Triangular Article 9 Sales: An

Underutilized Alternative to Section

363 Sales

Agenda

I. Exit Alternatives for Middle Market Lenders

II. Basics of an Article 9 Sale

III. Pluses and Minuses of an Article 9 Sale

IV. Article 9 Sales – A Summary of Why They are Underutilized

V. Article 9 Sales – One Banker’s Perspective

VI. Case Studies

VII. Conclusion

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Section 363 Sale

Receivership Sale

Assignment For The Benefit Of Creditors

Note Sale

Refinance And Less-than-par Payoff To Senior Lender

Liquidation Or Foreclosure

Triangular Article 9 Sale (Friendly Foreclosure)

I. EXIT ALTERNATIVES FOR MIDDLE MARKET LENDERS

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Secured Party Sales Under Article 9 Sales Of The Uniform Commercial Code Have The Following Basic Legal Requirements:

Notice To Creditors

Asset Lien On Collateral Being Conveyed

Commercially Reasonable

Proper Application Of Proceeds

II. BASICS OF AN ARTICLE 9 SALE

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POSITIVE ATTRIBUTES OF AN ARTICLE 9 SALE:

Discreet: May Be Important To Insiders/Customers And Improve Values

Out of Court/Simplicity: Reduce Legal Complications; May Improve Values

Speed: Achieved In Under 60-Days; Preserve Values; Reduce Cash Burn And Costs

Cost: Shortened Time And Reduced Level Of Professional Over-Sight Reduces Expenses

Value Preservation: Better Asset Values Realized In Many Situations

NEGATIVE “POTENTIAL” ATTRIBUTES OF AN ARTICLE 9 SALE:

Lien & Default: Need For Loan Default And Likely Need For All Asset Lien

Risk Of Challenge

Increased Risk of Litigation

Possibility Of Involuntary Filing

Liability To Secured Parties

Need For Ownership Cooperation

Facility-Based Complexities (Leaseholds And Fee Real Estate)

III. PLUSES AND MINUSES OF AN ARTICLE 9 SALE

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Lack Of Constituent Knowledge

Fear Of Litigation By Borrower’s (Seller’s) Management, Lender & Buyer

Professional Income Opportunity

Industry Familiarity And Acceptance Of 363 Sales

Perceived Execution Risk

IV. ARTICLE 9 SALES – A SUMMARY OF WHY THEY ARE UNDERUTILIZED

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Size: Article 9 Sales Better Alternative In Lower Middle Market Deals Vs. Larger Transactions

Security: All Asset Lien By Lender’s Preferred To Avoid Fight Over Intangibles And Lack Of Control Of Entire Bundle Of Assets Essential To Going Concern

Debt Profile: Single Revolving Lender Deals vs. Syndicated; Junior Lender Cooperation A Plus. Reduce Number Of Secured Parties Involved

Ownership Cooperation / Other Constituents: Guarantees Of Owners Likely To Improve Cooperation; Unions May Complicate Process; Licenses; Regulated Companies, etc. May Be Factors

Timing/Cost Issues: Need Clear Demonstration That Speed Will Preserve Value Without Impairing Others; Liquidity Issues Also Demonstrate Need For Lower Cost Process

Reasonableness Documentation: Key Aspect Of Article 9 Is “Commercial Reasonableness” Of Process; Appraisals, Prior Sale Efforts; Professional/Consultants Involvement To Provide Support

Profile: Depending On Secured Lender, The Public Profile Of The Company Could Be A Factor.

Demonstrated Need For Process: Effort To Maximize Value And Properly Apply Proceeds

Probability of Challenge: If Threats Of Litigation Are High, Must Weigh Against Benefits of Article 9 Process

V. ARTICLE 9 SALES – ONE BANKER’S PERSPECTIVE

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Company: $500MM distributor of cigarettes & sundries to convenience store industry.

Debt Profile: $20MM asset based revolver plus unsecured trade debt.

Situation: Failed acquisition roll up led to losses and liquidity constraints. Major tobacco companies reduced terms overnight which exacerbated liquidity crisis.

