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Its Bankrupt Towle’s Manufacturing Company Sandeep & Biswa Asian Institute of Management, Manila Catal 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.
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…
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.
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
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
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.