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Anatomy of a Deal: Special Situations, Split-Lien Term Loan with a Bank ABL
By Spencer Brown and Charlie Perer
SG Credit Partners’ executives detail a complex deal completed during the pandemic.
In the course of two weeks, SG Credit Partners (formerly Super G) went from first phone call to closing a complicated split-lien deal with a major bank ABL group. When you tell someone “we just closed another multi-lender transaction in less than two weeks,” the level of complexity, determination, and teamwork required to accomplish such a task, is rarely understood. This transaction provided a pay down to the senior lender, provided for critical payments to vendors and created liquidity for the company’s investment bank to run a refinancing process. Like most special-situation transactions, the initial loan was just the start, not the end. This Anatomy of a Deal will attempt to highlight the role of a non-bank credit fund, SG Credit Partners, partnering with conforming ABL.
A confluence of factors led to the genesis of this transaction. The Company is a non-sponsor backed, branded consumer products company that generates over $100 million in revenue. The Company’s founder is a lifelong entrepreneur and during the good times had been making investments in non-core brands. However, at the same time, the Company started dealing with the negative effects of pre-COVID tariffs. The combination of non-core activities and tariffs led to stressed financial performance. Like most entrepreneurs, the owner was not in a position to write a multi-million-dollar check to remedy the Company’s liquidity needs.
The bank transferred the client to its ABL division to better monitor the collateral and manage liquidity. By this time, the Company was in its slow season and the bank-ABL group immediately ended up in a significant over-advance. Amidst all this, the Company’s payables had continued to stretch, and vendors were starting to demand payment. The bank ABL was required to go deeper into an already existing overadvance to fund a large amount of working capital for vendor deposits. Timing was of the essence in order to get enough product on the water prior to factories shutting down for an extended period of time.
The bank ABL group realized the Company was going to need additional capital for the next season and continue funding the turnaround. This led to the Company being asked to find a new banking relationship. The bank ABL knew this process would take several months (best case), yet the Company ran into an immediate working capital issue the bank was unable to solve. To add to the complexity, the founder did not want to raise equity at a low valuation due to the Company’s recent financial performance, and the bank (again, as a regulated institution) didn’t have the ability or desire to be the Company’s equity partner.
The Company not only required the typical amount of inventory for its seasonal working capital cycle, but also required additional inventory to support a large retail account recently awarded away from its largest competitor. The Company was not in a position to fund its immediate working capital needs, much less have the extra liquidity to fund growth. To add to the complexity, the Company also replaced its CFO with a very experienced industry professional and was also required to engage a turnaround consultant. Although this added new people to a tenuous situation, it was necessary to ensure the bank was provided a clear and accurate depiction of the Company’s current working capital situation and anticipated cash flow.
Concurrently, the Company engaged a regional investment bank to accomplish two tasks: 1) find a solution for its immediate working capital need and 2) find a replacement senior lender (and permanent capital partner) to take out the incumbent bank. If the Company was able to find a solution to clean up its trade payables as well as have additional working capital to fund the newly won business, the Company would be in a position to have the best year of its 15+ year history. This fact further incented the founder to avoid any unnecessary dilution, since the equity value should significantly increase over the following 12 months.
The Company was now entering its slowest point of the year with working capital (and availability) at its lowest point. Critical vendors were making noise re stretched trade, the new CFO was still getting his arms around the business, the bank would not lend up, a turnaround consultant was watching every move, and an investment bank had to start gathering info to run a dual-track process (i.e., pursuing two independent capital raises, simultaneously). Meanwhile the founder and other executives had their sights set on having a blockbuster year.
This is the moment SG received a call from the bank ABL inviting us into this situation. Oh, and we were told that we had two weeks to close or else the Company’s vendors would not be able to get product shipped before factories shut down. We also had to be prepared to immediately bridge to another ABL due to the lender fatigue, so this was either going to be a bridge to another ABL or bridge to a sale depending on the next few weeks. To further add to an already complicated situation, if SG was brought in to solve the immediate working capital need, this would require a split-lien intercreditor agreement to be negotiated with the bank.
The bank ABL and founder were now in a stalemate. The bank did not want to liquidate, yet was unable to provide additional capital. The founder did not want to take on any equity dilution. The investment bank was trying to get the best deal available for the client. A new split-lien lender or junior lender had to get comfortable with the situation and close in an extremely short period of time. These factors do not even consider the complex landscape SG had to navigate while negotiating a split-lien intercreditor agreement with a large bank institution (i.e., the bank-ABL had to release collateral it already held). This required a real balancing act as the bank is also the referral source and a critical component of SG’s business model, leaving no margin for error.
