Restructuring at Danfurn Case Study Solution

Case Overview

Danfurn was found in 1964, and since then the company has significantly grown itself and is performing exceptionally. By the year 2006, the company owned up to 15 stores, apart from which,it also leased 25 stores in 12 different states to expand its reach and included a total of 562 workers. The company heavily relied on its retained earnings as its primary source of earning. The company also maintained a small line of credit of $10 million with the local bank in order to meet the fluctuation due to the seasonal effects and the delay in the collections that were typically paid by the end of the year.

Ler in 2007, the organization was sold to Brichtree, who acquired the company using a combination of debt and equity. Bichtree arranged $100 million through senior secured debt from M&L bank. The debt package consisted of $15 Million revolving credit line and $85 million term loan that were secured through assets, inventory and the receivable of the company. the company also borrowed an additional $30 million from us in the form of senior unsecured notes that was governed in part of inter-creditor subordination agreement in return we were provided with the equity warrants that could be exercised in case the company decides to go public or gets sold to another company. Apart from that 20 million was contributed by Birchtree itself, in the form of common equity.

The company soon after the acquisition got hit hard by the downturn of the economy followed by 2008-09 crisis, since then the company is struggling with its sales and profit margin. The cash of the company has significantly narrowed due to the declining sales and the company is blown by the cash flow covenants on its $100 million financing agreement. Therein order to save the investment and to maximize the value of the claim. We need to consider the most appropriate restructuring option in order to negotiate a consensual restructuring. (Zhu, 2014)

Liquidation and Going Concern Value

After analyzing the current situation and performing the necessary calculation regarding the ongoing concern value and the liquidation value of the company which is 38036 and -49458 respectively. It was identified that the company’songoing value is far greater than its liquidation value. It is mainly due to the fact that since last two years the company has been incurring some major losses due to which the company’s profit has sharply declined, narrowing the available cash of the company while increasing the amount of debt in comparison to the assets of the company and even before the company’s sales were in the phase of declining, which eventually affected the goodwill of the company by making it negative.(Exhibit 1)……………………………….

 

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