Other Factors: Quick turning assets resulted in need for a fast resolution; company out of liquidity to pay for more expensive bankruptcy proceeding; owners had pledged liquid assets to backstop guarantees.

Asset Buyers: Investment banker located competitor who wanted hard assets and routes.

Resolution: Assets sold in an Article 9 sale in under 60-days; value in company preserved; senior lender paid in full; guaranty of owner released and collateral returned.

Article 9 Outcome: Article 9 sale worked well as it allowed secured party to move quickly in light of rapidly deteriorating situation in which collateral levels were shrinking . Process was highly efficient and resulted in lower professional fees. Lack of other funded debt and relatively low level trade payables resulted in a lack of legal challenges to the process.

VI. ARTICLE 9 SALES – CASE STUDY

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Company: $125MM rental company of concert & theatrical lighting .

Debt Profile: $25MM asset based revolver; $12MM of junior secured debt; $10MM of trade.

Situation: 2008 recession slowed concerts which depressed sales. Private equity firm turned over ownership to mezz lender in exchange for new capital. Prolonged downturn eroded liquidity and ownership unable to further support business.

Other Factors: Lengthy attempted going concern sale process by investment banker unsuccessful; multiple consultants unable to right size business; CRO engaged to liquidate; pending potential litigation added a complication; secured mezz lender seeking some level of recovery at same time that bank was concerned with its collateral coverage.

Asset Buyers: International buyer prepared to acquire assets for $5MM higher than liquidator’s proposal but only outside of bankruptcy.

Resolution: Assets sold in article 9 sale in 45-days; bank’s principal paid in full; mezz lender paid small amount; value in enterprise preserved and total liquidation avoided.

Article 9 Outcome: Canadian subsidiary complicated matters (priming taxes/employee obligations); buyer’s reservation regarding obtaining “clean title” eventually resolved; Article 9 preserved orderly value and minimized professional fees.

ARTICLE 9 SALES – CASE STUDY

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Company: #2 pontoon mfr. $120MM sales $40MM. EBITDA fell from $15MM. Failed LBO.

Debt Profile: $22MM syndicated leveraged loan (1st for 3 small banks). <$5MM liquidation value.

Situation:

Dealers were stuffed with too much inventory, which management was trying to work down.

$60MM unsecured floor-plan line under water.

Balmoral believed in brand, management, turnaround and building backlog.

Management ownership of real estate, purchased in 2007 at the peak and leveraged 95%.

Management believed in the business and wanted majority ownership.

Working capital starved (by banks & flooring).

No acquisition financing available.

Non-core division was trouble.

Successor liability matters (warranty, PL).

Former sponsor wanted a “tip.”

Needed private deal so as not to spook customers.

Needed to help vendors survive.

Resolution/Article 9 Outcome: Sale to Balmoral. Surpassed prior record performance within 18 months. Management now owns majority.

ARTICLE 9 SALES – CASE STUDY

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Company: Contract electronics mfr. High-mix, low-volume. Fell from $100MM sales, $10MM EBITDA. Scottish parent company liquidated. 1 of 5 N. American sites shut down. Another liquidated.

Debt Profile: $17MM debt held by foreign bank that took over the loan. <$5MM liquidation value.

Situation:

Scottish parent acquired but didn’t integrate several entities into its U.S. sub.

Parent distributed out all cash flow of U.S. sub dry over a decade; did not re-invest.

U.S. sub lost major customer and had to liquidate two of five sites.

Scottish restructuring advisor hired to market the U.S. sub of a company in BK in UK.

Management issues and opacity in diligence.

Issues with critical customers.

Article 9 Outcome:

Balmoral moved quickly with proposal to acquire via Article 9.

Foreign lender hadn’t heard of nor had appetite for “exotic tri-party Article 9.”

Balmoral didn’t value shut down facility, so referred liquidators.

Balmoral changed management.

Worked with new CEO, CFO, board to rebrand & turnaround.

Invested in PP&E, people, quality & certification.

Now profitable, growing & seeking add-on acquisitions.

ARTICLE 9 SALES – CASE STUDY

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Key Elements Of Sale Document

Questions And Answers

VII. CONCLUSION

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