Danfurn Case Study

INTRODUCTION

Current Issues

• March 2011, Board meeting, Decision must be made and implemented before March 31st
• Danfurn has blown through cash flow covenant on our 100$ million senior secured financing agreement.
• Further waivers to covenant violations will not be forthcoming.
• A failure to fix this problem within the next month will put Danfurn in default under the loan agreement. This would lead to bankruptcy.
• Danfurn is not allowed to proceed with its potential solutions without first contacting M&L.

Situation/Problems

• Sales declined 22% in 2010.
• EBITDA fell to $6.5 million during 2010, down from $10.9 million in 2009, and $29.2 million in 2008.

Results

• Danfurn did not meet the covenant of $8.5 million EBITDA in 2010.
• Liquidity of the firm dropped. Cash balance decreased by 43.1%
• Inventories have accumulated to $41.8 million, an increase of 25.2% from 2009.
• Accounts payables have increase to $15.8 million, an increase of 37.0% from 2009.

Danfurn’s Board must make a decision

• Has the company entered the zone of insolvency? Cash flow test/Balance sheet test

• Cash Flow Test: EBITDA is lower than int. exp./Cash Balance is very low (lower than int. exp.)
• Balance sheet: Liabilities are not higher than assets.
• Still, Danfurn is now considered insolvent.

• The board has a duty to put the interest of creditors above all else when making new decisions.
• “Duty of care” and “duty of loyalty” must be ensured.

        Danfurn still has a high growth potential

***Danfurn’s sales are greatly affected by the state of the economy. Since they sell high-quality furniture, the demand for their product depends on their customers’ willingness to pay a premium for their design/quality. Their sales were growing at a very high rate before the recession. (71.0% growth from 2006 to 2008) According to the National Bureau of Economic Research, the recession, which began in Dec. 2007, ended in June 2009. In every quarter since then, the economy has grown. The demand for high-quality furniture should follow the course in the coming years. Therefore, Danfurn has great potential for growth and should not be viewed as a sinking company, despite its insolvency situation.

Refinance Debt

-          Danfurn would reorganize its debt obligations by either refinancing or restructuring its existing debts.

o   Restructuring would involve changing the terms of the loan (reduction of interest rates, extension of the loan’s terms, improvement of covenants)

o   Refinancing could be done by issuing or borrowing new debt to help pay off existing debts. It can also involve issuing new equity to pay off a part of the debt.

-          These options should not be counted on:

o   Restructuring of the debt is unlikely as it has already been done twice in the previous 2 years (covenants have been improved (6.0x EBITDA to 10 million EBITDA to 8.5 million). M&L have also stated that they would no longer waiver on their covenants.

o   Refinancing is also unlikely because of the firm’s poor financial situation. The effects of the recession are still being felt and lenders are more reluctant to “pull the trigger” on troubled investments.

Sale process

http://www.deallawwire.com/2015/05/28/the-bitter-bidder-late-bids-in-insolvency-sales-processes/

http://www.airdberlis.com/templates/Articles/articleFiles/508/Insolvency%20Aspects%20of%20the%20Purchase%20and%20Sale%20of%20a%20Distressed%20Business%20in%20Canada.pdf

http://www.tdslaw.com/knowledge-center/obtaining-maximum-benefit-for-the-assets-of-an-insolvent-business/