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The Call From Hell, South Dakota

“Hello, this is Chuck Smith calling. I am your new loan officer. I am with the Special Assets Group of the bank and we need to talk. Please send me your latest borrowing base and call me back right away.”

Recently the CEO of a consumer products company got a disturbing telephone call, as paraphrased above. Why a phone call and not a visit? Because the banker was located in another time zone. Fortunately the CEO called Burke Capital for a translation to what the cryptic message meant and to help develop an action plan for the call.

Why are banks becoming so impersonal?

Don’t blame the bank. Their business models are dramatically changing. The roots of these changes go back several decades, and include the repeal of the “Glass-Steagall Act” in 1999, the financial crisis of the late 2000s, and the “re-regulation” of the banking industry in 2009 (Dodd-Frank). Today the economics of banking are extremely challenging. Among other things, increased stringent regulations and exceptionally low interest rates are causing banks to reevaluate their cost structure.

Banks are being forced to abandon traditional ways of doing business and have come to view customized solutions for middle market business owners as often too costly. Layer on top of that the high degree of scrutiny from the safety and soundness regulators who encourage only “no-brainer” loans, and our friendly banker is being put right into the pressure cooker. No longer can banks always be counted on to help guide their customers by reviewing financial trends and pointing out potential areas of turbulence; they just don’t have the time nor the manpower as they used to.

It always comes down to the cash

Back to the struggling consumer products company. It was navigating through an unanticipated seasonal sales dip, which was seriously exacerbated by a prior year of losses. Normally it entered the low season flush with cash and out of debt. This year was very different. It was out of cash, and the line of credit was fully drawn. To make matters worse, the company was severely over-advanced against the borrowing base. All indications of a significant cash problem were present.

The bank’s solution was to press the company for substantial loan pay-downs, but it was clear the bank had no idea how much trouble the company was actually in. We later learned that the bank officer was responsible for hundreds of accounts; there simply wasn’t enough time to review anything except those customers with severe payment delinquencies. This one had slipped through the cracks until it was in real danger.

We quickly determined the company could not survive without a significant capital injection. The forecast for the upcoming year was hopeful, but it needed additional financing to make it to profitability. We projected the bank’s over-advanced position to self-correct at the company’s seasonal high point, but we needed to get from here to there.

Burke Capital partners took a triage approach to the crisis, with one partner managing the banking relationship, one managing the Board, business operations and sale of business and a third managing the analytics and finances. In this way, we were able to accurately forecast performance and trends, stabilize the business, keep the bank informed and supportive and appropriately reduce costs while packaging the company for debt & equity infusions.

In our analysis we observed something very important. Even though the company was losing money, out of cash, and overextended on its loans, it had something of great value: it’s brands. It had a strong recurring sales base in several key product lines. This intangible asset later proved to be hugely valuable to the final outcome.

Concurrent with the creation and funding of a bridge loan, we sourced well-known investment bankers to bid on selling the company’s leading product line. The sale was very successful, reaping a 16X multiple on the forecasted EBITDA. As a result the bank was fully repaid, and received a nice bonus for its patience.

So, if you get that dreaded call from another time zone don’t hesitate to pick up the phone and call on the professionals at Burke Capital. Creative, result-oriented solutions to daunting business challenges is our specialty and we have twenty years of satisfied customers with unique stories to tell of survival and return to prosperity.

Contact Burke Capital today with your special situation. A Burke Capital principal will give you some preliminary ideas on successful paths forward.