Case Study CVA for Leveraged Buy In Managment Buy Out

KSA was invited to review this marketing and print management company with circa £8.9m of sales.

“We have a failing company whose investors have invested £1m, plus £7m of loans and loan notes. HMRC is threatening to wind up the company for unpaid VAT and PAYE”.

So the distressed company director started a conversation with Keith Steven. After 20 minutes we established the following position.

1. The company had a turnover of £4.4m in the last 6 months. Its had previous year sales of 8.9m.
2. Trade creditors amount to c. £506,000.
3. Inland Revenue was owed c. £834,893 for PAYE and NIC, various time to pay (TTP) deals had been agreed and reneged upon owing to cashflow pressures.
4. VAT was owed approximately £450,000.
5. Investors funded the MBO that formed the group holding company. Investors had provided loan notes of £5.3m, interest has been accruing and interest stood at £738,365. Directors/shareholders had provided a further £808,000 of loans and interest was accruing as above.
6. The Bank was owed £550,000 on a term loan. It also provides an overdraft of £150,000 to the Group Holding Company. Currently the bank overdraft was standing at £216,000 (nominally).The bank held a debenture with a fixed and floating charge on all monies due from both companies on a charge created 17th November 2006.
7. Invoice discounting was provided by the same bank. The current facility provided for 85% initial payment. Overall the facility provides an advance of £1.091m. The debtor book was currently £1.329m.

Our caller wanted to know how to stop a winding up petition, how could KSA reorganise the business such that the venture capital backers / loan note holders did not take a complete bath and so that he could invest some money in a recovery whilst removing non performing directors and management. Not an easy challenge!

Given the acquisition had been driven through a “whitewash” procedure to avoid breaching the Financial Assistance rules (s151-153 Companies Act 1985) , the inter company position was that Holdings owed trading co some £700,000. This was never going to be recovered because the only value that Holdings had was 100% of the equity of trading co, it was insolvent and about to enter a CVA! Secondly, the loan notes and equity investment were at risk if the trading co entered administration or pre-pack Administration.

We considered pre-pack administration but the bank was not keen on that option nor were the VC investors or the loan note holders (the director was the largest loan note holder). So a company voluntary arrangement seemed the logical answer for the trading company.

The director had a plan which was comprehensive. First the company needed to be downsize, employee numbers needed to be modestly reduced but mid and senior management needed sharply reducing. Some 600,000 of cost savings alone was planned. But of course many had long term contracts and redundancy costs would have been prohibitive. Secondly the business had run out of cash and the director was prepared to invest to support the company but he only held a modest equity stake. He wanted to gain control of the business if he was to put the money in.

The venture capital investors had lending restrictions on their fund and could not lend the company any more working capital. Nor could the bank. Indeed a recent secured loan was already under water.

Keith Steven of KSA led the restructuring discussion with all parties and then set out a detailed rescue plan. Using a CVA the company entered a state of non payment to creditors, loan repayments to the bank and aggressive cashflow management led by KSA. Over 3 weeks we carefully assessed the management plan and also the proposed restructure of the share holding. Our suggestion was to leave the Group Holding company with 25% of the subsidiary, thus giving some upside for the investors and loan note holders. The new MD would take 75% and this would also be partly distributed to “staying” management.

Four directors left the company with immediate effect and with nil cash cost to the business. One took out an employment tribunal. He will probably win his case but any such claims or awards are bound by the CVA process. This saved over £430,000 of annual cost. the remaining £170,000 cots cutting target will be met with a reduction in headcount and sharper procurement practices.

To avoid the public sector tendering problems it faced when entering an insolvency process, we hived down the trading business to a new subsidiary company.
Before the CVA was finalised, KSA met with the bank and carefully guided the bank through the very detailed financial forecast that our modelling team had produced. We produced forecasts that showed the term loan was being repaid faster than cashflow would allow in year 1 and the bank agreed to a 6 month capital payment holiday providing the overdraft was repaid.

With initial cashflow being positive the overdraft was paid down as required. This improved the bank’s position.

We drive some housekeeping and wrote off the holding company loan to the CVA company. We also wrote off other debts from the CVA company to other group companies. This then resulted in a simplified balance sheet.

Finally, the CVA was ready to be put in front of the VC’s and loan note providers. They agreed that the CVA scheme maximised their long term interests. Upon agreement, the new MD bought 75.1% of the equity and provided £250,000 of loans to fund the rescue. The CVA was filed at Court and the creditors meeting was successfully negotiated.

Overall 60 jobs were saved and the company will be paying 34p in £1 to its unsecured creditors over 5 years. Only one small creditor voted against and HMRC voted in favour for £1.3m.

Most people say to us once they have started talking to KSA Group, “if only we had talked to you sooner”! Don’t be like them waiting and worrying, get help for your CVA today!
Private Equity or Venture Capital Investor? Call Keith Steven now on 07974 086779 for a confidential chat.