March/April 2017 | 1

TURNAROUND MANAGEMENT ASSOCIATION OHIO

Turnaround TimesVolume 4 | Issue 1 | March/April 2017

TMA is the premier national organization

of professionalsdedicated to

corporate renewaland turnaround management.

March/April2017

In This Issue

Page 2The 2018 Recession? A Mirror Image of 2008?

Page 32017 Events Schedule

Page 4Supreme Court Ruling

Limits Chapter 11 Exit and Settlement Strategies

Page 5Congratulations Best

Lawyers

About TMA

Visit our website:www.turnaround.org

Follow us on Twitter:@OhioTMA

President’s ReportMark KozelBDO USAFor readers who may not be aware, my name is Mark Kozel, Director of Management Consulting at BDO USA, LLP. I have the privilege of leading the Ohio Chapter of the Turnaround Management Association for the 2017 and 2018 terms. I thank the chapter and the board for this opportunity to serve and hope that I can measure up to the high standards set by my predecessors.

For this first newsletter of 2017, there is much to report to our members and friends. First, we welcome new board members Glenn Bartley of Huntington, Marc Merklin of Brouse and Lance Frew of Inglewood, along with returning board members Dan DeMarco of Hahn Loeser and Mark Kutylowski. Eager to participate on the board, Glenn is heading up the Recognition Committee (in charge of our annual Lifetime Achievement Award as well as the Turnaround of the Year Award), while Lance is working with fellow board member M.J. Hilker on the Great Lakes Conference (coming up May 25-26). Dan DeMarco returns to the board as Vice President and Mark Kutylowski returns as Treasurer. Board member Michael Kaczka has taken over as Secretary from Dan DeMarco, and Chris Peer from Wickens Herzer Panza Cook & Batista has taken on the mantle of newsletter editor. Welcome all!

In programming, Dan DeMarco, Suzana Koch and I have been working with Kelly Burgan, Gus Kallergis, M.J. Hilker, Rob Stefancin, Michael Kaczka, Drew Parobek and Mark Kutylowski to assemble a great lineup of programs for 2017. We started the year with our economics presentation in January, our fraud presentation in February and our cybersecurity presentation in March. On April 27th the Ohio Chapter of TMA joined the CMBA Bankruptcy & Commercial Law Section, the Federal Bar Association and NEON-IWIRC to sponsor a retirement dinner celebration for the Honorable Pat E. Morgenstern-Clarren at the Drury (formerly the Cleveland Board of Education building). May 25-26 at Avalon Inn and Resort in Warren, Ohio is where you’ll want to be for the Great Lakes Conference. M.J., Lance, and their team promise great golf, plenty of beverage carts, a welcoming reception and dinner and a great program on Friday morning worthy of rising and shining! Then on June 13, our chapter and the ACG will jointly host our annual Shoreby event, promising great networking, fully stocked bars and wonderful food. And last but not least, rounding out our first half offerings, July 27th will be our 26th Annual Golf Outing at Mayfield Country Club. Organized by the legendary golf organizer Drew Parobek and his team, this always popular event fills up fast, so watch for the start of sign-ups and sponsorship opportunities.

The second half of 2017 promises to be no less exciting, with our first TMA/CFA Event in September, our TMA/CMBA Education event in October, our annual TMA/IWIRC event in November and our annual Holiday Party on December 7th. All of our events focus on providing our members with plenty of networking and socializing opportunities, along with some very interesting and topical educational programs designed to help each of us professionally, as well as round-out our knowledge of current topics of interest. To that end, if you have ideas or suggestions, please pass them along. John Hecker was impressed with a speaker he had heard and passed that information along – which lead to our March cybersecurity presentation by Barry Spencer of the FBI – a very memorable and eye-opening presentation, to say the least. Our goal is to provide our members with content designed to help each of us grow professionally and personally.

While members of the board spearhead various activities, we’re always looking for folks interested in helping out. It’s a good way to get involved, learn more about the chapter and potentially position yourself for consideration when board seats open up. Please see me, Dan, Suzana or any board member if you’re interested. We’ll get you connected with the right team, and we appreciate your willingness to help out.

