Blog Post

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Corporate life often mirrors personal experiences. The COVID-19 pandemic shook the foundations of our lives, prompting a series of unexpected consequences across both our personal and professional domains. At the onset of the pandemic, most people did not anticipate such a significant disruption that would last well over a year. Some have gained the “freshman 15 pounds” during quarantine due to limited mobility, lack of exercise, and extended periods in front of computer screens on zoom calls in sweatpants all day. And there are those who took the opportunity to refocus, establish discipline in their routine, and get in the prime shape of their life. This analogy can be applied to the corporate world as well. Leaning up your organization will remain critically important in this uncertain future.

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It’s now over a year since the start of the pandemic, and, despite a stepped-up vaccination program, and a loosening of business restrictions, a robust recovery is still a ways off. Although COVID-impacted earnings are recovering for many businesses, uncertainty remains as to what the new normal will look like, and when it will be reached.

After a slow M&A market in the spring and summer of 2020, activity has picked up through early 2021. Many have delayed M&A in the hopes of maximizing the value of the businesses they’ve built. Nevertheless, there are ways for sellers to achieve their goals, even in the midst of uncertainty.

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“This recession will finally end the private-sector ‘debt super-cycle,’ says firm that invented the term” – MarketWatch, April 4th, 2020

Over the past decade, forecasters have been anxiously tracking rising corporate leverage levels and the proliferation of covenant-light loans, while lamenting the woefully declining credit quality of borrowers. Lenders could only “amend and pretend” for so long, they argued, and it would be just a matter of time before we witnessed an apocalyptic deleveraging event that would finally mark the end the current debt cycle. The sovereign debt crisis, tariff war, inverted yield curve, all came and went, but a global pandemic should have been the final straw. As infections and lockdowns spread in early 2020, commentators competed to see who could predict the biggest surge of bankruptcies and corporate defaults.

By Q3 defaults had fallen to below pre-COVID levels, and yields had declined dramatically across the board. In a shocking turn of events, debt issuance had surged to record levels, providing liquidity to healthy and distressed borrowers alike. The ultimate irony was, as S&P Global noted, investors “were so supportive that some of the corporate sectors that saw the largest increases in bond issuance relative to the prior five years were those most negatively affected by economic lockdowns.” Undeterred, commentators have now rolled forward their doomsday forecasts, bracing for an even bigger deleveraging and fallout in 2021. But what if we have collectively “broken” the corporate debt cycle? Consider the following three factors:
First, and foremost, is the Fed backstop, which involved unprecedented direct lending to both investment grade and distressed borrowers. Overnight, the Fed’s balance sheet nearly doubled to $7.4 trillion, all but ensuring that the Fed will be a permanent participant in private credit markets. Markets are inarguably in “risk on” mode, and it’s difficult to imagine any kind of crisis of confidence in the foreseeable future.

Second is the near-mythical “search for yield” and its side-effects, specifically the prolific rise of non-bank lending. Institutional investors, grappling with falling returns on fixed income and other assets, have pushed deeper into the private credit market. AUM at private debt funds has skyrocketed from under $200B in 2007 to nearly $900B, with $300B of dry powder waiting to be deployed. The new breed of lenders is more creative and better-equipped than traditional banks at segmenting and capturing risk premium at all levels of the capital structure. These investors, willing to take greater risks, were happy to put money to work during the pandemic, while banks battened down the hatches and sat on the sidelines. For these lenders, COVID has become a mere EBITDA adjustment, and most were willing to ride out the storm and “amend and extend” into 2021 leaving the search for yield poised to continue unabated into the future.

Last, but not least, is the evolution of lenders’ strategic options for dealing with distressed loans. Historically, a bank loan workout was a lengthy affair, with a forbearance or amendment followed by a two or three-year operational turnaround of the borrower. Today’s lenders prefer to move quickly to exercise their remedies. They are frequently turning to secondary debt sales, special-situation refinancings, carveouts or expedited sales of the company. Increased specialization means that there are buyers for every type of security, asset, and distressed business or division. For deeply troubled credits, options such as Article 9 foreclosures or Section 363 sales can be used as a tool to efficiently foreclose and sell viable assets at premium prices, and then wind down the remaining liabilities through either an in- or out-of-court process. As a top-tier middle market restructuring advisor, we employ these strategies (and more) every day on behalf of our clients, and have witnessed firsthand how lenders can now dynamically shift risks throughout this ecosystem. More and more, lenders rely on our firm to provide not only financial and operational support, but also integrated banking capabilities and increasingly advanced legal sophistication.

