Bankruptcy usually means the end of the road for businesses, especially for smaller privately held companies with less than $50 million in annual revenues.
“For a large company with a lot of critical mass and a sophisticated set of lenders, the ability to negotiate and exit (a bankruptcy filing) in some fashion is high,” said Laxson Boyd, a consultant with Wadsworth Whitestar Consultants in Wauwatosa. “As you move downstream in terms of revenue size and profitability, the probability changes from exiting and tilts toward a liquidation or sale of the business.”
Businesses typically use one of three types of court-supervised bankruptcy filings when they encounter financial difficulty: federal Chapter 7 or Chapter 11 bankruptcy or Wisconsin Chapter 128 protection.
Chapter 7 and Wisconsin Chapter 128 do not allow business owners to retain their companies. Chapter 7 calls for a company to be liquidated. Chapter 128 may liquidate a business. It may also be sold to another party as a going concern.
However, Chapter 11 bankruptcy allows a business to continue as a going concern with its current owners in place. Some smaller companies have been able to survive the process, generally if there is a continuing demand for its products or services.
“If you are able to maintain the business through cash flow, you have a much better chance of being successful in the process,” Boyd said. “Cash is everything, and for most businesses that contemplate bankruptcy, that is not a typical scenario.”
A case study
Milwaukee-based Wisconsin Steel Industries Inc., a heat-treating company on the city’s west side near Miller Park, filed for Chapter 11 protection in the U.S. Eastern District Court in Milwaukee on Jan. 22 and was able to exit bankruptcy protection on May 8.
Wisconsin Steel Industries specializes in heat-treating for large manufacturers such as Bucyrus International Inc. and Joy Global Inc. Wisconsin Steel serves the mining, defense, oil and gas, wind power generation and construction markets, and the company’s ovens regularly reach temperatures approaching 2,000 degrees Fahrenheit.
The company was not having a difficult time paying creditors. In fact, the firm’s business was booming when it filed for bankruptcy protection. However, in 2005 through 2007, the company went through some lean times.
“Our business was thriving,” said Ted Dolhun, president and owner of Wisconsin Steel. “We had good cash flow in 2008 when (we were) foreclosed (on). I could still pay the bills and maintain and fix our equipment. I could make payroll.”
Unconventional circumstances
Wisconsin Steel’s filing was directly related to a lending relationship it entered during the economic slowdown of the early 2000s.
In the aftermath of the Sept. 11, 2001, terrorist attacks, business slowed significantly for many of the company’s customers. As a result, its previous bank said it would not be able to extend a new line of credit.
“Bucyrus and Joy Global fell on hard times, and we took some losses in accounts receivables,” said Steve Haas, a turnaround consultant and the company’s interim chief financial officer. He has been working with Wisconsin Steel since early 2008. “The bank, which was based out of Chicago, pulled the plug on us. We scrambled to find lending.”
After a lengthy search, Wisconsin Steel was able to secure a $1.6 million mortgage with Heartland Wisconsin Corp., a Milwaukee-based financing firm that specializes in industrial equipment and real estate-backed lending. The mortgage was guaranteed by Wisconsin Steel’s real estate, as well as the personal real estate held by Dolhun. In addition to its 50,000-square foot-facility, Wisconsin Steel also owns several of the buildings that surround it.
The note’s interest rate was 13.9 percent, which required an $18,300 monthly interest-only payment.
When the credit line expired at the end of 2006, Heartland Wisconsin did not seek a renewal, Haas said. Wisconsin Steel Industries continued to make payments.
Complications
Then, in January of 2008, Heartland Wisconsin initiated the foreclosure process on Wisconsin Steel. The lender sought control of the company’s real estate.
“This property is more valuable than the value of the loan, probably four times more valuable,” Haas said. “(The loan) had everything in it – the property, (Dolhun’s) homes.”
From January through late 2008, Wisconsin Steel tried to negotiate a new loan agreement with Heartland Wisconsin, Haas and Dolhun said. An agreement was never reached, and in September, 2008, Heartland Wisconsin won a $300,000 judgment against Wisconsin Steel.
“The judge found that Ted had contradicted himself in (previous) testimony,” Haas said.
The judgment also ratcheted up the interest rate to 18 percent, which was made retroactive 33 months.
Wisconsin Steel attempted to negotiate a new loan, with lower interest rates, with Heartland Wisconsin, but was unsuccessful. Wisconsin Steel also tried to find a new loan with another bank.
However, on Jan. 22, 2009, Heartland Wisconsin had Wisconsin Steel’s bank accounts garnished.
To protect its assets so that it could pay vendors, suppliers and employees, Wisconsin Steel filed for Chapter 11 protection that afternoon.
“We did all that we could to not file, but our hand was forced,” Haas said. “We knew that we were a going concern and a viable company. We needed to get out from under an onerous lender and use the federal bankruptcy laws to help us do that.”
The bankruptcy filing prevented additional garnishes from Heartland Wisconsin. The filing also would allow Wisconsin Steel Industries a chance to renegotiate its debt to Heartland Wisconsin.
“There is a cram-down provision in the law, and we were prepared to go to trial to use that technical term within the law,” Haas said.
