When a borrower goes into Chapter 7, it’s natural to focus on the endgame: liquidation. After all, operational concerns come to the fore only in cases involving reorganization, right? Not necessarily. Consider our largelot sale of the majority of former assets from one of North America’s biggest auto parts suppliers — Fenco (Fenwick Automotive Products Ltd., and Introcan).
A major supplier to the likes of AutoZone, GM and NAPA Auto Parts, Fenco once posted annual revenues of over $200 million. With $60 million of automotive parts, raw materials and the core components used in auto-parts remanufacturing in play, this was clearly a substantial case. But our focus was not on old-school liquidation tactics — i.e., strolling into Fenco’s darkened warehouses and saying, “Let’s throw it all under the hammer and see what we can get.” On the contrary, the first impulse of our 10-person team was to ask how we could get the lights back on (the company had been shut down for a month) and start looking for efficiencies that could yield savings for the estate. Our team was supported by 20 former Fenco employees who were brought back to assist with the sale. By establishing an organizational flowchart — bringing in team members focused on such areas as finance and accounting, operations and sales and marketing, all led by a project manager/CEO — we laid the groundwork for executing on the sell side.
Take those warehouses. Acting as both operator and seller, we realized that $10 million in inventory from two Fenco warehouses could be transferred to a single, far-less-expensive facility at a savings to the bank of about $500,000 in real estate and labor. Putting it all beneath one roof made for more efficient logistics as well. And having dealt with automotive collateral on several occasions over the past few years, we also knew that inventory-management would be critical. Within three weeks, our team had a new warehouse management system up and running. We didn’t just reboot Fenco’s system — we built this from scratch.
Because Tiger financed all the working capital during this process, one could argue we acted as financier, turnaround firm and investment bank rolled into one. To an outside observer, our accounting and finance experts would have seemed every bit as busy as their counterparts at still-thriving companies. They spent long hours paying bills, monitoring budgets, managing cash and dealing with issues related to a complex network of vendors and Accounts Receivable.
Why this sharp focus on operations? Because of the benefits this can yield on the sell side. Functioning as an operator can actually help efforts to secure a greater recovery. When potential buyers walk into a warehouse and see it humming with life, they sense the presence of value. Intangibles matter. The $50 brake caliper sitting in an active warehouse with good inventory systems can be perceived to be worth $25. But if that warehouse is dormant, that same caliper may be perceived to be worth $12.50. Our goal was to show Fenco’s former industry competitors a well-organized, turnkey operation—one with assets worth competing for.
During the sale process, we sold full product lines, business units and the majority of Fenco’s former equipment to two strategic buyers: Cardone Industries and Triple Diamond Imports. Cardone also took over Fenco’s 600,000-sq. ft. facility in Lock Haven, Penn. Had we auctioned these assets to a host of smaller buyers, the result would have been a lower top line, with higher costs. However, by approaching this sale as an operator, we were able to more than double the estimated auction recovery.
This result highlights the added value today’s firms are bringing to the bankruptcy process — even in Chapter 7 cases that would have been treated as fire sales in eras past. By bringing in operator-sellers with industry-specific experience—firms that are not afraid to get creative and explore all avenues to maximize the recovery — lenders stand to benefit. This is particularly true if they do so early in the process rather than later.