In sum, we could be witnessing the end of the broad-based credit cycle, and the start of a new era characterized by more complex, localized pockets of risk accompanied by fewer, but larger, distressed events. The current debt-cycle may live on for some time yet.

Konstantin A. Danilov is a Vice President at G2 Capital Advisors, which provides M&A, capital markets and restructuring advisory services to the middle market.

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When crises like the pandemic wreak havoc on businesses, having the right resources in key leadership roles determines whether a Company will successfully navigate a distressed turnaround situation or not.  Rapid

and decisive crisis stabilization determines success.  G2 Capital Advisors’ (“G2”) primary objective in a turnaround is to establish a capital and operating structure in line with the strategic priorities and cash generation of the enterprise.   In partnership with key stakeholders, G2 extends the cash runway of the Company to create time for revitalization.  This liquidity management exercise requires information to be developed and presented to a host of critical players, including but not limited to, shareholders, lenders/creditors, management, employees, customers, vendors, and any court appointed Trustees, if so needed.

Many turnarounds fail due to a lack of alignment between the Board of Directors and executive management on a strategy and timing to fix the Company.  Bringing in a trusted third-party restructuring advisor, such as G2, to oversee the turnaround as an independent fiduciary can achieve such strategic alignment.    Not all restructuring advisors are created equal and each situation prescribes particular skill sets and capabilities to effectively navigate the corporate turnaround.  Of utmost importance, every restructuring and turnaround 1) must have a foundational plan, and 2) that plan must be published and communicated broadly.  The entity or entities managing the turnaround must draw ideas out of the Company’s employees and stakeholders and galvanize them into action with an action strategy with specifics on what, when, and how.  In the post-COVID environment, planning and communication have become even more critical as certain industries find themselves at a pivotal juncture.  For many companies, massive strategic and operational shifts, and even fundamental changes to existing business models, will be necessary for a turnaround to be successful in this “new normal.”   

Our successful turnarounds are accomplished by focusing on 4 C’s – Communication, Concentration, Cost Control, Cash Flow.  Traditionally Financial and Operational focused restructuring firms stay on opposite sides of the fence.  For  middle market companies, hiring separate firms is cost prohibitive and inefficient.  G2 is uniquely positioned to provide a one-stop shop with a fully integrated team comprised of operational, financial, and investment bankers to address stakeholder needs and maximize ultimate recoveries.

To address critical aspects of a turnaround, G2 proposes a two-pronged approach to focus on both Financial and Operational Restructuring elements.  G2, as an integrated firm, can manage both aspects of financial and operational restructuring within one team.  Usually, a transactional Chief Restructuring Officer (CRO) where there is a strong management team, or an operational Chief Transformation Officer (CTO) where the advisor steps in to run the Company day to day.   G2 is differentiated in our ability to provide both functions to our clients with foundational industry experience:

FINANCIAL RESTRUCTURING

Owning fiduciary responsibilities and represents an independent voice using the Company’s financial data to address concerns of all stakeholders.

  • Reports to Board of Directors.
  • Serves as liaison to lenders, creditors, etc.
  • Manages all external communications.
  • Leads negotiations with vendors or customers.
  • Establishes go-forward operating cash flow budget.
  • Generates required reporting.
  • Manages any legal filings.
  • Develops formal Restructuring Plan, driving to a successful Restructuring Transaction.

OPERATIONAL RESTRUCTURING

Working with existing management to determine appropriate operating parameters.

  • Identifies useful assets and operations.
  • Discontinues non-performing assets, divisions, products, etc.
  • Prioritizes strategic initiatives.
  • Identifies a few areas for concentration.
  • Implements cost control measures.
  • Minimizes Company cost structure.
  • Manages internal communications with employees. Supports external communications.
  • Sets go-forward performance targets.
  • Augments interim management needs.
  • Architect and executor of Revitalization Plan.

