River Road: Case Studies
Raising Capital through Divesting Non-core Business
An underperforming company needed to raise capital to address near-term debt maturities.
After selling the bulk of the assets for over $100 million, the remaining $33 million in assets had collateral valued at approximately $24 million, predominantly in real estate located in Texas, Oklahoma, Colorado and New Mexico. To complicate matters further both Oklahoma and Colorado are "judicial foreclosure" states possibly requiring an extended time period to effect foreclosure.
Mr. Hundley was responsible for the sale or liquidation of the finance subsidiary and learned that the collateral package included stock powers of the owners, which were primarily management and private equity investors. To expedite the foreclosure process the principal led the action to exercise the rights under the stock powers and named a new Board of Directors (led by Mr. Hundley). From this point the Board led the Company into a Bankruptcy proceeding on a "Rocket Docket."
The Bankruptcy filings resulted in a court-approved foreclosure on the collateral assets in less than 80 days, avoiding the judicial foreclosure process that could have delayed collection on the assets. During this time, Mr. Hundley led the management team in a review of the assets and operations at each location to limit any asset value diminishment during the process.
Loan Recovery--Struggling Leverage Buyout
The Receiver for the lead bank in a failed LBO needed a strategy to maximize its recovery as quickly as possible. The Debtor was suffering from below forecast sales and margins when commodity plastics prices increased, causing the Debtor to break covenants and exhaust borrowing base availability.
Working for the Receiver, Mr. Hundley exercised blockage rights on payments to the subordinated debt and initiated negotiations with management, the buy-out sponsors, and sub-debt to establish stability and protect the Lender’s interest. To confront initial skepticism from management and the sponsor, Mr. Hundley prepared persuasive analysis on the financial and operating problems.
The sponsors replaced the senior management of the Debtor; the sub-debt lender increased their investment and purchased the senior debt.
Improving Margins for Healthcare Services Company
The company was experiencing 20+% growth, down from 30+% the prior year. Despite the strong revenue growth, the Company was not experiencing profit growth.
Mr. Hundley identified cost saving measures, determined the break-even point and ROI of the Company’s investment in Sales and Marketing and initiated an upgrade of financial reporting systems to provide easier access to needed information. The cost saving measures and system improvements were implemented and the Sales and Marketing expenses were refocused.
The changes created efficiencies in Finance, Sales and Marketing resulting in improved profitability without sacrificing growth.
Financial Restructuring of NYSE Services Company
A NYSE services company had seen its share price decrease by 91% to $3.50 per share in the previous 14 months and was facing a difficult financing market with nearly $2 billion in debt scheduled to mature in the coming two years, a syndicate of banks that was transitioning the account to their workout groups, bond prices at distressed debt levels and a "Negative Outlook" from both major credit rating agencies. In addition, the company’s largest competitor had filed bankruptcy six months earlier.
Mr. Hundley led the development of the refinancing plan that included asset sales, debt payments and refinancing the maturing debt through debt exchanges, 3(a)9 exchanges, bond repurchases and rolling over and restructuring the credit facility. Mr. Hundley was responsible for the preparation of the income statement and cash flow budgets used for Board deliberations including the earnings guidance to equity markets as well as the financial plan assessment with auditors pertaining to the going-concern opinion. Mr. Hundley led a road show team for the issuance of $345 million in securities.
These activities helped reduce debt and reestablish the company’s credibility in the capital markets, enabling improvement in the stock price leading to the issuance of convertible debt.
Executive Coaching Assignment
A talented executive developed credibility problems with other executives and had lost the confidence of a key member of the executive team.
Mr. Hundley explained the situation to the individual and counseled him to conceive his explanations from the listener’s point of view as well as improve his preparation for key presentations and discussions. In addition, he adjusted his communication style with others to include providing greater detail in executive discussions and demonstrating his knowledge more convincingly.
The executive accepted the criticism and took the advice offered. After several months of changed behavior the executive had built his credibility and become a trusted part of the executive team.
Acquisition Integration and Evaluation
A large financial sponsor acquired an $800 million international chemical business and encountered systems and reporting issues after an unsuccessful effort to integrate Finance into an existing portfolio company. The Company’s ERP system could not generate accurate financial statements that could form the basis of the evaluation process. The system maintained accurate product volumes and prices and therefore revenue numbers. However, the expense recognition was inaccurate. In addition, currency exchange rates were not adequately addressed in the system. Mr. Hundley was engaged to improve the business management and reporting with the key objective to evaluate company performance relative to the initial financial plan, which was not possible given the condition of the systems. The engagement started seven months after the acquisition closed.
Given the large amount of debt borrowed to finance the acquisition, Mr. Hundley focused on getting an accurate estimate of cash flow. This was achieved using the worldwide bank accounts and resources from the sister company’s treasury group. The deposits and withdrawals were analyzed to generate a cash basis income statement from which certain known, non-recurring transactions were excluded and additional adjustments completed to accurately estimate EBITDA.
