Group

Mem
bers

1. Madiha Niaz
F2017051012
2. Aliya Manzoor F2017051018
3. Qurat ul Ain Akhtar
F2017051016
The restructuring of Danfurn
LLC
Company Background

• Rasmussen –young protégé- famed Danish furniture designer,

Finn Juhl.
• Settled in Winconsin
• Making and selling furniture
• Furniture instant hit
• Opened a workshop
• Gained repute
• Expansion
• Larger warehouse
• Danfurn Inc- Founded in Madison, Wisconsin, in 1964 by Jens Peder
Rasmussen
• By 1980, 10 stores stretching across Wisconsin, Iowa, Illinois, Michigan
and Minnesota.
• 1983- expanded to New York and Boston
• 1987- first stores in Texas and California (hired 8 apprentice designers)
• Hired his son (young attorney at Milwaukee law firm)
• 1990s- growth contd
• First decade of 21st century- online catalog and shipping business
• 2006- Oregon, Wisconsin, manufacturing facility has grown to 120,000
square feet and employed 120 furniture makers
• End of 2006- 15 stores, leased 25 stores in 12 states, 562 workers
 Funding historically

• Retained earnings- primary source of funding

• Small line of credit ($10 million) with a local bank

• Funds always paid on end of fiscal year

 Periods of poor
performance
• 1981-82--- recession
• 1981-Sales declined 20%
• 1982- Sales declined 30%
• Till 1986- did not recover to prerecession levels
• Forced to lay off 10% of work force
• Two year wage freeze on its salaried workers (including the salaries of
Rasmussen and his son)
• Scale back growth plans
 2001-02
Economic downturn

• Cost cutting measures

• Avoided employee layoffs

• 2002- sales improved

 IKEA – A competitor

• 1985- entrance of IKEA (hampered growth)

• Modern Scandinavian-styled furniture

• Affordable prices
 Danfurn- Marketing
strategy
• Durability

• Exclusive design

• Appeal urban and suburban consumers

• “Danfurn strives to be Bang & Olufsen of furniture market.”

 Acquiring
Danfurn
• 2007-Birchtree Capital

• Acquisition of Rasmussen stake (67%) plus all other

shareholders

• Johnny Rasmussen and other family members (23%).

• 6/8 furniture designers hired in 1980s and 1990s (10%).

 Offer of Birchtree
• $150 million for all shares
• Succession plan :
• Rasmussen-CEO up to 3 years
• Retain board seat till death
• Johnny Rasmussen – CEO for next 5 years
• Renewable term and sit on board till CEO
• Remaining five boards- general partners of BirchTree or
individuals selected by Birch tree
 Selling Danfurn- Appealing
idea
• 1. Cash life work

• 2. Retiring as a part of purchase agreement

• 3. Son in the place of new CEO

• 4. independently managed and owned

Organizational structure after private
equity acquisition
Danfurn
Management LLC

Danfurn LLC

Danfurn Stores Danfurn

LLC Manufacturing LLC
 Financing
Bichtree
• Full $150 million
• Debt ($100 in senior secured bank financing from M&L bank)
• $15 Million (line of credit) both tranches secured by
• $85 Million (term loan) substantially all assets of the
operating company including
• $30 Million (notes) inventory and receivables

• Own equity($20 Million)

• $1.5 Million carved for Johnny Rasmussen and 6 furniture
designers
 Danfurn new
Board

Milwaukee attorney Dan

Brukmuller

• Milwaukee accountant
Bridget Urmanski

• Jens Peder Rasmussen

and Johnny Rasmussen
 Recent
Troubles
• Subprime residential market
collapsed
• Shutdown in commercial
and consumer lending
markets 2007-2008
• Hit to U.S economy
• Great recession
• Economic growth halted in
beginning of 2009
• U.S. unemployment was still
in range of 9%
Impact of Great Recession on Danfurn
• Sales and profitability decline- 2006-2010
• Sales declined by 15% and EBITDA fell to $10.9 million

Situation/Problems
• Sales declined 22% in 2010.
• EBITDA fell to $6.5 million during 2010, down from $10.9 million in
2009, and $29.2 million in 2008.
Exhibit 3 (Consolidated Statement of Operations) and
Exhibit 4 (Consolidated Balance Sheet)
.....On Excel Sheet
 Horizontal Analysis of Net Sales
Net Sales
0.6
0.55
0.5

0.4

0.3

0.2

0.1 0.11

0
2007 2008 2009 2010
-0.1
-0.15
-0.2 -0.22

-0.3
 Horizontal analysis of EBITDA
0.4

0.29
0.2
0.17

0
2007 2008 2009 2010

-0.2

-0.4 -0.39

-0.6
-0.63

-0.8
Results of downturns
• Danfurn did not meet the covenant of $8.5 million EBITDA in 2010.

• Liquidity of the firm dropped. Cash balance decreased by 43.1%

• Inventories have accumulated to $41.8 million, an increase of 25.2%

from 2009.