The transaction required SG to be on a deal call on a Friday, issue and sign a term sheet over the weekend. Then fly across the country first thing Monday morning, parachute into hostile territory, get comfortable with the situation and navigate the intense terrain in order to get a transaction closed in less than two weeks. If SG could not close in time, the Company would be forced to be sold or raise equity. SG built its reputation solving these situations for non-sponsored businesses when they face non-conforming liquidity challenges.
It quickly became paramount for SG Credit to get comfortable with the current state, ability and willingness of those key vendors to fulfill orders, as well as what it would require in order for them to agree to do so. This process involved several overseas calls with vendors in the middle of the night as it was impossible to coordinate otherwise. All parties had to walk a fine line of increasing the vendors’ confidence in the Company by bringing a financial partner to the table, while not scaring vendors into thinking the problem was potentially bigger than they realized.
SG needed to get through business diligence, legal diligence and documentation (involving three law firms as well as a new intercreditor agreement with the bank), credit approval, and fund in under two weeks. This would enable the company to make payments to key vendors who would in turn get additional product shipped to meet the necessary delivery windows for its retailer customers. The uniqueness of SG is that it can solve these non-conforming needs quickly by not using a leverage line, and closing quickly is never an issue due to its institutional capital base.
After several days onsite with management and countless phone calls negotiating legal documents between three parties, SG was ready to close. In less than two weeks SG had accomplished an insurmountable number of tasks, including getting comfortable with a very uncomfortable situation and negotiating a new split-lien intercreditor agreement with the bank. SG’s split-lien term loan provided a critical solution when all parties found themselves in a tough situation.
The process took a tremendous amount of effort, collaboration, cooperation and compromise from all parties involved, ultimately leading to a positive outcome. The attorneys and investment bank were all paid for their services, the bank de-risked its position with a paydown and avoided a negative outcome. Just as importantly, the owner avoided undesired equity dilution, critical vendors received a much needed paydown, and the company received the additional capital needed to solve its immediate liquidity issue. This transaction enabled the Company to solve a key financing issue as well as take advantage of growth opportunities and position itself for the best year in company history.
This two-week sprint was just the start of SG’s relationship with the Company. The initial goal was obviously liquidity to satisfy all constituents – the bank ABL, owner and vendors, but the longer-term objective was just starting. The regional investment bank exceeded all expectations as the multitude of offers was prolific. SG again played a pivotal role transitioning a bank ABL client to another lender, as desired, leading both the bank ABL and the Company to a successful outcome. The Company had to choose between a name brand non-bank ABL who would provide a conforming ABL plus a non-conforming stretch piece, or conventional bank ABL, keeping SG involved to roll over its split-lien deal.
The Company’s strong preference was to move to a new regional bank ABL group, and keep SG Credit in as a split-lien capital provider. The blended cost of a large bank ABL deal enabled the Company to achieve significant cost savings and keep us involved, given SG had built a strong relationship with the Company. SG entered this transaction with the end result in-sight, which enabled the Company to generate strong EBITDA, even through COVID.
About the authors:
Spencer Brown is a principal of SG Credit Partners, Inc. (“SGCP”), responsible for originations, deal execution, and portfolio management. Spencer joined Super G Capital, LLC (“Super G”) in May 2017 and is based in the Denver office. Prior to Super G, Spencer was an associate at FirstBank Holding Company (“FirstBank”) primarily focused on underwriting in the retail and commercial lending divisions. FirstBank is a privately held regional bank in Colorado with over $18BN in assets. Spencer began his career at Noodles & Company (NASDAQ: NDLS) corporate headquarters in Broomfield, Colorado.
Spencer earned both a B.A. and an M.B.A. from the University of Colorado at Boulder. He can be reached at email@example.com.
Charlie Perer is the co-founder and head of originations of SG Credit Partners, Inc. (SGCP). In 2018, Perer and Marc Cole led the spin out of Super G Capital’s cash flow, technology, and special situations division to form SGCP.
Perer joined Super G Capital, LLC (Super G) in 2014 to start the cash flow lending division. While there, he established Super G as a market leader in lower middle-market second lien, built a deal team from ground up with national reach and generated approximately $250 million in originations.
Prior to Super G, he co-founded Intermix Capital Partners, LLC, an investment and advisory firm focused on providing capital to small-to-medium sized businesses. At Intermix, Perer spent significant time sourcing and executing transactions and building relationships within the branded consumer, specialty finance and business services industries. Perer began his career at Oppenheimer & Co. (acquired by CIBC World Markets) where he was a member of the Media Investment Banking Group. He graduated cum laude from Tulane University.
He can be reached at firstname.lastname@example.org.