Effective Monitoring and Use of a Cash-Flow Model Influenced the Secured Lender During Proposal and Eventual Sale

March 18, 2016


Effective Monitoring and Use of a Cash-Flow Model Influenced the Secured Lender During Proposal and Eventual Sale

The Challenge 

The secured lender, which had invested over $15 million already, was concerned about its security position and was being asked to advance a further $3 million to a large distribution business. Operating in an intensely competitive business, the company had experienced three years of declining sales and was struggling to cover overhead.

The lender had issued Notices of Intention to Enforce Security and had the ability to appoint a Receiver, but was concerned that doing so right away could erode its collateral, the largest component of which was hundreds of accounts receivables balances with customers across Canada. The lender knew that purchasing additional inventory for the Christmas season could provide better recovery on its security position, but was concerned about risking further capital. The lender was forecasting a loss in excess of $5 million on its loan. The family, which owned the company, was also worried as it had provided guarantees to the lender which would be called upon in the event of a shortfall.

The Solution

The company filed a Notice of Intention to Make a Proposal to its creditors (NOI) and Farber was appointed as Proposal Trustee. In this role, Farber was able to monitor the operations of the business and ensure that the lender and other creditors’ interests were protected, while still allowing the company to operate without an immediate receivership, saving costs. Under Farber’s supervision, the lender was comfortable providing financing and supporting the company through the busy Christmas season.

In order to further protect the lender and the company, Farber developed a cash-flow model to forecast collections and receivables on a weekly basis. The model provided a benchmark which both the company and the lender could agree to and was critical to the lender’s support. The model became an invaluable communication and management tool between Farber, the lender, and the company.

The Result

The lender determined it was not to prepared to support the company in the long term and the company and the lender agreed that a sale of the business was the best way forward. The company continued to operate while the sale was underway. Continued operations of the company resulted in the selling of a going concern business which maximized realizations.

Continued operations also allowed a smooth transition for customers to a new distributor. This minimized potential offsetting claims from customers as there was no interruption in product flow. Additionally, some of the sale transactions were structured so that the new distributor was the collector of the receivables from the customers. The smooth transition resulted in strong recoveries of accounts receivable, the largest asset of the company.

The lender was able to achieve almost complete payout from the assets of the company leaving minimal exposure for the family under the guarantees.

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Paul Denton is a Managing Director with the Restructuring practice of Farber. His practice focuses on providing restructuring and advisory services to corporations, lenders, and under-performing companies. Paul can be reached at 416-496-3773 or pdenton@farbergroup.com.