Equipment appraisals typically assume an orderly liquidation value, which is rarely realized in the auctions that result from a distressed situation. Tiger Group’s Jeff Tanenbaum suggests a blended approach and provides two case studies demonstrating the benefits of a multi-phase liquidation process.
Commercial and industrial equipment is generally sold at auction in distressed situations, yet lenders typically rely on appraisals that assume an orderly liquidation with time to spare. How to square this circle?
For starters, lenders must be clear on what constitutes an orderly value. Of necessity, appraisals of commercial and industrial assets must give lenders a strong sense — right down to each individual asset — of the collateral’s worth under an assumed orderly process. For instance, they are ideal for companies selling off individual assets as part of a consolidation or wind-down, and they represent an appropriate floor (often adjusted up by 20% or 25% for in-place value) when liquidating on a turnkey basis to a going concern.
Orderly values, in other words, represent what something should be worth under ideal circumstances and timing. When push comes to shove, if an orderly process turns out to be viable, it is all for the good.
But when business distress occurs, it is often unrealistic for lenders to count on recouping the full value contemplated by the appraisal. The hourglass may empty too quickly for all assets to be sold to private buyers in a patient, methodical process. Even in an ideal scenario, 100% sell-through of assets in an orderly sale is not likely without the eventual use of an auction to complete the disposition.
Finding the Middle Ground
Nevertheless, the outcome need not be seen as one-orzero — either a picture-perfect orderly sale on the one hand or a one-and-done auction on the other. The fertile middle ground involves leveraging elements of both an orderly process and a traditional auction. For this to happen, the disposition firm must be willing to step out of its comfort zone and rethink certain prevailing norms in the business. Firms most familiar with running auctions can tend to dismiss pre-auction sales as detrimental or unnecessary distractions. A hallmark of this practice is a firm’s pre-auction sale process that amounts to little more than running auction-specific ads with the line, “Available for pre-sell. Call now.”
In the commercial and industrial space, there is a substantial, unexploited opportunity to run a more intentional, orderly process prior to a final auction. That means setting sale schedules, establishing and tracking metrics and making true sales calls. The goal is to net more dollars for the client than what might be recovered via a straight auction alone.
Take the process for Houston-based construction equipment rental company, Prime Equip, which had assets appraised assuming orderly liquidation values. After running into challenges with its debt financing, Prime Equip was unsuccessfully shopped for months when, at the beginning of the year, Tiger Commercial & Industrial took the case on behalf of its lender. Rather than going straight to auction, the team started by making absolutely sure all options had been explored with respect to finding a potential turnkey, goingconcern buyer. This gave stakeholders peace of mind. After significant efforts, no buyer emerged, and the team moved forward with a four-month orderly process for the individual assets.
The time spent during this first phase was not wasted. It enabled Prime Equip to complete the contracts for its on-rent units while conducting make-ready equipment repairs. An even more significant benefit was, as the Tiger team courted turnkey buyers, it simultaneously conducted all of the necessary prep work for the orderly process. Indeed, many of the same top prospects for a turnkey sale were ideal potential buyers for individual Prime Equip assets. The team was able to efficiently pursue two objectives at one time.
The orderly phase proved highly successful. Through a combination of direct outreach and target marketing, Tiger’s sales team found top-paying customers for the majority of Prime Equip’s assets. Working from Prime Equip’s headquarters, the team did traditional liquidation marketing and advertising directed at the construction industry but also focused heavily on targeted telephone outreach to prospective buyers that would be most interested in Prime Equip’s specialized, foreignbranded fleet. These efforts resulted in the successful sale of approximately 85% of the available equipment.
Tiger leveraged multiple auction formats to sell the remaining 15% of the fleet. Throughout the process, Tiger assisted the lender and its consultant in determining cost-effective equipment repairs while managing all aspects of the sale, which included off-site assets in Florida and Georgia, as well as British Columbia and Alberta, Canada.
The net effect of this approach? Through a fivemonth sale process, Prime Equip was able to attain more than a 20% higher recovery (a seven-figure difference for the client) than would have been achieved by going directly to auction.
When to Consider a Blended Approach
To be clear, such a blended approach may not always be possible or even advisable. For some assets, it might make sense to spur a sense of urgency among prospective buyers by going directly to auction in short order. For example, the demand for the equipment could be unusually strong, the mix of assets relatively shallow and the target audience easily reachable. In such cases, the law of supply and demand works in the seller’s favor — buyers will pay top dollar for the assets at auction.
More often, a blended approach is the best course. In most pools, at least 10% to 20% of the assets are challenged or highly specialized. Getting on the phone and negotiating with a foreign buyer or other prospect can often be the best way to recoup maximum value. This is precisely why, when liquidating assets purchased via equity deals, Tiger prefers a blended sale approach conducted within a tight, but not rushed, timeframe.
These investments often help repeat clients advance their competitive strategies. Last year, for example, Keslow Camera (North America’s largest privately held movie and TV production equipment rental house) acquired Clairmont Camera and its operations in Vancouver and Toronto. The move more than quadrupled Keslow’s anamorphic and vintage lens inventory and added a substantial range of custom camera equipment to its portfolio. Naturally, it also led to some equipment redundancies.
Tiger, in cooperation with a JV partner, purchased this inventory and sold it via a blended process involving both auctions and direct sales. Our acquisition of this equipment — the sale was one of the largest dispositions of assets of this type in recent memory — helped provide significant operating capital to Keslow.
The strategy involved, first, tapping prospective buyers in international markets — predominantly China, India and the Middle East — with known appetites for these categories of production equipment.
International direct sales efforts successfully moved about a third of the available equipment while initial multiformat auctions disposed of another third. An additional round of direct sales at adjusted market pricing, followed by a final auction, completed the disposition. For Keslow, the blended approach yielded a gross recovery result at least 15% higher than an auction would have achieved. And this is a conservative estimate. If this large volume of assets had immediately been auctioned at the beginning of the process, the price erosion could have been far greater, proving the blended approach even more effective.
While a multi-phase liquidation process is not likely to hit the numbers listed in an orderly liquidation value appraisal, it typically outperforms direct-to-auction sales. Appraisal values exist in a vacuum. Liquidations, on the other hand, often occur amid a storm of unanticipated challenges. Lenders can best protect themselves by understanding this reality, reading appraisal narratives that offer valuable warnings and through early employment of recovery professionals offering the full bandwidth of services to apply turnkey, liquidation and any other strategies which may help provide the highest and best possible recoveries.
Moritt Hock & Hamroff counsel Theresa Driscoll takes a look at the recent Second Circuit Momentive decision and uses it to examine the importance of clarity in drafting loan documents and understanding what loan documents say, especially when a lender needs to enforce its rights.