In May 2013, we purchased an under-performing loan relationship (RLOC and term loan) from a large bank. The borrower historically had low leverage and a long history of profitable operations. However, the business experienced a cash flow strain from increased leverage, negative working capital and operating losses over the 12 months preceding our note purchase.
These issues resulted from a 100% senior debt-funded purchase (via new term loan and advance on working capital line) of a new piece of equipment that ownership thought would add a highly differentiated production capability that no other competitor had. After assessing the situation, we urged the Borrower to run a utilization analysis on all its equipment over a two-month period. To the owners’ surprise the new piece of equipment only had a 20% utilization rate.
Owners’ agreed (after some deliberation!) to sell the new equipment, which took 90+/- days, at 50% of purchase price from 12 months earlier. To ease the burden, we amortized the remaining balance. Within 90 days, the Company was cash flow positive/profitable; and within 12 months, we were paid in full, via a Bank refinance. Today, the Company continues to operate profitability, sticking to its core business.