• Accounts payables have increase to $15.8 million, an increase of

37.0% from 2009
 What to do
Next???
• Has the company entered the zone of insolvency? Cash flow test/Balance
sheet test
• Cash Flow Test: EBITDA is lower than interest exp./Cash Balance is very
low (lower than interest exp.)
• Balance sheet: Liabilities are not higher than assets.
• Still, Danfurn is now considered insolvent.
• The board has a duty to put the interest of creditors above all else when
making new decisions.
• “Duty of care” and “duty of loyalty” must be ensured.
 Assessment of Going Concern Value
and Liquidation Value of Danfurn
• The value of a company to another company or individual in terms of
an operating business is called going concern value.
• Liquidation value is an estimation of the final value which will be
received by the holder of financial instruments when an asset is sold,
typically under a rapid sale process.  A business is typically
liquidated as part of a bankruptcy process and tangible assets are
sold quickly, often for pennies on the dollar, for an extremely low
percentage of their original cost.
• The difference between a company's going-concern value and its
asset or liquidation value is deemed goodwill and plays a major
role in mergers and acquisitions.
How to Calculate Going Concern
Value and Liquidation Value?

• Investors analyse going-concern value when they believe a

company has the potential to survive and grow in the future.
The main factor to consider when calculating going-concern
value is the most recent year's earnings data. Using past data to
reveal recent trends, investors can set future income
expectations (on Excel Sheet)
• Liquidation Value = Proceeds from Sales – Long term
Liabilities
What option(s) to pursue in the
negotiations?
• Secured Creditors

• Secured Creditors at
Operating Subsidiaries

• Unsecured Creditors at
Parent

• Equity Holders
 Refinance
Restructuring Debt
options

Sale
process Restructuring Bankruptcy

of Danfurn

Out of
court
restructure
 Refinance
Debt:
• Availability of Financing

• Required New Equity Infusion

• How much debt can company support

• Terms
 Refinance
Debt:
• Restructuring would reorganize its debt obligations by either refinancing or
restructuring its existing debt
• Reduction of Interest rate

• Borrowing new debt

• Issuing new equity

• Extension of existing loan terms

 Sales
Process
• Marketing Process

• Retain Investment Banker

• Company Operating Burn rate

• Need to fund Process

 Market
Process:

• Identify potential buyer

• Improve customer Base

• Improve prices
 Retain Investment
banker

• Highly helpful

• Bid highest prices

 Operating Burn rate:

• It consist of number of days a firm can cover ongoing and

operating expenses with their current amount of cash on hand.

• 90866-90200=666000

• Cash/operating expenses 6017000/666000 =9days

 Need to fund
issue

• Debt refinancing is the costly procedures that can be difficult to

obtain during recession period.
 Bankruptcy:

• Goals ? What should be achieved?

• Funding
• Sale Process In bankruptcy
Stalking Horse Bid
Credit Bid by Bank
 Goals

• Is to get the clean chit

• offers a path to eliminating unsecured debts

Funding

The bankruptcy trustee gathers and sells the debtor's

nonexempt assets and uses the proceeds of such assets to
pay holders of claims (creditors) in accordance with the
provisions of the Bankruptcy Code
 Sale Process in
Bankruptcy
If any property of the bankruptcy estate will be sold,
such a sale is usually referred to as a "bankruptcy sale,"
an "asset sale," or a "363 sale." The term 363 sale is based
on Bankruptcy Code section 363, which governs the sales
of bankruptcy property outside the ordinary course of
business.

Stalking Horse
Credit Bidding
 Restructuring
Plan:
• According to Bankruptcy Law chapter 11:
• Funding Issue
• Cash Collateral
• Potential for litigation with bank
• Dismissal for bad faith? Relief from Automatic stay
• Exit Financing
• New equity Investment
• Director Officer Liability issue
 Funding issues

• Chapter 11 bankruptcy is intended primarily for the

reorganization of businesses with heavy debt burdens,
most often associated with corporations .

• Exempt from paying all part of debts.

 Cash
Collateral

The debtor files certain motions with the bankruptcy

court to allow for the continued operation of the debtor's
business. Key among these early motions would be
requests relating to retention of legal and financial
professionals, use of cash collateral.
 Potential for
Litigation

• Upon the filing of a bankruptcy case, the automatic stay

prevents the continuation of – or initiation of litigation
against – the debtor.
 Dismissal for Bad faith: Benefit of
Automatic STAY

• While a specific bad-faith test has not been established,

courts have identified certain factors that necessitate the
dismissal of a particular case as a bad-faith filing.
Exit
Financing
• Obtaining exit financing to support the transaction is one of the
keys to success for any plan of reorganization, and ultimately,
for the entire Chapter 11 filing.

• The Bankruptcy Code makes it easier for a Company in Chapter

11 (a “Debtor”) to do all three of these things: borrow money;
sell assets; and raise new equity investments.
 New equity
Investment:

• If the company restructures and emerges from Chapter

11 as an improved organization, its share price may rise
to higher levels than previously witnessed.
Director Office Liability
Issues:

• Many times a corporate Chapter 11 bankruptcy debtor

proceeding through the reorganization process has
liabilities that bind directors and officers.
 Out of court restructure

• Consensual foreclosure
• Debt for equity swap
• Sale by bank to third party
• New equity investment
• Director liability issues
• Wind down costs, payment of unsecured claims
• Priority tax and wages claims
Conclusio Refinance
Debt
n

Sale
process Restructuring Bankruptcy

of Danfurn

Out of
court
restructure
Open for questions