Saturday, April 1, 2023

Special Situations and Debt Restructuring in the Printing Industry

 Graphic Arts Advisors, LLC, M&A advisors and consultants to owners, lenders and investors in the printing, mailing, packaging, digital advertising, and graphic communications industries, is pleased to present a conversation with John Hyde, Esq., Managing Director of Special Situations, the leading expert in M&A involving financially-challenged companies in this marketplace.

Q: Your colleagues at Graphic Arts Advisors and others in the printing industry say that market conditions are currently positive for mergers and acquisitions. Do you agree?

JH: Yes, the current M&A marketplace is robust for businesses sold as a going concern or as a tuck-in. In most cases, buyers are placing significant value on the intangible assets such as customer relationships, the book-of-business, market presence, qualified and trained employees, and functioning infrastructure with installed equipment up and running.

Q: What does this mean for owners and investors of companies that find themselves financially “upside-down,” owing more in debts than they can reasonably pay off?

JH: If the company’s assets are worth less than what is owed to creditors, then the owners or investors face lousy options such as using personal savings to pay the shortfall, slog it out in bankruptcy court, abruptly walk away with resultant reputational harm and risk of legal action, or negotiate amicable and fair debt settlements in a structured process outside of bankruptcy court. The latter option, often known as non-bankruptcy debt restructuring, is usually less painful than the other more extreme measures. Non-bankruptcy debt restructuring is ideally suited to owners and investors of financially-challenged companies who prefer to achieve a graceful transition that is amicable for customers, employees, suppliers, lenders, investors, partners, and landlords.

Q: What do you mean by “restructuring”?

JH: Restructuring is the art and science of substituting one obligation for another. It often involves a process designed to negotiate fair settlements with creditors as part of a comprehensive plan.

Q; Is it a legal term?

JH: Yes and no. There is no exact legal term called “restructuring”, but professionals engaged in the practice incorporate elements of federal bankruptcy law, state creditor rights laws under Article 9 of the Uniform Commercial Code, state laws related to real estate foreclosure, and plain-vanilla contract law. Restructuring in practice goes beyond legal principles by factoring into the mix financial, legal, tax, accounting, corporate, psychological, reputational, family, and ethical considerations.

Q: Is “restructuring” legally binding like in a formal bankruptcy case?

JH: It can be if carried out under the auspices of a court-appointed receiver or trustee, but “restructuring” as a trade craft is broader in meaning. It includes unspoken understandings, subtle nuances, and an extensive treasure chest of tactical opportunities based on what works and what doesn’t work in these kinds of cases.

Q: When do company owners and investors need to consider non-bankruptcy debt restructuring?

JH: Non-bankruptcy debt restructuring is worth considering in situations where too much debt prevents the owner from simply getting out from under. It is applicable to M&A scenarios, but it is also used when M&A is not feasible, desirable, or fast enough. It is not uncommon for a buyer’s M&A offer to leave the potential seller with significant retained liability. Non-bankruptcy debt restructuring fills the void so the valuable parts of the business can be sold and transitioned to a strategic acquirer.

Q: Does this mean that the financially challenged seller can accept an M&A offer that does not cover the debts?

JH: The value placed on intangible assets such as the customer relationships, market presence, book-of-business, qualified and trained employees, and equipment up and running, provides a form of currency. Intangibles value is frequently combined with equipment sale proceeds and monetized retained assets such as AR and real estate, to create a pool of funds from which necessary expenses are paid and debts are settled in a fair manner. A graceful transition does not require every debt to be paid in full. Settlements need to be fair, but not necessarily full payment of debt.

Q: What about where there are enough assets, but it is going to take time for money to come in?

JH: Non-bankruptcy debt restructuring is an appropriate option if the debts are due before the assets can be monetized. There may not be enough cash at the M&A closing or in the bank on final day of operations to take care of everything at the same time. That doesn’t mean the price was too low or that the assets aren’t worth enough. Many sellers negotiate a fair M&A deal that supplements the cash received at closing with future payments from the buyer in the form of an earn-out, royalty, or promissory note. However, typical creditors (bank, suppliers, leasing companies, credit cards, and landlords) expect payment much sooner than when those future payments would come in. Restructuring is often a process intended to align timing expectations with reasonable forecast of future money that would come from the M&A buyer or other asset sale transactions by seller, effectively a payment plan based on a future likely stream of income.

Q: If there’s too much debt or the creditors will have to wait for payment in the future, why not just file for bankruptcy or walk-away?

JH: Very few cases in our industry are good candidates for bankruptcy. Legal costs are one prohibiting factor, but even more so is that every creditor would have to be treated the same within certain classes of creditor. Treating all creditors alike regardless of who they are without context, background, history, and past relationship does not resonate with owners. There is something fundamentally different about the big paper houses, the local mailing house, the die cutter down the street, and the freelance designer who saved a customer by touching up a job at night. Credit cards, office supplies, freight invoices, and click charges are just not the same.

Q: It sounds like flexibility, affordability, and discretion are more readily found in non-bankruptcy cases, is that right?

JH: Non-bankruptcy debt restructuring offers greater flexibility than bankruptcy, to a point. There has to be fairness, and formal bankruptcy is the unspoken backdrop to negotiations. It is up to the skilled advisor to read the landscape properly in crafting the plan that accommodates different interests. I am not a bankruptcy lawyer, but I do look at the bankruptcy options. The first phone call I receive often comes after an owner has just received a bankruptcy consultation and did not like what they heard.

Q: Why are there are so few bankruptcy cases in this industry?

JH: In addition to the requirement to treat all creditors equally within certain classes and the high legal fees, the icing on the cake against bankruptcy is that survival in our industry is hard enough without competitors waiving your chapter 11 petition in your customers faces. Customer’s perceived risk of sending a job to supplier that is operating in bankruptcy is huge. In some of our industry segments that involve privacy laws and data security, such as transactional printing, bankruptcy is contractually immediate grounds for termination of the relationship. In other words, the value of the company’s intangible assets, its customer relationships, is more negatively affected by a bankruptcy filing than it would be in non-bankruptcy debt restructuring.

Q: How about when an owner that wants, or more critically, needs to sell their company and is under the gun to sell quickly due to the mounting debt load?

JH: In these instances, we can run a dual process in which our special assets team plans out the restructuring and work with the creditors to extend the time frame, while our other partners run a robust sale process to find the best offer for the business assets. Notably, creditors, especially the secured lenders, will appreciate that the sale is being conducted by industry-specific specialists in a transparent, arms-length process. That makes a tremendous difference when the secured lenders are asked for forbearance or other concessions.

Q: How do you assess the current receptiveness for settlements from lenders, trade suppliers, and other creditors in these situations?

A: Creditors’ expectations for payment in full are high in today’s climate. Expectations were high in 2018, then came down significantly in the early stages of the pandemic and have since rebounded. As in pre-Covid times, there is little tolerance for a plan that gives creditors five cents on the dollar while the former owner walks away with their shirt on. That said, this is not a climate in which hard-ball tactics are used to punish owners that are in a difficult financial position. We find that our clients are coming out okay as long as they can substantiate a well-presented offer that is fair and reasonable in the particular case.

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