G2 believes any changes in organization culture will be driven by a vision, encourage feedback and require prompt action.  The CRO in conjunction with a Company’s CEO and management teams must champion that change by cultivating it within the organization.  By actively engaging all employees and helping them understand the new direction of the Company, G2 can achieves multiple objectives:

  • Managing stakeholders
  • Implementing rolling go-forward 13-week cash flow
  • Developing strategic priorities (and if necessary, pivoting to succeed in the post-pandemic “new normal”)
  • Stabilizing operations 
  • Identifying performance / process improvements
  • Driving organizational change
  • Identifying Company structural change
  • Instituting risk mitigation parameters
  • Identifying new financing needs
  • Supporting clear communications

Frequent and continuous communication with all stakeholders and interested parties remains critical. G2builds confidence and trust within these groups through transparency and honesty.  G2’s decisive and clear actions thereafter drive the successful turnaround process.

G2’s highly capable team, including seasoned interim CFOs, Controllers, or FP&A resources, not only can help our clients navigate challenging liquidity or performance environments, but also can drive improvement in core finance/accounting functions. Feel free to reach out to the G2 team to learn more about the approaches we are using across our 45 plus clients in our industries of focus.

Jeffrey Unger
Chairman & CEO
Boston, MA
[email protected]

Ben Wright
Chief Operating Officer
San Francisco, CA
[email protected]

Chris Capers
Managing Director
Boston, MA
[email protected]

Konstantin Danilov
Vice President
Boston, MA
[email protected]

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G2 shares the stories of three influential Black figures who shaped the industries which our Firm serves.

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Assignments for the Benefit of Creditors (“ABCs”) – A Solution For Troubled Companies

As the pandemic continues to blunt business activity, more and more distressed companies will be evaluating their options. If pursuit of lifeline capital or a trade sale exit doesn’t materialize for a company facing creditor uproar and a finite cash runway, winding down may be the unpleasant but necessary next step. Privately held companies in this difficult position should weigh the merits of various paths forward with guidance from trusted advisors.

Available methods have pros and cons:
• An informal wind-down and dissolution is straightforward but likely not feasible if remaining cash is insufficient to pay back creditors.
• A Chapter 11 bankruptcy is a formal reorganization process that plays out in court. Often the best route for companies that have substantial operations and face the threat of heavy litigation, this proceeding rarely makes sense for a small company. It is expensive, public, requires court filings and approval for major actions, and takes at a minimum several months to complete.
• In a Chapter 7 bankruptcy, which is likewise expensive, a court-appointed trustee administers the asset liquidation. Trustees often lack industry knowledge, incentives to act with urgency, and the ability to operate the business, should doing so for a short period benefit creditors.
• A foreclosure sale under UCC Article 9, while quicker and cheaper than bankruptcy, may not yield optimal value for the assets, and requires that the lender take responsibility for the sale effort—which they may not have the resources, expertise, or desire to do.

Enter assignments for the benefit of creditors. An “ABC” is a corporate liquidation process available to an insolvent company that has run out of options. A nimble procedure governed by state statute rather than federal law, ABCs are often an attractive alternative to bankruptcy and other options since they are usually faster, simpler, less expensive, and yield better outcomes. While not suitable for all situations (e.g., a company with highly complex multi-state operations and litigious creditors), an ABC is a recognized proceeding that a board can avail itself of to maximize recovery for creditors and minimize its liability. ABCs have grown in popularity in recent years with venture-backed technology companies and traditional brick-and-mortar firms alike.

Here’s how it works: with consent from its board and shareholders, a distressed company transfers ownership of its assets (technology, inventory, machinery, etc.) to a third-party fiduciary of its choosing—the “Assignee”—through a general assignment agreement. The Assignee then sells the assets in an accelerated timeframe, communicates with stakeholders, distributes remaining cash to creditors, and manages the administrative wind-down of the Company.

While providing the company’s board members and officers with many of the protections of a bankruptcy proceeding, an ABC can be made at a fraction of the cost. ABCs happen without judicial oversight in key states (California, Massachusetts, Illinois, etc.), enabling Assignees to move quickly. A speedy process maximizes creditors’ recovery, since many acquirers want to pursue, in parallel with their purchase of the assets, a company’s customers and key employees as well—who would likely be off the market if the process were to take too long. The Assignee is able to continue to operate the business, as long as those operations are financially solvent.

Exploring an ABC makes sense when it becomes clear runway is limited. If the business will be unable to remain a going concern without the closing of a company sale transaction or capital infusion, contingency planning around wind-down options, including ABCs, is prudent.

