When advisors talk about restructurings, they use phrases like “restructurings are a contact sport,” “restructurings are not for the feint of heart,” or “put on your helmet, it’s going to be a bumpy ride.” These phrases and others focus on the hard nose negotiations that take place between the company and its stakeholders.
However, they fail to take into account the prize - fixing the company so it can grow in value over the long term. And, they ignore the men and women that work day in and day out at the company to make it great - people with families, bills, responsibilities and obligations, who count on the company to pay them for their hard work.
Masonite, one of the largest manufacturers of doors, found itself smack in the middle of the real estate storm to end all storms. For Masonite to operate profitably and grow it needs a robust housing market. However, as the real estate bubble burst, Masonite felt the pain. Housing starts went from more than 2 million in 2005 to less than 1 million in 2008 — and housing starts fell below 500,000 in the first half of 2009. Imagine losing 75 percent of your customers in 3 years!
As this was happening, Fred and his team focused on stabilizing the business, which meant making heart-wrenching decisions regarding layoffs and plant closings. After stabilizing the business, Fred and his team focused on fixing its balance sheet to be in line with projected earnings and the likelihood that the housing market would not take off anytime soon. And, thus, the first and most important lesson taught by Fred Lynch:
- Put the Company First: This lesson sounds so simple, but to put it into practice is so difficult. As a restructuring is unfolding, and the varied creditor voices with different desires are screaming at the top of their lungs, it is tempting to take the easy (or easier) road. Rather than fixing the company, it can be easier to placate the different opinions of the stakeholders in the capital structure and cut a deal that works in the short term, but may result in another necessary restructuring (or worse) in the long term. It is hard - and takes courage - to stare down stakeholders to do what’s right to position the company for long term growth. However, from day one of the restructuring, Fred preached: “Always put Masonite first.” He made sure that the management team and advisors always considered what was in the best interests of Masonite, including its customers, employees, suppliers and creditors. Doing this resulted, at times, in painful discussions with stakeholders, but the end result was a plan of reorganization supported unanimously by the holders of over $1.4 billion of leveraged loans, which eliminated all of the debt on Masonite’s capital structure, left it with $150 million of cash and positioned it for long-term success.
How did Masonite pull of this amazing deal for the company?
It learned and followed these other lessons:
- Maximize Liquidity at All Costs: A company with no liquidity is a company with no negotiating leverage and no options. As a result, even if the management team is trying to “put the company first,” it can only do so much if and when it is at the mercy of its stakeholders for obtaining liquidity to operate the business. Consequently, a company sensing or cognizant of the need to restructure must plan ahead and make sure it has the necessary liquidity to last through long, painful and, sometimes, antagonistic negotiations. So long as a company has cash to use to operate its business, it can keep fighting for the best long term deal. Masonite, keenly aware of this, drew down $336 million from its revolver when it could. This was not an easy psychological thing to do because Masonite knew the lenders would not be happy seeing $336 million flow into Masonite’s coffers, but, for Masonite, it meant everything - it enabled Masonite to operate, negotiate and, in the end, consummate a successful restructuring for the company.
- Communicate and Tell the Truth (Even if its Bad News): As noted above, Masonite was caught in the middle of a housing debacle to end all housing debacles. And, although, it was not Masonite’s fault, the stakeholders — watching the numbers decline constantly -- wanted someone to blame. As always, that someone was management. However, rather than running from the facts, Masonite constantly communicated with all of its stakeholders — creditors, employees, customers and vendors. And constant, honest communication with its lenders was key. By never sugar coating the situation and communicating bad news as and when it happened, Masonite gained credibility. The lenders’ finger pointing quickly faded and recognition of the gravity of the situation took its place. This set the stage for the massive and necessary de-leveraging that occurred and gave the lenders - who would become the new shareholders - confidence in the management team as straight shooters who would do what was best for the new shareholders’ company.
- Be Patient and Be Prepared: Masonite knew that it was important to cut the right deal, not just any deal. As the housing world was (seemingly) coming to an end and the creditors continued to put potential deal structures on the table, Masonite remained patient — waiting for some stabilization in the housing market (at some point the ground will stop it from falling) so it could determine an appropriate balance sheet for the long term. This patience was frustrating for certain of Masonite’s lenders and with impatience came threats. In response, Masonite made sure it was prepared to commence a chapter 11 case on a moment’s notice, thereby protecting itself from value destroying actions by creditors. Masonite made sure the lenders knew this and, as a result, the threats of accelerating debt or taking state court actions against the company were hollow and stopped. Accordingly, patience and preparation positioned Masonite to achieve a successful restructuring.
Fred Lynch taught many other lessons during the Masonite restructuring - lessons that extend out to other areas of business and life — but, at the end of the day, by leading through example and focusing on team work, Masonite is poised today for long-term growth.
And, before concluding, I would be remiss to leave out Fred’s most important lesson - hire great advisors!
Jon Henes is a partner in the Restructuring Group of the law firm of Kirkland & Ellis. Jon's practice involves representing debtors (including portfolio, privately-held and public companies), creditors' committees and distressed investors (including hedge funds, private equity funds and companies) in acquisitions, restructurings and bankruptcy cases.