Creative Financing

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by Jenny C. McCune

Excess debt has threatened to sink many business owners. Media mogul Rupert Murdoch watched his empire go through a painful debt restructuring in the 1980s after he pushed it to the limit with an acquisition spree. Recently, he was able to turn it around, aided by a $2 billion investment from MCI Communications Corp.

Even when no one answers your call for capital, it's possible to escape from the grip of creditors. David Preiser, a managing director at New York investment banking firm Houlihan Lokey Howard & Zukin, specializes in debt restructuring. Before renegotiating your loans, he says, you must consider your options.

• Ask for lower interest rates. Bargain for extended terms. In cases where bankruptcy is a real threat, you may be able to persuade the banker to forgive part of the debt.

• Shop for another lender who will offer more favorable terms.

• Substitute equity for debt. Offer creditors stock, or warrants on stock, in exchange for reducing the amount you owe.

• Sell off assets and use the cash to meet obligations. Preiser had a client who manufactured and sold automotive parts. The company, made up of 30 units acquired over five years, sold off the least profitable ones to raise cash for its creditors.

Restructuring debt requires skillful negotiation. Preiser's involvement in more than 50 transactions has helped make him a master. One client, a New England textile manufacturer, had borrowed $26 million to modernize its factory to compete with foreign players. Then two of the firm's three bankers ran into financial trouble and demanded repayment.

"The company could afford to pay only the interest, not the principal, on the loans,'' says Preiser. He persuaded one financial institution to extend payments and lower its interest rate. He struck a better deal with the second bank: The manufacturer would pay 60 cents of each dollar owed, and the rest of the loan would be forgiven. "They got $6 million in return for $10 million in debt,'' he says. Two years later, "the company is chugging along on the recovery path,'' he reports.

Negotiate Better Terms

Here are some rules to follow when going head-to-head with your creditors:

• Show respect but don't be intimidated. If you're in financial trouble, you're bargaining from a position of weakness. Undoubtedly, your banker will try to squeeze the most out of your company. Use your financial problems as an advantage. Remember: The bank's worst fear is that your business will go under and it will receive nothing.

• If you're renegotiating terms because your company is no longer a heavy risk, prove it to your banker. Tell him you're free to go elsewhere for a better deal. Of course, it's wise to have a banker in the wings before you make this threat.

• Companies that try to conceal difficulties or act in a devious fashion are destined to run into trouble. Your banker is trained to sniff out problems. Be honest. Describe your situation as objectively as you can. Defending your company is much easier when you're straightforward.

• Develop a coherent, conceivable restructuring plan. Many entrepreneurs become overly optimistic about their recovery. Avoid that trap, says Preiser, by sketching out a realistic agenda that includes sensible sales projections.

• Hold on to as much cash as possible. Don't settle for terms that will bleed your company.

• Guard your collateral rights. "If your debt is unsecured, be cautious about giving up security or collateral rights,'' says Preiser. "It will give creditors more rights in the event of bankruptcy.''

• Dealing with creditors is a balancing act. Overemphasize the bad, and you'll create panic among your creditors. Underplay the problems, and you'll lose the urgency of your argument; you may not get the deal done. But when you negotiate a better deal, you improve your company's overall performance. The key to success: "Offer some future hope, so people will want to work with you,'' advises Preiser. "But don't overpromise."

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