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 cash flow projections, they had to convince the bank to lend an additional $50 million to continue to operate and finance operations, bringing the company’s total debt to $425 million. The company also needed the bank to agree to a forbearance of the credit agreement until a plan to restructure the company’s debt could be established.
The company CFO, now a NextLevel executive, led the restructuring of the company’s debt by developing a business plan to significantly reduce its debt to $325 million, $50 million below the original credit agreement and $100 million below the over-advanced loan of $425 million.
In order for the bank 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 previous high level financial information the company had always provided, which had included historical data only and few detailed operating metrics.
- Establish and provide the bank a 13-week cash flow report, including a weekly variance analysis of actual cash flow with the budget, and a new 13-week cash flow forecast on a monthly basis. Consistently meeting the 13-week cash flow 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 cash flow were completed, the company developed a new “bottom up” operating plan that reflected the company’s ability to repay the debt. The company simultaneously negotiated new covenants that over an 18-month period would, in stages, return the bank covenants back to the original credit agreement definition while reducing the borrowing capacity by $50 million.
- The company was granted a monthly forbearance until it brought its debt to $325 million and the company met its monthly step down of 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 its longer term needs.