a new lender.

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Tales From the Receivership Trail

 

There are many current negative economic indicators that would suggest that in the near future there likely will be an increasing number of distressed companies.

Particularly, as the Central Bank appears to be ready to continue to increase interest rates until the current surge in inflation subsides.

These among other factors will most likely result in an increasing number of Receiverships either through Assignment for the Benefit of Creditors, or Receiverships forced by third parties, by lenders or other creditors.

Revitalization Partners (RP) has certainly seen an increase of late, in the number of inquiries and activity related to receiverships, so we thought we would share a story periodically based upon our experience serving as court-appointed receivers.

 

CONSISTENT CASH FLOW ISSUES …

RP was engaged by an internationally based secured lender to work with one of their borrowers that was experiencing consistent cash flow issues and had borrowings on their line of credit that was maxed at their credit line limit.

We met with the borrower and conducted a thorough analysis of their cash flow situation.

It became apparent after completing the analysis, that the owner of the business was making loans to himself by drawing down on the bank credit line.

Upon finding this issue, we confronted the owner and he confirmed that he was in fact initiating those loans and that he felt it was appropriate.

We immediately contacted the lender and advised them of the situation and recommended that they initiate an emergency receivership to allow a neutral third party to take control of the company and its assets.

They agreed with our recommendation and asked RP to serve as the receiver and to further investigate our findings of potential fraud.

 

CASH FLOW POSITIVE IN A FEW MONTHS …

The receivership was approved by the court and RP immediately took control of the business. The objective was to investigate our initial findings and to quantify the amount of possible fraud that took place. The owner was immediately terminated.

We took control of the operations of the business and worked with the management team to streamline operations, reduce inventory and improve the operating cash flow of the business.

We were able to accomplish the goal of improving cash flow to a level where the company was cash flow positive within a period of several months. We also identified a member of the management team that had the ability to manage operations and moved them into a general manager position, reporting to the receiver.

We were able to work with the new general manager and make further improvements to the business.

 

MILLIONS IN FRAUDULENT LOANS …

Concurrent with our work to improve cash flow, we launched an investigation into the scope of the alleged fraud and found that the former owner had in fact taken millions in undocumented loans from the company.

In conducting further research, we learned that the former owner had used the funds to upgrade his residence, purchase cars, boats, and had made an investment in an illegal business operation.

All while having cut wages for his employees to “save money to preserve the business”.

After documenting this information, we conveyed it to the lender to determine what action they would like to pursue.

 

A GOING CONCERN …

After operating the business at a profitable level for about a year, RP decided to sell the assets of the business as a going concern.

We marketed the assets of the company through a number of channels, including businesses that we had prior relationships with from past engagements.

After marketing the business for several months, we identified a company we had a past relationship with, as the best and highest bidder.

They were in the same industry and wanted to expand their operations to the west coast and Hawaii. The sole issue delaying the sale was that the company in receivership had a union and the purchaser would not allow a union in any of their divisions.

After negotiating a financial and claim arrangement with the union, we believed that we had a transaction that we felt was in the best interest of the creditors and closed the transaction at a price well above liquidation value.

As part of the process, we were able to pay the secured lender in full and return some portion of the funds to the unsecured creditors.

After working through this complicated process, we were able to negotiate the sale to the satisfaction of the secured lender, the union, and the employees of the company while selling the assets of the company at a going concern value and did so at a level that maximized the value of the estate for the creditors.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Maximizing Value in a Court – Appointed Receivership

 

Given the current business climate, particularly in light of recent negative economic indicators, there is little question that more businesses will be showing signs of distress.

For example, the US business activity gauge contracted for the third consecutive month, according to an S&P index, as a result of high inflation and increasing interest rates.

Loan default rates have also more than doubled since the beginning of the year. Furthermore, US bankruptcies are forecasted to increase over 50% by the second quarter of 2023 compared to the prior year according to Trading Economics.

 

NO COMPANY IS IMMUNE …

It’s unsurprising then, based on the above data, that many businesses have been unable to cope with the rapid increase in inflation, rising interest rates and a slowdown in demand for their services or products.

No company is immune from these factors and their ability to cope with such challenges is typically hampered by management’s inability to deal with them in a timely fashion.

This inaction ultimately results in a rapid decline in revenue and cash flow and frequently leads to the business becoming insolvent.

 

ONLY A FEW CHOICES …

When businesses become insolvent, they have only a few choices to deal with the problem. The most frequent thing we hear in these circumstances is that “we will just file for bankruptcy and reorganize the business”.

Once management has contacted an insolvency attorney, they often find this option is either not a viable solution due to the lack of resources to pay professional fees, and/or they don’t have a realistic plan to generate enough cash to pay back their creditors.

The State of Washington laws provide for an alternative by way of a court-ordered “Receivership” or an “Assignment for the Benefit of Creditors”.  In this situation, a neutral third-party professional steps into the shoes of a business-owner and manages the process in a way that maximizes the value of the assets for the benefit of its creditors.

The “receiver” is considered to be an officer of the court and manages the process based on the powers they receive as outlined in the Washington State Receivership Act.

 

A BETTER ALTERNATIVE …

There is typically a belief that the receiver’s job is to rapidly wind down the business and sell the company’s physical assets at an auction. While this is a possible solution in some situations, it does not always provide the best return for the creditors or for the stakeholders.

There is usually a better alternative, where the receiver operates the business as a going concern and eventually sells the assets of an operating business to the highest bidder.

As part of this process, the receiver rapidly streamlines the business and optimizes cash flow, with the goal of generating enough free cash flow to pay all expenses including the expense of the receivership.

In many situations, the amount of cash generated can exceed the expenses and as a result the receiver actually improves the value of the estate by increasing cash balances.

 

ANOTHER SIGNIFICANT BENEFIT …

Another significant benefit of operating the company in a receivership, is to leverage the receivership statutes in a way that enables the receiver to collect cash that might not have been collectable otherwise.

For example, the receiver can compel collection of past due accounts receivable or payments on construction contracts, regardless of outstanding liens or other encumbrances.

The receiver has the support of the receivership statutes, their legal representatives and the court to compel these payments, when otherwise these amounts might not have been collected. These actions also increase the value of the estate by adding to the cash balances

 

A GOING CONCERN VALUE …

Selling the business as a going concern benefits the receivership estate by generating more cash than would be achieved by outright liquidating the assets of the business.

In these situations, the assets are valued based on their use to the individual buyers, as a package that generates ongoing cash and therefore has more value.

One additional benefit is that employees of the company are retained by the receiver and typically end up being employed by the company that purchases the assets subsequent to the sale of the business.

Another benefit is that the creditors of the business typically continue to supply goods and services to the receiver and often continue to sell to the company’s new owners.

 

OVER 30 CASES …

Since 2009, Revitalization Partners has served as a receiver in over 30 cases in Washington and Oregon.

During those proceedings, we have typically sold assets of the company as a going concern and have significantly maximized the value of those assets at a value in excess of what would have resulted from a liquidation of the assets of a non-operating company.

We have also gained valuable experience in managing the affairs of the estate in a way that increases the value to the creditors and stakeholders.

When companies, lenders and attorneys look at options to deal with insolvent companies, it is important to look at all potential possibilities.

When considering receivership as an option, make sure to talk to professionals who have the experience in maximizing the value of assets for all stakeholders.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.