asset pool, and so they were overextended
on their formulas from a structure
standpoint. Compounding this problem
of course, was the fact that the values
did go sideways for the most part in the
retail space – at least until the consumer
convinced us that they would show up for
sale events.
For a lot of these highly leveraged retail
companies, it was absolutely a double
whammy from a liquidity perspective and
many of them went away: Linens ‘n Things,
Circuit City. There’s a half dozen other
ones that you could name. Ultimately, a
lot of these balance sheets had to be fixed.
Companies had to cut back on their capital
expenditures and get back into alignment
over the last, you know, 15, 18 months.
DRATT: It’s probably evident, but I would
say the impact of lower values on assets
that form part of the borrowing base is that
the advance a lender could make against
those assets goes down. We see this both
in our own work and in the comments that
come back from lenders to us.
When you look at the large syndicated
ABL market today and compare it to a year
and a half ago, there are far fewer deals being
done of the size that we once saw. The buoyancy of that marketplace meant a lender
could do a billion-dollar ABL pretty quickly.
SCHMITT: What we saw is that a number
of lenders did incur losses and were in
over-advance positions because of the
drop in value of the equipment and real
estate markets. This resulted in a high level
of skepticism and uncertainty; as a result,
lenders became unwilling to advance new
term debt to many companies and focused
financing on revolving loans, which were
viewed as more liquid assets. And some
lenders just made bold statements saying,
“We’re not doing any term debt at this time.”
As a result of the overall poor economic
conditions and lenders’ reactions of limit-
ing new loans and term debt, the decline
in asset values was further exacerbated.
There were a lot of companies that could
not obtain the funds to finance their
capital expenditures or take advantage of
acquisition opportunities, which limited
demand and thus reduced values.
DRATT: One thing I’d add to what Rick just
said, from the exit perspective, if you’re
either an appraiser doing a liquidation
analysis with a strategy or you are actually
the liquidator, there’s no longer a world of
orderly liquidations. Today, it’s all about
forced liquidations.
Hilco, like others today, is not willing
to hold a deal for six months. We’ll go in
and buy on the machinery and equipment side, but the auction is going to
take place within 90 days of the day
we bought. And, at one point in 2009,
between the Chrysler and the GM bankruptcies, we stopped buying and we held
to fee and commission deals for about
three months beyond that before we
started to buy again.
So NOLV is a nice concept that works
in the ordinary world. In the so-called new
normal, I’m sure that NOLV is really more
akin to FLV.
COVE: How has the large number of
business bankruptcies in the past year
affected the liquidations business?
SCOTTI: Again, it’s a tale which has two
parts because, immediately after the
onset of the financial meltdown, I think
the entire liquidation community was
extremely busy with transactions as banks
and other entities dealt with the implosion
of the marketplace. During the first six
months after the meltdown, there was an
extraordinary amount of activity. I have
one client, one lender, who probably had a
bankruptcy a week from January 1 through
March. That’s how active that portfolio was
in terms of dealing with restructuring.
Over the last six months, however, at
least as it relates to consumer products
and retail, there’s been a dearth of activity.
For a lot of these
highly leveraged retail
companies, it was
absolutely a double
whammy from a
liquidity perspective
and many of them
went away: Linens ‘n
Things, Circuit City.
