Towle's manufacturing company

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  • 1. Its Bankrupt
    Towle’s Manufacturing Company
    Sandeep & Biswa Asian Institute of Management, Manila
    Catal C Associates
  • 2. 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.
  • 3. New Aggressive Strategy by Florence
    • Expansion by Acquisitions
    • 4. Company Repositioning
    • 5. More products
    • 6. Lower Prices
    • 7. Higher Volumes
    • 8. Efficient and varied Distribution Channels
    • 9. Movement from Silver to Crystal and Aluminum alloy products
    • 10. Risk Mitigation to volatile Silver prices
    48%
    Florence’s Inorganic growth and Brand Repositioning Strategy did a turnaround for the Towle.
  • 11. 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.
    • 12. Towle lost the confidence of some customers.
    • 13. 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.
  • 14. Misfortune still haunted them.
    Response to the problems
    Desperation lead to improvements.
    • Retrofitting the Revere with better computers
    • 15. Regained Customer confidence in 1984
    • 16. Limited its order, so as to fill and ship in timely manner
    • 17. Contingent Inventory planning to avoid stock – outs and offer prompt delivery during peak selling seasons.
    • 18. Retailers ordered less than expected
    • 19. Labor Problems at the Massachusetts Port Authority hampered Towle’s receipt of purchased goods from suppliers.
    • 20. Increased administrative & Inventory costs due to high returns from 4Q 1984
    • 21. Revolving credit facility exhausted.
    • 22. Common Stock dividends were stopped
    Murphy’s Law holds true, what will go wrong; shall go wrong…..
  • 23. Paul Dunphy arrives…
  • 24. What Dunphy did and his key findings…
    In case of mistrust, change the Debtors
    Thorough review of Accounting & Control
    • Replace Towle’s Banking group
    • 25. Towle was in technical default on several provisions of its loan agreements.
    • 26. A new group of lenders were lined for $110 mn.
    • 27. After the 1984 reported losses, the credit terms were slightly revised.
    • 28. No thoughtful thinking in case of acquisitions
    • 29. No Post-Merger Integration
    • 30. Autocratic and over ruling Leadership
    • 31. No or very less accountability in case of Managers due to the Organizational Structure
    • 32. No formal Profit and Loss responsibility
    • 33. Serious deficiencies in handling of Inventory and Accounts receivables
    • 34. No track of Customers with more than 90 days of credit
    • 35. 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
  • 36. Towle turned to be a House of Cards ready to be gone with the wind, if nothing phenomenal was done immediately…
  • 37. 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
    • 38. Make or import silver plate, stainless steel, artificial flowers and certain other products
    • 39. 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
  • 40. Mr. Florence was asked to resign and Mr. Dunphy takes over CEO--------Nov1985
  • 41. Wrenching Changes on the way for Towle
    Asset Restructuring
    • Three Manufacturing plants were shut down
    • 42. More than the company’s 19 showrooms were shut down
    • 43. More than half of workforce was victim of downsizing
    • 44. Many Business and Real Estate were up for sale
    Financial Restructuring
    • Common Stock dividends were discontinued
    • 45. Preferred stock dividend was omitted
    • 46. 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
  • 47. Need for an additional $ 5 mn
    • An amount of additional $ 5mn was necessary for the Inventory build up for the spring selling season
    • 48. Lenders were concerned about how well protected the target loan be
    • 49. As per banker’s suggestion, if Towle were to file under Chapter 11, such additional financing would be in lender’s view less risky.
    • 50. 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
  • 51. 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…
  • 52. Definition of Terms
    • Includes default and bankruptcy, but also
    • 53. Threat of default or bankruptcy and its effect on the company
    • 54. 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
    • 55. Violation of debt agreement
    • 56. Formal procedure for working out default
    • 57. Does not automatically follow from default.
  • Indicators of financially distressed firms
  • 58. Advantages
    • Automatic stay of all creditor collection efforts.
    • 59. Debtor can negotiate with a single forum the bankruptcy court.
    • 60. Court can allow debtor to reject unfavorable contracts.
    • 61. All claims can be dealt with at one time.
    • 62. Interest stops accruing on unsecured claims.
    • 63. Bankruptcy court can affirm plan over the objections of dissenting creditors.
    • 64. Cram down* rules apply.
    • 65. Upon confirmation, all creditors and stockholders are bound by the plan.
    • 66. Avoid taxes on income that results when debt is retired at less than face value.
    Disadvantages
    • Business is disrupted.
    • 67. Debtor in possession must meet stringent reporting requirements.
    • 68. Bankruptcy court must approve all transactions outside the ordinary course of business.
    • 69. Bankruptcy filing can trigger other claims.
    • 70. 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.
  • 71. 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.
    • 72. 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
    • 73. The additional financing with the court’s approval is generally called ‘Debt in Possession Financing’.
    • 74. 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.
    • 75. 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
  • 76. Firms deal with financial distress in a variety of ways
    • Selling off assets
    • 77. Cutting back R&D and capital spending
    • 78. Merging with another firm
    Financial restructuring
    Asset restructuring
    • Cutting dividends
    • 79. Issuing new securities
    • 80. Negotiating with creditors
    • 81. Exchanging debt for equity
    • 82. Filing for bankruptcy
  • Financial Performance
    Financial Performance is poor, restructuring is not effective…
  • 83. 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.
  • 84. Different Options and its impacts
    Options
    Impact and Viability
    • Forego the needed Capital
    • 85. Simply refuse to file Chapter 11 and make a formal request of the banks for more credit
    • 86. Finding new set of Creditors
    • 87. New issue of subordinated debt or equity
    • 88. Another loss making year
    • 89. Since the Company has not surpassed the credit line of 80% of eligible receivables and 60% of Inventory, there is a possibility
    • 90. Difficult to find, under the present financial performance
    • 91. 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.
  • 92. Final Recommendation
    • Negotiation with the Bankers with negative covenants
    • 93. Operational Restructuring: Reducing the SGA Costs
  • biswajeet.pattnaik@gmail.com