When a company approaches insolvency (inability to pay debts as they come due) the board must act with caution since creditors replace shareholders as the primary beneficiaries of any residual value of the business. Directors of an insolvent corporation are exposed to claims from creditors that the directors’ actions harmed enterprise value and thus failed to protect creditors’ interests. If future prospects are limited and ongoing operations would deepen financial troubles, an ABC can be a graceful way to exit and should be considered.

Who benefits in an ABC?
• the creditors – since an experienced Assignee is officially working to maximize their recovery. The Assignee can take the assets to market immediately upon ABC launch (as opposed to the three-to-six-week delay in a Chapter 7 bankruptcy), and engage company personnel to assist, thus preserving asset value and institutional knowledge.
• the board – since they can minimize their liability by resigning day one of the ABC, and do not face the disclosure requirements (and therefore stigma) of a bankruptcy.
• the acquirer – since the assets are sold free and clear of liens and related liabilities, and the sale can close quickly—without the need to obtain court approval (in many states).
• the company’s vendors and customers – since they can start a fresh relationship with the (presumably solvent) asset buyer.

How G2 can help
As a premier financial advisory boutique, G2 helps troubled companies evaluate available options, gain stakeholder buy-in, and implement the best solution. G2’s experience with ABCs and other fiduciary services covers an array of industry sectors and geographies. Our investment banking prowess ensures a professional asset sale process that will yield the highest possible recovery for creditors. G2’s capabilities in special situations span the full range of operational and financial restructuring options available to distressed middle market companies. As an effective tool for both satisfying creditors and allowing stakeholders to exit, an ABC is one such option that a company facing crumbling business prospects may want to consider.

Nate McOmber
Director
415-825-5866
[email protected]

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As we enter the typical fall budgeting process, G2 has been assisting our clients in exploring new ways to approach 2021 forecasting given the uncertainty related to the COVID-19 pandemic and its impact on various industries over the near to medium term. Many operators and their finance teams are struggling to reliably forecast their businesses, making strategic planning more challenging and limiting stakeholders’ ability to assess the long-term prospects for their companies. Through our financial advisory and turnaround consulting engagements, G2 has been leveraging a number of key practices to enhance the productivity of 2021 budget building, helping companies and their management teams plan proactively manage the uncertainty:

• Consider New Methodologies
o Year-over-year variance modeling – When a business has seen temporary pandemic related demand disruptions, we’ve applied efficient top down discounts to 2019 actuals or 2020 original budgets to drive revenue assumptions for 2021. The top down discounts can be refreshed based on latest views on the depth and duration of the impact of the pandemic on a particular business or industry. By layering on updated cost structure assumptions based on management’s various initiatives, a full profitability picture can take shape. For indoor businesses, like restaurants or retailers, G2 has been similarly modeling the revenue impact of the pandemic through the winter months in colder geographies in the U.S.
o Bottoms up around the “New Normal” – For companies with significant and likely permanent changes to their operating realties, a bottoms up full budgeting process may be the preferred method. Benefits include revisiting detailed revenue assumptions, which can prompt creative approaches or calls to action to drive new revenue opportunities. Similarly, divisional level, line item by line item review of cost structures can yield material expense reduction opportunities or nimbler, potentially tech enabled operating models explored during the pandemic.
o Build multiple “cases” vs. one baseline budget – Clients that severe pandemic related revenue declines have typically taken a scenario modeling approach to budgeting, focusing more on potential states of the world and the associated impact on the business, rather than on presenting one budget, that with certainty will be wrong.
• Scenarios modeling is more valuable than ever
We value “sensitizing” forecasts based on key assumptions and drivers in order to stress test profitability and liquidity in times of significant uncertainty. By creating upside (vaccine in Q1) and downside cases (no vaccine), leadership teams arm themselves with key insights on the range of potential outcomes for both revenue and expense level recoveries. Furthermore, stress tests provide clients with insight into what breaks the business and how to proactively manage cost structures and liquidity (keeping dry powder for CAPEX or working capital investments) based on topline trends and other key indicators of business activity. Commodity costs can be a key driver of margins and warrant particular scrutiny in scenario models. Stress testing covenants and minimum available liquidity is critical in leveraging forecasts as a tool to provide transparency and peace of mind to lenders at this time. Consider also pulling forward the budgeting process timeline in order to get estimates of potential outcomes in 2021 earlier, allowing management to take more aggressive action sooner.
• Flexibility may be more valuable than granularity
In times of high uncertainty, building granular bottoms up forecasts require significant resources and provide limited value given the pace of change. The return on those resources can be enhanced by building flexible models that can be updated over the course of the year with actuals and refreshed on a rolling basis. A dynamic forecast is highly valuable in providing leadership with real time forward views and empowers nimbler responses on driving revenue opportunities and trade-offs on investment, especially in a recovery scenario where working capital requirements can be significant.
• Bridge Building
We recommend tracking the impact of COVID-19 on revenue, costs, and cash in order to bridge between 2020 actuals to a pro forma, adjusted view of the business. Analyzing 2021 forecasts and scenario cases through EBITDA or free cash flow bridges isolates key assumptions and plays a critical role in educating stakeholders on drivers of performance. For more challenged situations, sizing cash needs becomes a critical output of the 2021 budgeting process, whether funding operating losses or working capital. Solving for these liquidity needs in the form of a “cash bridge” has been a key focus across many G2 engagements with pandemic impacted companies.