Thank you for your continued interest and participation in TMA. We look forward to seeing you at our upcoming events. –Mark

2 | Turnaround Times

The Centrus Group has been recognized as one of the premier turnaround practices in Ohio, providing services to middle market companies for the past 24 years. Centrus assists companies in developing and implementing a variety of creative and strategic actions that will result in a sustainable, profitable and growing company. Centrus provides expert management and strategic services in the areas of turnarounds, crisis intervention, wind-down management, financial/debt restructuring, executive recruiting and divestitures. Visit Centrus’ website at www.centrusgroup.com or contact the firm at 330-864-5800.

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Featured Sponsor

Ohio TMA Officers

President Mark Kozel

Vice President Dan DeMarco

Secretary Michael Kaczka

Treasurer Mark Kutylowski

Ohio TMA Board Members:

Glenn Bartley

Sally Barton

Kelly Burgan

Lance Frew

Mary Jane Hilker

Gus Kallergis

Suzana Koch

Marc Merklin

Steve Skutch

Rob Stefancin

Rick Szekelyi

Chapter Executive: Louise Walsh

Every week a banker, lawyer and/or client asks me if the overall business environment is improving. I always respond, “it all depends on which business indicators you are looking at.” I further elaborate by saying “if you are looking at consumer spending, the business environment is improving, howev-er if you are looking at manufacturing, and specifically all of the automobile sectors of the economy, the business environment is approaching decline.” In a nutshell, the United States economic decline of 2016-2019 likely has already begun and may be a near mirror image of the decline of 2005-2008 inspired by the crash of the housing market.First, we take a quick walk down memory lane to review the housing market collapse that led the U.S. economy into recession in the late-2000’s. Note that 2005 was a banner year for housing starts. This expansion in the housing market was driven by highly aggressive mortgage rates and loans provided to borrowers that, in hindsight, should have never received one. In December of 2005, for the first time in a number of months, housing starts began to decline. By the end of the first quarter of 2006, it was clear that the declining housing market exemplified a downward trend. By 2007, the value of many homes was less than the then-outstanding mortgages. Banks began to foreclose on homes due to non-payment, and unemployment grew, all of which in turn fueled even greater mortgage defaults. During this period from 2005 through 2007, the U.S. Gross Domestic Product Index (GDP) continued to grow, fueled by consumer spending. So, if you asked in 2006-2007, if the economy was growing, most people would say “yes,” because GDP was growing. Then, of course, came the recession in 2008.The Auto IndustryNext, let’s take a look at the recent performance of the auto industry. The total employment impact of the auto parts industry nationwide was estimated at more than 4.3 million jobs directly and indi-rectly in 2016 – more jobs than any other manufacturing sector.1 Half of the companies listed in the Dow Jones Industrial Average depend on autos for some share of revenue.2 While the auto industry may not be the largest component of GDP, it certainly is significant.Annual U.S. vehicle production dipped to just below six million units in 2009.3 Following this milestone, low vehicle production nearly tripled from 2009 levels to 17.5 million units by the end of 2016, breaking the all-time record, and marking the seventh consecutive year-over-year sales growth - a first in automobile sales history.4 Many industry experts are predicting that 2016 could be the high-water mark for the industry’s comeback since the recession.5 Auto inventory as a ratio of

1 http://www.dbusiness.com/daily-news/Annual-2017/Report-US-Automotive-Parts-Manufacturing-Jobs-Increase-Near-ly-19-Percent/

2 file:///Users/BUSINESS/Desktop/Auto%20Article/Economy%20%7C%20Alliance%20of%20Automobile%20Manufactur-ers.webarchive

3 https://www.selectusa.gov/automotive-industry-united-states4 file:///Users/BUSINESS/Desktop/Auto%20Article/Record%202016%20for%20U.S.%20Auto%20Industry%3B%20

Long%20Road%20Back%20May%20Be%20at%20End%20-%20The%20New%20York%20Times.webarchive5 ibid.

