Towle's manufacturing company

Its Bankrupt
Towle’s Manufacturing Company
Sandeep & Biswa Asian Institute of Management, Manila
Catal C Associates

Concern of Mr. Dunphy
Keeping in mind, the Towle’s Manufacturing’s spring selling season; he wanted additional $5 million to finance a buildup in inventory. As suggested by his Investment Banker, he had to evaluate the advantages and disadvantages of BANKRUPTCY compared to either foregoing the capital or trying to find it elsewhere.

New Aggressive Strategy by Florence
Expansion by Acquisitions
Company Repositioning
More products
Lower Prices
Higher Volumes
Efficient and varied Distribution Channels
Movement from Silver to Crystal and Aluminum alloy products
Risk Mitigation to volatile Silver prices
48%
Florence’s Inorganic growth and Brand Repositioning Strategy did a turnaround for the Towle.

Error in Demand
Forecasting
Growing beyond
the sustainable
growth rate
Inadequate
Technology
Support
Moving and Severance
Costs
Problems developed
Despite heavy use of overtime and airfreight, which increased its costs, Towle was unable to fill all its orders on time.
Towle lost the confidence of some customers.
Caused several startup problems and ultimately had to be replaced.
Three more acquisitions, expanding product line. Handling 20,000 products and 35,000 SKUs
Higher expenses for the year 1983 due to relocation operations.
Absence of efficient Distribution, and aggressive acquisitions lead to a debacle of Towle.

Misfortune still haunted them.
Response to the problems
Desperation lead to improvements.
Retrofitting the Revere with better computers
Regained Customer confidence in 1984
Limited its order, so as to fill and ship in timely manner
Contingent Inventory planning to avoid stock – outs and offer prompt delivery during peak selling seasons.
Retailers ordered less than expected
Labor Problems at the Massachusetts Port Authority hampered Towle’s receipt of purchased goods from suppliers.
Increased administrative & Inventory costs due to high returns from 4Q 1984
Revolving credit facility exhausted.
Common Stock dividends were stopped
Murphy’s Law holds true, what will go wrong; shall go wrong…..

Paul Dunphy arrives…

What Dunphy did and his key findings…
In case of mistrust, change the Debtors
Thorough review of Accounting & Control
Replace Towle’s Banking group
Towle was in technical default on several provisions of its loan agreements.
A new group of lenders were lined for $110 mn.
After the 1984 reported losses, the credit terms were slightly revised.
No thoughtful thinking in case of acquisitions
No Post-Merger Integration
Autocratic and over ruling Leadership
No or very less accountability in case of Managers due to the Organizational Structure
No formal Profit and Loss responsibility
Serious deficiencies in handling of Inventory and Accounts receivables
No track of Customers with more than 90 days of credit
No accountability in terms reasoning or book keeping of product return acceptance
It was unclear how much inventory the company had , nor how much of what it had was salable

Towle turned to be a House of Cards ready to be gone with the wind, if nothing phenomenal was done immediately…

Prestige Products
Tabletop Products
House wares
In the wake of emergency, drastic steps were taken…
Asset Restructuring was the only way out…
Sterling flatware and hollowware, cutlery, and crystal
Make or import silver plate, stainless steel, artificial flowers and certain other products
A limited number of kitchenware products
Everything else was sold out, Headcounts reduced, SKU’s drastically reduced & Profit centers were created and more authority and accountability was given on Division Managers

Mr. Florence was asked to resign and Mr. Dunphy takes over CEO--------Nov1985

Wrenching Changes on the way for Towle
Asset Restructuring
Three Manufacturing plants were shut down
More than the company’s 19 showrooms were shut down
More than half of workforce was victim of downsizing
Many Business and Real Estate were up for sale
Financial Restructuring
Common Stock dividends were discontinued
Preferred stock dividend was omitted
Common stock and Promissory note were issued in lieu of cash for Series B preferred dividend
By largely reducing the working capital. Towle was able to reduce the Total Assets by $ 100 mn

Need for an additional $ 5 mn
An amount of additional $ 5mn was necessary for the Inventory build up for the spring selling season
Lenders were concerned about how well protected the target loan be
As per banker’s suggestion, if Towle were to file under Chapter 11, such additional financing would be in lender’s view less risky.
The ‘Debt in Possession’ financing following the filing, would provide enough capital to see Towle through the selling season.
Dunphy was disillusioned and was weighing his options for financing

