Please refer the assignment case to answer the below questions.
PinewoodAssignment Questions
- Is Pinewood’s financial distress a result of unfortunate circumstances or poor strategies adopted by the CEO during the expansion period? Was the asset-restructuring program implemented by Walker after 2008 effective in achieving the company’s cash needs?
- What are the advantages and challenges of an out-of-court restructuring, compared to a Chapter 11 filing? Did Walker make a mistake by not accepting the acquisition and asset purchase offers?
- What interests do secured lenders,unsecured debtholders, trade creditors, preferred stockholders, common stockholders, and management have? What incentives or circumstances will induce them to support, or reject, an out-of-court restructuring?
- What is Pinewood’s enterprise value based on management’s cash-flow forecast? Is the value credible? (Use CFW Equity Valuation template with information from caseexhibits.)
- What is the estimated recovery of each class of claims? Compare your estimates with the respective principal amounts and market values. How would the recovery to each claimant change in a more pessimistic scenario?
- What is the estimated recovery to each class of claims if the company is sold or liquidated instead? Will Walker receive the minimum vote he needs for the out-of-court restructuring?
Pinewood Mobile Homes, Inc. ________________________________________________________________________________________________________________ HBS Professor Emeritus William Fruhan and Professor Wei Wang, Queen’s School of Business, Kingston, Ontario, prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events, and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. W I L L I A M F R U H A N W E I W A N G Pinewood Mobile Homes, Inc. In March 2011, Kenneth Walker, CEO of Pinewood Mobile Homes, sat in his office and considered a restructuring plan that his CFO had prepared with the assistance of the company’s financial advisors. The restructuring proposal’s key element was an exchange offer that would allow Pinewood’s creditors to swap their existing claims for new securities. If the company was unable to obtain the necessary approval from its creditors, it would be at imminent risk of having either to file for Chapter 11 bankruptcy or to sell a majority of its assets. Walker knew that he had to act quickly. Pinewood had exhausted its credit lines, and it had to pay the principal on its short-term debt in the next month. Company Background Pinewood Mobile Homes, based in Dallas, Texas, was a large manufacturer of prefabricated homes. It manufactured one-story, ranch-style houses; two-story, single-section and Cape Cod modular homes; and townhomes, apartments, and duplexes. It also produced modular commercial structures, including two- and three-story buildings and barracks for U.S. military bases. Pinewood had 24 home- building facilities located in 10 states and two provinces in Canada and more than 3,000 employees. Founded in 1952 by Walker’s grandfather, Pinewood Mobile Homes had been exclusively family owned until 1997, when it filed for an initial public offering (IPO) and listed its stock on the NASDAQ stock exchange. Walker took over the company from his grandfather shortly before the IPO. After the IPO, Walker invested in energy-efficient products and expanded the company’s geographic reach by building new production facilities in the southern United States. The expansion strategy worked well over the following few years and resulted in fast revenue growth and high profit margins. Meanwhile, Walker had adopted a conservative financial policy to support Pinewood’s growth strategy. He maintained a low leverage ratio and financed investments through internally generated cash flows. In 2000, Walker decided to raise debt for Pinewood’s rising working capital and investment needs. He initiated a revolving credit facility of $110 million with a consortium of seven U.S. banks, led by National Bank of Dallas. The facility’s interest rate was set at LIBOR plus 1%. Virtually all the assets of the company were pledged as collateral. The bank debt contained various restrictions, including (1) 9-915-547 M A R C H 4 , 2 0 1 5 For the exclusive use of E. Dione, 2020. This document is authorized for use only by Edouard Dione in FINA 6224-ON Summer1 2020 taught by NEIL GOODMAN COHEN, George Washington University from May 2020 to Jun 2020. 915-547 | Pinewood Mobile Homes, Inc. 2 BRIEFCASES | HARVARD BUSINESS SCHOOL affirmative covenants pertaining to the company’s net worth and liquidity position; (2) negative covenants restricting its ability to further issue debt with higher seniority than the bank debt; and (3) prohibitions to raise dividends before paying off the bank debt. Subsequently, Pinewood issued a ten- year, senior unsecured note with a face value of $285 million in 2004, and a ten-year, subordinated convertible debenture with a face value of $170 million in 2006, to finance its capital investments and acquisitions. In addition, Walker renewed the revolving credit facility in late 2005, while increasing the credit line to $215 million. Between 2003 and 2006, Walker acquired several small- and medium-sized manufacturers in the western United States and Canada by using funds raised through debt issues. As a result, Pinewood’s U.S. market share reached 18% by the end of 2006. However, the housing market crash of 2007–2008 hit the company hard. Pinewood’s revenue declined by more than 40%, from its peak in 2006. Its financial condition deteriorated further after 2008, as the prefabricated