The results demonstrated that the company was performing below plan, largely resulting from softening in chemicals prices and inefficiencies related to the acquisition transition. The performance could be improved, however, with a completed integration process and changing management’s focus to the business. Once the ERP system was installed, the initial cash flow analysis was proven accurate.
New Market Opportunity
A private, sub-prime consumer finance company wanted to expand beyond its core financing of cosmetic dentistry into financing funeral and cemetery services for consumers. Mr. Hundley was engaged to evaluate the industry, develop the business model and the market penetration strategy for the new line of business.
The client's business model called on local dentists in "second tier" cities and relied on the dentist’s very high incremental profit from each additional cosmetic dentistry patient. Since the incremental margins and cash flow characteristics of the funeral and cemetery business is not as high as those in cosmetic dentistry, a different approach to the market was necessary. Rather than pursue their traditional second tier cities and individual local funeral and cemetery businesses, the strategy was to pursue the market consolidators and develop a program to roll out to their nationwide locations. The net interest margins were less per transaction, which would be offset by lower sales and marketing costs and larger volume customers. This would also allow the client to put more money to work with returns greater than their cost of capital.
The client understood the differences between the markets and opted not to pursue the funeral and cemetery operators as their capital restraints prevented them from pursuing a nationwide approach. Ultimately the client company was sold to another finance company.
Bankruptcy Debtor's Financial Advisor
River Road Partners was engaged as the Financial Advisor to a resort hotel owner in Chapter 11. The engagement entailed designing the financial aspects of the Bankruptcy Plan and providing expert testimony on the plan feasibility and interest rate. The case involved approximately $300 million in defaulted debt.
After reviewing the relevant documents, appraisals and other expert reports and completing due diligence with the client and their counsel, Mr. Hundley created the financial model to restructure the debt under a cram down scenario and with an 1111(b) election. Interest rate research for this asset class was completed and a final report delivered with the interest rate and feasibility analysis and opinions. The mortgage servicer deposed Mr. Hundley in the process.
The plan was confirmed by the court using the proposed structure, becoming the largest case in Southern Arizona with a confirmed plan since 2008.
Outsourcing F&A Function to Improve Profitability without Loss of Productivity
The client's two hundred person specialty finance and accounting (F&A) operation had been outsourced to a national accounting firm that decided to exit this line of business following changes in the public accounting environment. The outsourcing firm gave the company the required sixty days notice to exit the relationship just prior to the initiation of the busy season for the company. Mr. Hundley was charged with replacing the outsourcer with another provider on a long-term contract that reduced cost. In addition, the operation could not lose productivity leading up to and through the busy season.
This process needed to be executed in a reliable manner to prevent significant transition issues and prevent the loss of employees that would impact accuracy and efficiency. The existing service agreement covering the outsourced F&A was problematic and included steep fees for extending beyond the termination date.
A fast-track process was designed to contact six replacement F&A outsourcers and quickly winnow the six to two, pick a finalist and negotiate the service contract and service levels. A communication plan was also designed to reassure the F&A team that they would be retained under the new contract and would not lose any benefits, or other forms of compensation.
The process was completed in the required time with an improved contract and a $3 million first-year cost reduction (approximately 20%). Additionally, the busy season filings were completed on time and without incident.
Bankruptcy Feasibility and Interest Rate Expert for the Creditor
River Road Partners was engaged by a bank that was the secured lender in a Chapter 11 case for a failed medical office development. The engagement was to provide interest rate and feasibility analysis of the Debtor’s Plan of Recognition. The collateral was comprised of three separate land parcels in different stages of development, with a separate note on each parcel. The Debtor’s Plan of Reorganization proposed a cram down of the secured lender.
The three land parcels were each analyzed separately based on their current appraised value, stage of development, costs to complete, revenue potential, the financing market for each parcel and the forecast cash flows. An interest rate was determined for each note and the plan’s forecast cash flow adjusted accordingly. Based on the analysis, Mr. Hundley's opinion was that the proposed plan was not feasible. A report was prepared and submitted to the client and to the court.
Mr. Hundley testified in court regarding the analysis and conclusions. The court denied plan confirmation and the client settled with the Debtor on terms favorable to the client.
Operating Company--Chapter 11 Trustee and Post-Confirmation Collections
Mr. Hundley was appointed as Chapter 11 Trustee for an aircraft maintenance and repair company that reached an impasse with its creditors. Current management had lost credibility with the court and lacked the ability to craft and deliver a Bankruptcy Plan.
Mr. Hundley arranged $1 million DIP financing to finance the bankruptcy process, restructured management, led the process to create the Bankruptcy Plan and marketed the business to potential acquirers. The post confirmation estate retained certain claims in litigation.
The secured creditor purchased the business at an attractive price for all creditors and over $3 million was collected on the retained claims. The secured creditor claims and the DIP were paid in full and the unsecured claims received substantially more than anticipated.
River Road: Principal
Please view background information:
Frank Hundley
Please contact River Road Partners using the information below:
Frank Hundley | Principal
frank@riverroadllc.com
Office: (520) 298-7875
Cell: (520) 205-2254