The cram-down provision within the Chapter 11 law can force a lending institution, even when it objects, to accept new loan terms, including interest rate and repayment schedule.
Banking on a solution
Wisconsin Steel did not need to use the cram-down provision of the Chapter 11 law. Instead, it was able to find another bank that was willing to extend it a new loan, which would repay its debt to Heartland Wisconsin and the $300,000 award the lender won against the company.
In early 2008, shortly after Heartland Wisconsin foreclosed on the company, Dolhun met with Glenn Stadler, a commercial lender with Community Bank & Trust. Over the course of several months, Stadler became convinced of Wisconsin Steel’s long-term viability.
“Clearly, the set of circumstances was very unusual,” Stadler said. “The fundamentals of the company being a going concern were all there. He (Dolhun) didn’t need to put together a projection that looked like a hockey stick to make this thing work. This is a second-generation company that has been there for 70 years, and they have capabilities in the plant to handle very large equipment. As a lender, you want to identify a niche that a company has, and they have one.”
During their first meeting, Stadler recommended that Dolhun contact Haas – who signed on as the company’s chief financial officer a short time later.
“He needed to get someone with the financial background of Steve Haas to walk alongside him to a point where a guy like me is comfortable,” Stadler said.
By the time Wisconsin Steel filed for Chapter 11 protection, Stadler had accepted a position as first vice president of commercial lending at Pewaukee-based Foundations Bank, which became the company’s new lender.
Foundations Bank does not usually back companies that are in receivership, but it saw that Wisconsin Steel was a unique case, said Greg Kolton, president and CEO of the bank.
“This is not what we typically rush out to do normally. Most companies that go into (Chapter 11) don’t come out of it,” Kolton said. “But this made sense to us, in our world. We look for really talented people, with companies that have a good niche and good customer base – people who have got some edge in the marketplace, a skill set or technology that gives them a leg up. (Wisconsin Steel Industries) meets that criteria.”
Solid future
Wisconsin Steel exited Chapter 11 protection in May. The company has paid off its balance with Heartland Wisconsin. However, Heartland Wisconsin may still seek additional personal damages from Dolhun.
“Wisconsin Steel Industries is free and clear. That is one of the benefits of Chapter 11,” Haas said.
“When we came out of Chapter 11, all of the creditors that were owed money were paid out 100 percent,” Dolhun said. “We chose (to take) some suppliers (into Chapter 11 with us) who were not paid at the time. It was whoever was not paid at that moment.”
Demand for the company’s services was strong through the first five months of this year, but orders began falling off in June. Dolhun remains convinced that the company’s orders will rebound late this year or in early 2010.
“It was an emotional roller coaster when one day things looked good and the next they didn’t,” Dolhun said. “But since May, it has been able to level off. There’s a huge pressure taken off. Our business might be down now, but I have confidence in our customers that in the fall and into next year things will get rolling.”
Crucial action
Looking back, several of the steps that Wisconsin Steel took proved to be crucial to its ability to exit from bankruptcy.
Although it filed for Chapter 11 protection on short notice, the company knew it needed to tell its employees, customers and vendors quickly.
“By the next morning (Jan. 23) it was on the front page of the business section of the newspaper,” Dolhun said. “We told our employees what was going on, and we called all our top customers. The top 10 didn’t even blink an eye.”
Wisconsin Steel also had to assure its suppliers that they would be paid in an orderly fashion. Some suppliers asked the company to pay cash on delivery for orders.
“The good news was that we had enough cash to do that,” Haas said.
The company quickly received court approval to pay its employees. It also ensured several customers that their parts would not be seized if Wisconsin Steel was forced to liquidate.
However, the most important lesson was about surrounding the company with the team it needed to have at its disposal before, during and after the process, Dolhun said.
If a company is to survive the bankruptcy or receivership process, it needs to hire qualified, experienced outside advisors who have been through the process before, Dolhun said.
“You’ve got to surround yourself with the right people,” Dolhun said. “With Glen Stadler, I had one meeting with him and for some reason, he seemed to be interested in helping this company. He told me I needed to meet with Steve Haas, so that he (Haas) can present our problem to banks in a way they can understand. And when I met Steve, we were on the same wavelength right away. I believed he could help this company.”
Finding outside experts to steer the company through the turnaround process was crucial, Dolhun said, because the company had never gone through it before.
“As strong as we feel this company is, with our work ethic and knowledge of heat treatment, we didn’t have a CFO to put the banking and community relations together to achieve this loan,” Dolhun said.
Having someone on staff with contacts in the financial industry played a critical role in the company’s emergence from Chapter 11 bankruptcy and has positioned the firm for future growth, Dolhun said.
“I’ve found that presentation (of the company) was the most important thing,” he said. “Once we got our presentation down, people could believe in me and the company.”
Part of Haas’ role at Wisconsin Steel Industries has been cleaning up its balance sheet so that bankers are able to understand that the company has a viable future and enough assets to survive and pay its bills in the meantime.
“We always had enough money, but we just couldn’t get the trust of the banking community,” Dolhun said. “The banks don’t look at the dirt and equipment in the shop. They look at the dollars.”
Editor’s note: Officials from Heartland Wisconsin Corp. did not return phone calls for comment on this story.
