A manufacturing and distribution company had defaulted on all of its credit agreement covenants and had fully utilized the $375 million borrowing capacity under its credit agreement. Based on the Company’s cashflow projections, the Company had to convince the bank to lend it an additional $50 million to continue to operate and finance its operations, bringing the Company’s total debt to $425 million.
The Company had to get the bank to immediately over advance $50 million on the credit facility from $375 million to $425 million, but also have the bank agree to a forbearance of the credit agreement until the Company could establish a plan to restructure the Company’s debt.
An extended team member, at the time the CFO of the Company, led the restructuring of the Company’s debt. The Company had to develop a business plan that reflected significantly reducing its debt to $325 million, $50 million below the original credit agreement and $100 million below the needed over advanced loan of $425 million.
In order to approve the Company’s “ask” on the over advance and credit facility forbearance, the Company had to do the following immediately:
- Provide the bank group a new more transparent operating and financial reporting package that allowed the bank to more closely monitor the operations and financial results of the company. This new package replaced the historical only, high level financial information the company had previously provided, which had included few detailed operating metrics.
- Establish a 13-week cashflow, which included the detailed key assumptions for the cashflow. The Company provided a weekly variance analysis of the actual cashflow with the 13-week cashflow budget and provided the bank a new 13-week cashflow forecast on a monthly basis. A top priority of the Company was to meet or beat the 13-week cashflow. The ability to consistently meet the 13-week cashflow budget was an important step in building trust with the bank that the Company would deliver on its operating plans.
Once the immediate improvements in reporting transparency and the establishment of the 13-week cashflow were completed, the Company established a new “bottom up” operating plan that reflected the Company’s ability to repay the debt. At the same time, the Company negotiated new covenants that over an 18-month period would stair step the bank covenants back to the original credit agreement while reducing the size of the credit agreement by $50 million.
- The Company was granted a monthly forbearance until it brought its debt to $325 million and the Company met its monthly stair step down covenant compliance requirements
- At the end of the 18 months, the Company had met each month’s covenant compliance requirements and repaid the bank debt below $325 million
- Also, at the end of the 18 months, the Company was able to establish a new credit facility to meet the longer-term needs of the Company