By Craig Webb, President, Webb Analytics
True Value Co. owed PNC bank and other lenders at least $238.2 million when it filed for Chapter 11 Bankruptcy Law protection from creditors, and it will get to keep using that money while the Chapter 11 case proceeds, a federal Bankruptcy Court judge has ruled.
Judge Karen Owens' Oct. 18 order noted that True Value had $219.46 million in revolving loan borrowings and $18.75 million in outstanding term loans. The future of those loan covenants is one of the questions to be resolved, as True Value seeks to have Do it Best purchase its assets out of Chapter 11 for $153 million plus assumption of certain liabilities and up to $45 million in trade payables.
The lenders estimate that, after expenses are taken out of Do it Best's payment, what's left of the $153 million would cause them to suffer a loss of at least $100 million.
Several court filings suggest how shaky True Value's financial status has been lately. A declaration by Megan Menzer, a hardware store owner and member of True Value's holding company, said the company "is already having trouble collecting receivables, with many customers beginning to slow-pay invoices." In addition, True Value "has not been paying drop-ship suppliers in recent months," she said.
In an Oct. 4 letter to lenders (page 110 of this filing), an attorney for True Value said 330 vendors had put True Value on hold "and refused to deliver products (including (literal) nuts and bolts) and logistics partners are threatening to stop services. ... As a result, management believes the Company is on the brink of collapse."
PNC's Oct. 16 filing included a history of True Value's maneuvers in the months prior to its Oct. 14 Chapter 11 declaration. "The Debtors [i.e. True Value] are in this predicament by their own doing by failing to adjust to their economic realities of falling sales months ago, and concealing the true financial condition of the company from the Lenders and other stakeholders," PNC's filing said. It said that engaging in a "highly risky" sale to Do it Best "does not benefit the one stakeholder with skin in the game--the Lenders."
One factor that Judge Owens will have to consider is whether to trust an assessment by liquidation expert Hilco Global regarding True Value's worth. Menzer's filing in favor of a sale to Do it Best said Hilco's report vastly overestimated how much True Value would draw at liquidation, in part because it concluded that True Value members would buy inventory from True Value at discounted prices.
PNC, meanwhile, focused on what it said was decision by True Value to discredit Hilco's conclusions regarding liquidation values. Instead, PNC said, True Value has promoted the conclusion of its financial advisor, M3 Advisory Partners. Using Hilco's low-end conclusion, M3 suggested liquidation would cost lenders $157 million. "M3 did not seek to adjust the high-end and mid-range HILCO valuations, because [True Value] simply disregarded them," PNC said. The size of those valuations hasn't been revealed.
The filing adds that M3 evaluated two bids from active going concerns, one of which was from Do it Best; the other bidder was blacked out of court filings. The Do it Best bid "would result in a loss to the Debtor [True Value] of $100 million, PNC said. The lender group consists of PNC, Bank of America, Bank of Montreal, First-Citizens Bank & Trust, Huntington National Bank, Citizens Bank, and Webster Business Credit.
True Value wrote to the lenders on Oct. 4, asking them to respond in three days over whether the lender would support the Do it Best sale or an alternative deal that has since been withdrawn. The lenders rejected that idea, in part because they wanted more information. Back-and-forth talks continued on Oct. 10 and 11, and on Oct. 13 True Value turned in its Chapter 11 filing, telling the world in a press release issued at 2 am ET Oct. 14.