Mr. Dunphy at Crossroads
Forego the needed Capital
Simply refuse to file Chapter 11 and make a formal request of the banks for more credit
Finding new set of Creditors
New issue of subordinated debt* or equity*
* Can not be raised without the permission of Existing Lenders and Preferred Stock holders.
Chapter 11 can provide quick infusion of Capital, but Mr. Dunphy is concerned at what cost to the company…

Definition of Terms
Includes default and bankruptcy, but also
Threat of default or bankruptcy and its effect on the company
Defined to capture the costs and benefits of using large amounts of debt finance
Bankruptcy
Default
Financial Distress
Failure to meet an interest payment, or
Violation of debt agreement
Formal procedure for working out default
Does not automatically follow from default.

Indicators of financially distressed firms

Advantages
Automatic stay of all creditor collection efforts.
Debtor can negotiate with a single forum the bankruptcy court.
Court can allow debtor to reject unfavorable contracts.
All claims can be dealt with at one time.
Interest stops accruing on unsecured claims.
Bankruptcy court can affirm plan over the objections of dissenting creditors.
Cram down* rules apply.
Upon confirmation, all creditors and stockholders are bound by the plan.
Avoid taxes on income that results when debt is retired at less than face value.
Disadvantages
Business is disrupted.
Debtor in possession must meet stringent reporting requirements.
Bankruptcy court must approve all transactions outside the ordinary course of business.
Bankruptcy filing can trigger other claims.
Legal and administrative expenses paid by debtor.
What weighs more for Bankruptcy?
*Cram down procedure permits confirmation of a plan over the objections of one or more classes of creditors provided that, the plan provides the holders with property whose value is at least equal to the allowed amount of their claims, or else no junior class receives anything.

Debt in Possession Financing
One major difference between Chapter 7 and Chapter 11 is that there is generally no appointment of trustee to supervise the bankruptcy.
In certain situations in which debtor must seek the court’s approval; these include seeking new credit for the business; selling, leasing, or using property outside the normal course of business; accepting or rejecting unexpired leases or certain contracts
The additional financing with the court’s approval is generally called ‘Debt in Possession Financing’.
The Bankruptcy Code grants special protection to those who lend new money to bankrupt company and receive same priority as Administrative claims which are paid just after secured claims.
In some cases, court may grant super – priority claims that take precedence over secured claims.
However the time required for the DIP financing processing is high with additional legal costs

Firms deal with financial distress in a variety of ways
Selling off assets
Cutting back R&D and capital spending
Merging with another firm
Financial restructuring
Asset restructuring
Cutting dividends
Issuing new securities
Negotiating with creditors
Exchanging debt for equity
Filing for bankruptcy

Financial Performance
Financial Performance is poor, restructuring is not effective…

In spite of pending Credit Line, Bankers want to protect their interests since they predict the
Company to be on the verge of being Bankrupt
Financial Performance : Distressed Asset Analysis
Altman Z score:
Z=1.2A+1.4B+3.3C+0.6D+0.99E
Z-Score = 0.185 (if below 1.8, company is a strong candidate for bankruptcy)
Company is in the distressed stage and at the verge of bankruptcy.

Different Options and its impacts
Options
Impact and Viability
Forego the needed Capital
Simply refuse to file Chapter 11 and make a formal request of the banks for more credit
Finding new set of Creditors
New issue of subordinated debt or equity
Another loss making year
Since the Company has not surpassed the credit line of 80% of eligible receivables and 60% of Inventory, there is a possibility
Difficult to find, under the present financial performance
Can not be raised without the permission of Existing Lenders and Preferred Stock holders.

Does Towle need $ 5 mn?
Reduced customer and supplier confidence in the company.
Since $45 million debt is due for April 1987, recovery plan should be planned now. Failure to turnaround would cause the company to insolvency and chapter 7 filing.
Needs an immediate recovery to boost sales.

Final Recommendation
Negotiation with the Bankers with negative covenants
Operational Restructuring: Reducing the SGA Costs

biswajeet.pattnaik@gmail.com

Towle's manufacturing company

by Biswajeet Pattnaik on Oct 04, 2010

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Towle’s manufacturing company Presentation Transcript