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Situational Overview: A contract manufacturer experienced softness in its business and required additional capital to continue its operations.  The lenders would not lend additional funds to the company.  An opportunity developed where the company could issue public equity but needed to have the lenders reduce their loan amounts.  Moreover, the company would need a working capital line of credit to raise the additional equity, which the lenders were opposed to.

Resolution: To overcome the lenders’ objections, a bankruptcy alternative was developed that clearly showed a company bankruptcy would end in liquidation, and the lenders’ recoveries would be dismal.  A plan was developed that provided that in return for the support of the capital raise and agreement to a loan principal reduction, the lenders would receive some of the proceeds from the capital raise and a new amortizing second-lien term loan.  The lenders also agreed to be primed by an asset-based revolving credit facility.

Results: The lenders were able to overcome their initial objections as the proposal presented the highest amount of recovery available.  Although somewhat counterintuitive, allowing their collateral position to be primed by an asset-based lender made sense.  The company needed liquidity to operate its business and service all its loans and the asset-based feature ensured that the company only borrowed for working capital purposes, thereby addressing the lender’s concerns of the company re-leveraging.