Client Situation
A wholesale beer distributor was acquired in a highly leveraged deal. A $25 million senior loan and revolving line of credit facility were obtained based on an expected level of EBITDA that was supposed to increase over time to lower the debt leverage and pay down the loan. Soon afterward, the company was not meeting its loan covenants due to lower than anticipated sales and margins. The bank began restricting the company’s borrowing capacity on the revolver and eventually put the company in default. Subsequently the bank threatened to call the loan immediately due unless the owners invested more capital and moved the company into its special asset group for troubled loans. The relationship between the owners and the bank turned adversarial with both parties desiring to end the relationship as soon as possible. Short-term it was necessary to get the bank to agree to a forbearance of the credit agreement until a plan to restructure the company’s debt could be established and implemented.
Solution
The owners hired an experienced CFO, now a E78 team member, to develop a plan of action for rapid implementation. He quickly determined the need to focus on three main areas.
Amending the current credit agreement to bring temporary relief from the current loan covenants was highest priority. The CFO was able to convince the bank to waive the most important covenants for up to one year. To increase sales and EBITDA he helped the owners acquire the distribution rights for four different beer brands, which increased sales 4 percent year-over-year. These acquisitions were financed with the owners’ capital under a subordinated debt structure. Finally, operational improvements were implemented including renegotiation of shipping rates, better inventory ordering practices to reduce spoilage expense, and improved oversight and administrative procedures.
Results
After one year, gross margins improved significantly year-over-year. With an improved financial outlook and a better story to tell, the company was able to meet with prospective banks. A regional bank was a great fit and they decided to partner with the company long-term on much more favorable terms. The new bank refinanced all of the previous bank’s debt and was able to increase the borrowing capacity providing the company more flexibility and enable growth on a more solid financial base.