home-manufacturing industry recovered slowly from the financial crisis. The company generated negative operating cash flows from 2006 through 2009. In 2009, Walker initiated an asset restructuring program that generated liquidity by divesting several non-core assets previously acquired by the company. (Exhibit 1 presents the consolidated balance sheets and income statements of Pinewood from 2001 to 2010.) Nonetheless, Pinewood was well-respected for its high-quality products and services by wholesale and retail customers. It won the Manufactured Housing Institute’s Manufacturer of the Year award several times. Moreover, Pinewood was considered an innovator in the product market because of its line of energy-efficient homes, which included modular “green” homes with bamboo flooring and solar power. The company marketed its mobile-home products under several different brands, including Pinewood Homes, EcoLiving Homes, and Elite Homes. Industry Background The prefabricated home-manufacturing industry was severely affected by the housing market crash. The industry’s sluggish recovery after the crisis was partly attributed to the slow recovery of housing prices and to a long-term shift in consumer preferences toward conventional housing. As a consequence, many small companies were forced to close operations and liquidate. Several large mobile-home producers either filed for bankruptcy or were acquired. Large, national companies acquired regional competitors to gain access to key markets and cheaper labor. There were more than $15 billion in deals completed between 2005 and 2010. As of 2011, there were fewer than 200 prefabricated home manufacturers in the United States. Many of these companies generated sales of less than $50 million. Operating margins were low due to the industry’s labor-intensive manufacturing processes and high material costs. Companies needed to develop new products in order to stay competitive. For example, many manufacturers added premium features to their products, such as high-end kitchen furnishings, and continued to improve product quality. Industry sales were expected to grow at an average annual rate of 3.6% from 2012 to 2019.1 Further industry consolidation was also expected. The Situation Pinewood increased its revenue and operating margin from 2009 to 2010. The EcoLiving product line generated nearly half Pinewood’s total sales in 2010. However, the company continued to generate 1Source: IBIS World industry report, 32199a – Prefabricated Homes Manufacturing in the U.S. For the exclusive use of E. Dione, 2020. This document is authorized for use only by Edouard Dione in FINA 6224-ON Summer1 2020 taught by NEIL GOODMAN COHEN, George Washington University from May 2020 to Jun 2020. Pinewood Mobile Homes, Inc. | 915-547 HARVARD BUSINESS SCHOOL | BRIEFCASES 3 operating losses, which, along with limited proceeds from divestitures, undermined Walker’s restructuring strategy. At the end of 2010, Pinewood’s book common equity was negative $8 million. Preferred and common dividends had been suspended for six quarters. Debt service obligations, including interest and amortized debt principal payments, were substantially higher than the internally generated operating cash flows were. The ongoing cash drain resulted in further drawdowns of the revolving credit facility. In late 2010, Pinewood reached the limit of its revolving credit facility. Walker could not negotiate an increase in the credit limit with bank lenders, who were concerned about Pinewood’s leverage and its breached covenants. However, he did manage to obtain month-to-month waivers of breached covenants and a three-month renewal of outstanding loans due March 31, 2011. Further, the company had to cancel the issuance of new preferred stock due to a lack of interest from existing shareholders. (Exhibit 2 presents the consolidated capitalization as of December 31, 2010.) On March 1, 2011, it was clear that Pinewood would be unable to pay interest on its existing debt and on a $40.7 million sinking-fund payment due April 15 on its long-term senior unsecured notes, which were held by several life insurance companies and pension funds. Moreover, National Bank of Dallas informed Walker that it would not approve any more one-month extensions unless Pinewood immediately made a 10% principal payment or entered into a letter of intent for the sale of the company on terms satisfactory to the banks. Walker knew that the banks would oppose the company paying interest on the senior unsecured notes before it reduced the bank loan, but was not sure how the holders of the senior unsecured notes would react if they did not receive contractual payments. National Bank of Dallas also disclosed that a few smaller banks in the syndicate had begun to lobby for foreclosure on the collateral. However, these lenders understood that such action would trigger a voluntary bankruptcy filing by Pinewood and that this filing would immediately impose a stay on foreclosures. Walker knew that the large lenders were opposed to forcing the company into Chapter 11 before efforts to reach an out-of-court restructuring were exhausted. In addition to debt service payments, Pinewood also needed about $50 million in cash by June 30, 2011, to finance an increase in seasonal inventory and receivables, as well as capital expenditures in new products. With cash on hand of $20 million, and proceeds from recent asset sales equaling approximately $35 million, Walker believed Pinewood could meet its cash needs. However, he saw no way for Pinewood both to service its debt and to invest in its operations.