The 2018 Recession? A Mirror Image of 2008?By Bob Cohen, Centrus Group

March/April 2017 | 3

monthly auto sales is up to 3.162, the highest level since the last recession in 2009.6 Total outstand-ing auto loan debt grew in 2016 to nearly $1.2 trillion, an increase of 9% from the previous year and 13% above the pre-crisis peak in 2005. Total household debt levels are now approaching the 2008 peak.7 See the similarities?More Warning CloudsOther factors negatively impacting the health of the auto industry are also mounting. The rate of seriously delinquent subprime car loans soared above 5% in February 2017. That delinquency rate is worse than during the Great Recession, and represents the highest such levels since 1996.8 Overall, defaults on auto loans and leases of all kinds are at the highest levels since 2008.9 Improvements in vehicle quality have resulted in more reliable cars, meaning consumers are less likely to trade their car in as early as they had in the past. Moreover, the typical car is on the road today for a record-high of 11.5 years.10 With the demand beginning to fall off for autos, General Mo-tors, still the nation’s largest automaker, announced plans to cut shifts of workers at three assembly plants that build cars in Michigan and Ohio.11 These facts and factors are illustrative.This is all starting to sound quite familiar – very similar to the beginning of the rapid deterioration of the housing industry from 2005-2008, except this time, it is the auto industry leading the way. Excessive inventories, aggressive financing strategies, record high household debt levels, significant loan defaults and unemployment fueled the last recession, and will most likely fuel our next Ameri-can recession. By the end of 2016, the U.S. economy continued to grow, though at a slightly lower rate. Real GDP increased at an annual rate of 2.1% in the fourth quarter of 2016, which is a decline from the real GDP increase of 2.5% in the third quarter of 2016.12 So if one was to ask how the economy is performing, as of the end of 2016, we could feel comfort-able that the economy was still in a growth mode. Of course, we could have said the same thing in 2006. However, with a deeper insight into the status of the automobile sector, and the uncanny similarities between the auto sector performance and the housing sector in December 2005-2007, we should take note that history may be repeating itself.

Bob Cohen has been a regular contributor to the Ohio TMA News over the years. Bob has been pro-viding turnaround and crisis management services to the industry since 1981 and is the Manager/Partner at Centrus Group.

6 https://fred.stlouisfed.org/series/AISRSA7 https://www.newyorkfed.org/microeconomics/hhdc.html8 http://money.cnn.com/2016/03/15/investing/subprime-unpaid-auto-loans-oil-crash/9 https://www.experian.com/blogs/insights/2017/02/auto-loan-delinquencies-extending-beyond-subprime-consumers/10 http://money.cnn.com/2016/03/15/investing/subprime-unpaid-auto-loans-oil-crash/11 file:///Users/BUSINESS/Desktop/Auto%20Article/Record%202016%20for%20U.S.%20Auto%20Industry%3B%20

Long%20Road%20Back%20May%20Be%20at%20End%20-%20The%20New%20York%20Times.webarchive12 https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

May 25, 26 Great Lakes Conference. Avalon Inn & Resort, Warren, OH.

June 13 TMA/ACG Shoreby Event

July 1726th Annual TMA Golf Classic. Mayfield Country Club.

September 19TMA/CFA Joint Event. Time and Place to be determined.

October 19TMA/CMBA Education Event. CMBA headquarters.

November 16 TMA/IWIRC social. Time and Place TBD.

December 7 Annual TMA/CMB Holiday Event. Evening event. Place TBD.

NOTE: The dates and subjects listed in this tentative 2017 calendar are subject to change to accommodate speaker’s availability, facility availability, verification of availability of other organizations in the case of joint events, and current events which might pre-empt this current schedule. This schedule will be updated as necessary.

2017 Schedule

4 | Turnaround Times

Established in 1920, Hahn Loeser & Parks LLP is a law firm with a national footprint and international reach. Hahn Loeser has offices in Cleveland and Columbus, Ohio; Naples and Fort Myers, Florida; Chicago, Illinois and San Diego, California. We practice the art of creative, sophisticated legal counsel, providing the full spectrum of legal services in one disciplined firm. The team of over 100 attorneys works relentlessly on behalf of our clients, partnering with them to develop strategic solutions.

Featured Contributor

Plan and settlement negotiation leverage will be shifting in Chapter 11 cases as a result of the United States Supreme Court’s 6-2 decision, issued on March 22nd. In Czyzewski, et al. v. Jevic Holding Corp., et al. (No. 15-649), the Supreme Court held that bankruptcy courts lack the power to approve so-called “structured dismissals” of Chapter 11 cases where a class of junior creditors received consideration from the estate and a higher class of creditors under the Bankruptcy Code’s distributive scheme receives nothing. In the Jevic case, the structured settlement provided for the estate to release all claims against senior creditors and the debtor’s owners where the settlement and distribution to the debtor’s general unsecured creditors was contingent upon the dismissal of the Chapter 11 case and upon a class of priority creditors receiving no part of the distribution. The assets to be distributed by the estate were the settlement consideration received by the estate from the debtor’s owner and senior secured lender, in exchange for the estate’s release of certain claims against them. The lower courts approved the settlement and structured dismissal based on the theory that the class of objecting, priority creditors would have received nothing in any event and, therefore, lost nothing as a result of the settlement. The Supreme Court disagreed, holding that the class of priority creditors would have been in the position to assert the very claims that were settled and released in the structured dismissal, or at least potentially to receive some of the proceeds.The upshot of this decision is that it will be harder to achieve structured settlements by isolating recalcitrant creditors if they are at a level

