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RECOVERING IN AN UNPREDICTABLE HEALTHCARE PRODUCTS MARKET — Plummeting demand and returns lead struggling manufacturer to seek relief using CMAG professionals
Problem
A product mix of cough drops, chewable calcium supplements, adhesive bandages and feminine hygiene products forced a $75 million manufacturer to ride the rollercoaster of the healthcare market.
A wildly fluctuating cold and flu forecast made the manufacturer susceptible, crashing returns when outbreaks were mild. After facing several back-to-back mild flu and cold seasons, the company’s revenues dropped. High inventory levels in the distribution channels further hindered the chance for recovery.
To further add to the company’s woes, the calcium supplement market plummeted simultaneously. This decline affected its chews division performance, which accounted for 95 percent of the company’s business.
The primary equity sponsor for the business was in the process of harvesting and winding down the fund, which had long since closed. Despite the fact the company needed a boost in capital, the additional funds simply were not available. The equity sponsor and the manufacturer began to divest various operating divisions, but the company still required an overdraft facility to sustain operations during the projected divestiture period.
Solution
Investors engaged Carl Marks Advisory Group (CMAG) to analyze and assess the company’s cash plan; determine if the business was run on a cash collections basis; draft an orderly liquidation value (OLV); and advise parties as to the best course of action for all creditors and stakeholders.
The assessment identified several issues in the manner in which the case forecast was being produced, which resulted in dramatic swings of projected cash needs. The lack of reliability rapidly eroded lender confidence in providing the overdraft needed to sustain weekly operations.
In light of the assessment, CMAG took the following actions:
- Created new models to link the cash forecast to the borrowing base.
- Trained the manufacturer’s staff to properly update the model and better control float.
- Assessed the divestiture process and determined anticipated critical dates.
CMAG professionals also drafted two OLV scenarios. One optimized potential recovery by running a division through the contact period of the chews division’s largest customer, projecting approximately $5 million in additional collateral recovery. During the recovery review, the letter of intent was received for part of the business. This validated the projected time frames and clarified both the needed amount and timeframe for the overdraft.
The CMAG team determined all creditors would benefit from divestiture rather than liquidation. The assessment’s various elements indicated that a limited overdraft facility supported by a disciplined cash forecast was a necessary, reasonable risk to support the divestiture of the lines of business. In the end, all parties optimized their return while minimizing the risk of capital loss.
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