About NWX Financial Group
Northwest Crossing (NWX) Financial Group is the debt and equity financing affiliate of CSC Capital. As the firm’s financing advisory group we advise middle market companies worldwide on financing strategies and deliver creative solutions from a wide range of financing sources. Our independent advisory model allows us to objectively examine all possible financing structures and alternatives and select the best solution for our clients. As an independent advisor NWX is not conflicted by the economic benefits that relationship banks, financial institutions, and brokers might gain by pursuing one financing goal over another. Our pure advisory business enables us to focus solely on achieving the most appropriate financing result for our clients while minimizing their execution risk.
Our roots started back with the founding of CSC Capital when we advised the firm’s restructuring clients on existing capital structures, debt restructuring, recapitalization, and the arrangement and refinancing of existing debt largely from client established sources. In one way or another, each restructuring had its own aspect of financing that was a natural outgrowth of the client engagement. The firm’s early successes in securing new or maintaining existing financing can be directly attributable to CSC Capital’s corporate restructuring program which convinced lenders that their customers as well as our clients have been transformed into a good credit risk. Previously to our client engagement, most of these commercial lenders were willing to “step aside” because certain loan covenants had been breached and allow another financial institution to take the account, even though principal and interest payments were always paid in full and never late.
Always successful, the firm through its restructuring acumen was easily able to negotiate terms and convert the old loans and notes with the previous institution with new loans and notes from a new institution, usually with more attractive borrowing costs. CSC Capital’s financing creativity formed many interesting alliances between borrower and lender. Lenders, who once had nothing more to do with their customer, suddenly became the best of friends, so to speak. BB&T, Union Bank, Merit Bank, Bank of America, and Wells Fargo just to name a few, not only opted to remain the lender of choice, but offered better borrowing rates to keep their customer from changing banks. The firm’s presence on our client’s site sometimes was enough to change the status quo, from our client being in a position of weakness to overnight being in a position of strength. Sometimes our capital structure creativity went to support our client’s mergers and acquisitions activities.
In the below cover letter to GE Capital in 2000, it is evident that the firm was well on its way combining the strength of both our mergers and acquisitions and debt and equity financing practices forming new and innovative capital structures for our corporate restructuring clients. This letter provided in full is attempting to summarize our arrangement of financing for our client XYZ Company, a $65 million in annual sales multi-location company located in the Southeast, the creation of a platform in which they could participate in regional acquisitions:
“The financing arranged by CSC Capital will come from the following sources: 1) $4 million in senior debt financing provided by GE Capital, which will be secured by the assets (account receivables, inventory, and equipment of XYZ Company), to be repaid over a five year period. In addition to, and outside the purchase price, a revolver of approximately $4 million will be needed to fund inventory and working capital needs. Of course, both the senior debt component and the revolver are senior to all additional borrowings. 2) $3.6 million in seller’s take-back financing by XYZ Company, and in the securities of CSC Capital, payable as follows: a) $1.2 million subordinated – five year promissory note, b) $800,000 in the common stock in Forty-One Companies Inc., a new investment holdings company established by CSC Capital to manage and operate the assets being acquired, c) $1.6 million in the form of a contingent earn-out based on the financial performance, as indicated by net profits, of Forty-One Companies Inc. over the next five years. 3) $400,000 of XYZ Company debt, which will be assumed by CSC Capital.
In structuring this financing, as you realize, CSC Capital has created a new company (Forty-One Companies Inc.) to receive, manage and operate the assets being acquired from XYZ Company.
This will help to insulate CSC Capital’s assets in the event of a dispute and make the accounting for the earn-out component easier to calculate. Also, under this arrangement, CSC Capital will shift the allocation of risk back to the seller by negotiating 45% of the purchase price as being contingent or deferred. From a liquidity and timing perspective, the financing is very favorable, since XYZ Company’s cash account is left intact which may be used to offset unexpected purchases and expenses. Also from a liquidity and timing perspective, CSC Capital has five years to repay its obligations to both GE Capital and the shareholders of XYZ company.
This acquisition offer has also asked the shareholders of XYZ Company to buy into the future business plan of Forty-One Companies Inc., both in stock and in the form of a contingent earn-out. Of course, the potential stock opportunities for the shareholders of XYZ Company given a successful regional consolidation could be enormous. Notwithstanding these attractive features for CSC Capital, Forty-One Companies Inc., and GE Capital, XYZ Company shareholders are immediately in good shape themselves. They receive 50% of the selling price in cash at closing, receive $400,000 of their current debt assumed by CSC Capital, and are second in line (behind GE Capital) with the security interests in the assets sold. CSC Capital is very confident it could support the debt service from this transaction. From the potential earnings as indicated in the attached cost savings analysis, we believe we can produce an EBITA valuation in excess of $30 million a relatively short period of time. In fact, our valuation indicates a possibility of a valuation between $29 and $37 million.”
In 2006 XYZ Company sold their holdings for approximately the same value as their 2000 company annual revenues of $65 million, roughly twice CSC Capital’s estimated value of the transaction in 2000.