equal to or higher (under the Bankruptcy Code) than creditors receiving settlement proceeds. The Jevic case may have the effect of prolonging litigation or reducing some settlement values. Structured dis-missals will require careful planning, and perhaps eliminating objections of all interested parties, if they are to proceed. Structured dismissals will need to address the Supreme Court’s mandate that creditors receive their due under the Bankruptcy Code’s priority scheme, which, generally speaking, first pays secured creditors, then priority creditors and finally unsecured creditors, followed by equity holders.In the Jevic case, a leverage buyout (LBO) of Jevic Transportation Company by an affiliate of Sun Cap-ital Partners (financed by The CIT Group) failed, as the business was unable to meet its obligations in year two of the LBO. In the ensuing Chapter 11 filing of the trucking business, the company was unable to reorganize. The failed LBO also spawned two lawsuits. The debtor’s former employees sued Sun for alleged damages due to the debtor’s failure to give a WARN notice to the former employees. In addi-tion, the creditors’ committee sued Sun and CIT, alleging that the LBO was a fraudulent conveyance. It is the fraudulent conveyance claim that was settled by Sun and CIT pursuant to the structured dis-missal, for a total payment in the amount of $3.7 million. This settlement was subject to Sun’s condi-tion that none of the proceeds go to the former employees (priority creditors), the rationale being that such proceeds ultimately could be used by former employees to fund litigation of their claims against Sun. The Supreme Court took note of the fact that, despite this condition, Sun defeated the former employees’ lawsuit by the time the appeal reached the Supreme Court.Justices Thomas and Alito filed a dissenting opinion, not challenging the ruling on the merits, but instead asserting that the Supreme Court’s agreement to review the lower court’s ruling was, in retro-spect, improvidently granted.

Supreme Court Ruling Limits Chapter 11 Exit and Settlement StrategiesBy Rocco I. Debitetto, Daniel A. DeMarco, Lawrence E. Oscar and Christopher B. Wick

Hahn Loeser & Parks LLP

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Ohio TMA Corporate Sponsors

Platinum

Baker Hostetler

McDonald Hopkins

BDO

Chikol

Skutch Arlow

Inglewood

Calfee

Phoenix

Centrus

Brouse

Silver

Thompson Hine

Walter Haverfield

Kiko

MorrisAnderson

Presidential Financial

March/April 2017 | 5

Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law

Baker HostetlerKelly S. BurganMatthew R. GoldmanJoseph F. Hutchinson, Jr.Michael A. VanNeil

Benesch, Friedlander, Coplan and AronoffWilliam E. Schoenberg

Calfee, Halter & GriswoldGus Kallergis

Hahn Loeser & ParksDaniel A. DeMarco

Ice MillerRobert M. Stefancin

McDonald HopkinsShawn M. Riley

Squire Patton BoggsG. Christopher Meyer

Taft Stettinius & HollisterBruce Lowe

Thompson HineAlan LepeneScott Lepene

Vorys, Sater, Seymour and PeaseBrian J. FarkasDrew T. Parobek

Lauren A. Helbling

David O. Simon

Top votes cast for a particular location and practice area:

Litigation – Bankruptcy – Joseph F. Hutchinson, Jr. (Baker Hostetler)

Bankruptcy and Creditor-Debtor Rights and Reorganization Law – Shawn M. Riley (McDonald Hopkins)

Congratulations!!The TMA Ohio Chapter offers its congratulations to members recently recognized in the Best Lawyers 2017 Survey supplement in Crain’s Cleveland Business.

Scenes From Recent TMA Events. In photo at left, FBI Special Agent Barry Spencer is with TMA’s Kelly Burgan at the March event on cybersecurity. At right, Assistant U.S. Attorney Mark S. Bennett poses with TMA’s Suzana Koch, also an Assistant U.S. Attorney, at the white collar fraud event.