G2’s highly capable team, including seasoned interim CFOs, Controllers, or FP&A resources, not only can help our clients navigate challenging liquidity or performance environments, but also can drive improvement in core finance/accounting functions. Feel free to reach out to the G2 team to learn more about the approaches we are using across our 45 plus clients in our industries of focus.

Digitization & Technology

G2 is pleased to present a Q&A session our very own Victoria Arrigoni moderated recently with Jim Gillespie, the CEO and co-founder of | GrayMatter | a leading Industrial Intelligence and Digital Transformation company. We had the opportunity of speaking with Mr. Gillespie to discuss key trends in digitization and technology adoption in manufacturing and middle market companies, including how COVID-19 has affected those trends. Mr. Gillespie has over 30 years of experience curating technology and guiding the digital process for manufacturing companies. GrayMatter enables assets and people to become smarter, more visible, and more productive. Through co-innovating with companies in manufacturing, water/wastewater, power, and oil and gas markets, GrayMatter delivers custom-fit operational technology programs and solutions.

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We hope you and your families are safe and well during these challenging times. Over the past three weeks, G2 has been in contact with over 100 lenders and private equity firms as well as stakeholders across our 40 active engagements. Our focus has been to continue to create bespoke solutions for our clients, helping them weather the current storm while positioning them to come out on the other side with a solid financial and operational foundation

Strategically positioned between G2’s M&A (sell side and buy side) advisory practice and Financial Advisory/Restructuring practice, G2’s Capital Markets team has the proven ability to raise capital in any market environment. Please find below our high-level perspectives on what we are currently seeing in the market.

Despite the uncertainty, debt funds are open for business

Although commercial banks are well capitalized this time around, they nonetheless are in preservation mode, providing amendments to stabilize clients’ situation while limiting incremental exposure within existing and new credits.
Many debt funds and direct lenders (i.e., non-banks) have said that they are “open for business,” and are eager to deploy their committed capital –albeit at very lender-friendly pricing and terms.
There is a clear willingness to lend, but not necessarily a clear way to do it

When pushed, investors are not sure how to actually model a COVID-19 bottom for most industries in terms of depth and duration, so how they would actually lend into theses situation is uncertain.
We also have seen certain lenders push back on COVID-19 adjustments in current restructuring negotiations, but we expect a universal acceptance of some level of COVID-19 add-backs in future credit agreements.
Desperate times do not call for desperate measures – Keep Calm and Finance On

In the early innings of this crisis, lenders have generally engaged in a relatively constructive tone as they acknowledge COVID-19’s unprecedented economic impact and seek to provide some flexibility.
Now more than ever, the key to accessing capital in these markets is to be prepared:
Pro-actively engage current lender group to discuss near-term challenges and possible short-term fixes.
Develop a sound qualitative investment thesis for a post-COVID rebound supported by detailed quantitative scenario analyses.
Work with auditors and counsel to lay the groundwork for add-backs.
Access government support programs (e.g., CARES Act). Click here to download our comprehensive guide!
Develop a strategy to access alternative sources of capital – to address both short-term liquidity needs and long-term investment in future growth.
Anticipate and front-end load diligence documents and data with the expectation that lenders will require more in-depth diligence.
If you need access to additional capital or are experiencing any issues with your current lending group, please do not hesitate to call us for an evaluation of your situation. We are ready to leverage the full capabilities of G2 to help you meet your financing and strategic goals. Failure is not an option. #FINAO