Specialty Construction Company

The revelation of accounting irregularities had forced a private equity backed middle market company to restate several years of financial results, placing the company in immediate covenant violation on $100 million in senior and subordinated debt. Vendor stress was incredible, with key suppliers threatening to cut off supply of necessary materials. Cash pressures were intense, with collections falling and a severe risk that payroll would not be met. Leadership in the finance function had been in flux, with several CFOs and Controllers in recent years.

The company was failing, and the scope of the potential value destruction was stunning. An immediate turnaround and restructuring plan that would be palatable to a set of stakeholders including the private equity sponsor, a diverse and set of senior and subordinated lenders, employees, vendors and customers was needed, and the margin for error would be slim.

Stabilize. Within the first 90-days, an ambitious but capital efficient turnaround and restructuring plan had been developed, and the private equity sponsor was in support. The company’s lenders agreed to a forbearance agreement. Active cash management, featuring a rolling 13-week cash flow forecast, had been implemented. Vendor relations had normalized. Customers were regaining confidence. And the new leadership team was reexamining its approach to market.

Green Shoots. As a condition of the forbearance agreement, leadership was under pressure to either A) refinance > $100 million in debt or B) sell the company, in less than a year. Leadership was bullish on the prospects of the turnaround and maintained that the optimal value creation path was to continue under current ownership, assuming the daunting refinancing could be closed on acceptable terms. The company performed in-line with its new forecast for the close of the current calendar year, retained investment bankers to drive the dual-track refinance/sale process, and sought to address the key operational bottlenecks that had restrained the company’s performance in the past.

Building Momentum. By fostering a closer working relationship between Finance/Accounting, Sales, and Operations, additional opportunities were uncovered, existing challenges were addressed more quickly, and a virtuous cycle of improvement was initiated. Over the first six months of the new year, the company outperformed its forecast every month.

Options. Less than a year earlier, the company had been in dire straits. The entire leadership team had been ousted, lenders were furious, the financial sponsor had reason to fear a total loss on its investment, employees were fearful and angry, customers were disengaging, and suppliers were threatening. The new situation was a complete change: the company received multiple attractive purchase and financing offers, ultimately selecting a refinancing option that allowed the financial sponsor to remain in control of a newly invigorated portfolio company poised for further value creation.