Soon after the corporate restructuring client engagement in 2000 with XYZ Company, we began to explore more innovative financing techniques largely based upon what was happening in the creative real estate investing market. To assist our mergers and acquisitions clients, CSC Capital developed a corporate development equivalent to the “land sales contract.” This financing model we named the Safety Buyout, short for “seller as financier and equity taker” or otherwise known as SAFET. In essence it was an innovative asset purchase framework that provided sellers the dual opportunity to earn sizable principal and interest payments thereby virtually eliminating the losses normally associated with capital gains and ordinary sales taxes, and also as mortgage holders to remain financially connected to the buyer’s ability to continue payments. A sizable “balloon” payment after a period of time would close the transaction.
Typically SAFET’s required that the transaction is seller financed through an interest bearing note, though a small percent may be financed through the sale of stock of a holding company’s stock or by other means to the seller, such as through equity partners. Additionally, the buyer may assume operating liabilities in lieu of providing an equity investment. In essence, the financing is very similar to Leverage Buyouts, in that virtually one hundred percent is financed by the seller, with either a small amount or zero cash required at closing by the buyer. As such the seller’s note is secured by the assets of the acquired company and/or through key man life insurance and/or errors and omission insurance and/or through a performance based insurance policy depending upon the situation.
On a business trip to Amsterdam, Netherlands in early September 2001, CSC Capital’s CEO was meeting with European bankers arranging financing for several U.S. clients when the tragic events of 9/11 occurred. Upon returning to the U.S. two weeks later he found the commercial debt financing and restructuring environment was already beginning to change rapidly. Several of CSC Capital’s restructuring clients needed new financing in order to successfully complete the turnaround engagement. What once was a simple task had become more complex and complicated. The commercial banks instead of becoming a financial partner in the restructuring became a financial adversary. It was in the fall of 2001, that CSC Capital started in earnest our Debt and Equity Financing Group in order to secure financing from all sources and for all situations. In essence the firm became more creative in developing and arranging financing transactions but also became much more aggressive in overseeing the financing process. After ten years in business first in corporate restructuring and management consulting, then in mergers and acquisitions, the firm had now become one of the premier middle market financing advisory firms in the U.S.
Our financial advisory depth coupled with our vast client experiences allowed us to see emerging “under the radar” contradictions in the availability of financing especially between business financing and home financing. Well ahead of the curve with our August 2002 article in ProSales Magazine in an article entitled”Up Up and Away” we wrote: “In reality if your bank isn’t already reviewing your working capital requirements, just wait. Banks are finding creative ways to limit their loan exposures and some [banks] are even questioning the construction supply industry as a customer, citing poor inventory control and collection of receivables. If you are based in Seattle or Denver, you might be experiencing a softening [financial lending] market. If you are in Middletown, U.S.A., your day is coming.” The following year in another Pro Sales Magazine article (July 2003) entitled “Changing Hands,” CSC Capital’s founder said it more bluntly about the changes in the financing marketplace though tries to end it on an optimistic note:
“Banks are guideline-oriented. If your ratios are out of line, they are coming down on you, and they really tighten the screws. There are no more ‘friendly’ bankers like in the old days…The result of all this is that banks are forcing companies to run more efficiently. And that means healthier businesses in the long run.”
But in the meantime housing lending, as we now so well understand, was exploding. At the start of the financial crisis during the fall of 2008 there were few acceptable out-of-court bank workouts or innovative financing solutions, especially for turnaround situations. If there was an over exposed loan for a distressed company, banks (especially the major banks) wanted their money – period. Months prior to the melt-down in an email to the above magazine’s editor in July 2008 we wrote plainly about financial institutions situation in general, “wake up; the banks are worse off than [their customer] you.” Since then, though the economy has been in somewhat of a confused state-of-mind financial funk not seen since the Great Depression, CSC Capital has continued to advise on and arrange outstanding financial solutions to clients needing debt and equity financing. Challenging times require creative solutions but today more so than in decades, financing no matter how creative and innovative must be predicated upon “rock-solid” business fundamentals of the debtor.
This has provided the firm with an ever expanding opportunity in the financing market today that few other advisors can hold claim. Instead of merely advising in and arranging creative debt and equity financing solutions, CSC Capital and NWX Financial Group provides clients with its un-matched strength in corporate restructuring. Not to be misunderstood, this is not just focused debt restructuring and recapitalization solutions, which is of course part of our financial advisory expertise and solutions at NWX. But rather our restructuring-based approach to all business solutions. We believe that financing no matter how its arranged nor how creative its structure, or even where it originates is like pouring good money after bad, if the correct organizational, financial and accountability structures are not firmly in place.
In an interview in an academic newsletter, Oxbridge NW in January 2009, the firm’s CEO reiterated the above statement regarding the proposed bank bailouts: “My experience is that if the company is not set up correctly before the money is sent, the money is wasted. I don’t see the people who caused the problems supplying the solutions.” To accomplish our goal of providing financial strategy and advice while delivering creative solutions from multiple sources, our group’s expertise is divided into two distinct financing solutions: Debt Advisory and Equity Advisory, and two interrelated though separate methods of altering capital structures: Debt Restructuring and Recapitalization.