Generation Brands announced on Dec. 4 that it was filing for Chapter 11 bankruptcy in an effort to alleviate significant debt and position itself for a comeback.
The company, which encompasses the well known lines Feiss Industries, Sea Gull Lighting, Monte Carlo Fan Co., Tech Lighting and LBL Lighting, voluntarily petitioned the court after all stakeholders agreed on a pre-packaged plan to restructure the company’s balance sheet by eliminating more than $150 million in debt and freeing up cash flow due to lowered interest payments.
The decision to file for bankruptcy was the best option for Generation Brands, says President and Chief Executive Officer Tracy Bilbrough, in a phone interview with Residential Lighting. The volatile economy, shrinking market and highly leveraged capital structure unleashed a perfect storm, he says.
The company’s current capital structure was established in June 2006, when Generation Brands purchased Encompass Lighting and its subsidiaries, Tech Lighting and LBL Lighting. The owners took on a lot of debt to secure the deal, says Bilbrough, describing it as a “calculated risk” in a peak time when business was booming.
“Like most private-equity deals, we were highly leveraged at that time. Obviously, no one foresaw the kind of market contraction we’ve had since [then],” he says. “We were able to keep that structure in place until six months ago when we finally just couldn’t support that size debt anymore for that size company. We have a bigger piece of a smaller piece and that pie is so much smaller now that the total profit dollars weren’t sufficient to carry the level of debt that was on the company.”
Generation Brands expects to emerge from Chapter 11 by the end of January at the latest, according to Bilbrough.
Filing for voluntary Chapter 11 bankruptcy would allow Generation Brands to change its outdated capital structure plan and pay off debt by allowing its investors to trade debt for more equity. With overwhelming support from the original investors — 82 percent on the first lien and 98 percent on the second lien, well above the required 67 percent — Bilbrough says the restructuring is a win/win scenario for all parties involved, including stakeholders, customers and employees.
“[They] still believe in the story and realize it’s a cyclical thing that we are in and the company is still strong,” Bilbrough says. “It’s very rare in these deals when everyone who was part of the original capital structure chooses to stay in the structure. In our case, everyone is choosing to stay.”
The owners, including Bilbrough, did suffer significant losses as a result, he says. Generation Brands will receive a new $20 million dollar equity investment from its principal shareholder, Quad-C Management Inc., upon exiting Chapter 11. When the restructuring is completed in January, the company expects to have more than $30 million in liquidity and no debt maturities until 2014, as stated in a company press release.
In a frank letter to employees, Sea Gull Lighting President Jeffrey Tartamella, compared his parent company's situation to when a working couple buys a house, and one of them loses their job. “The mortgage payment is too big for one wage earner to support, so they either need a smaller mortgage or a smaller house,” he wrote. “In Generation Brands’ case, we are getting the smaller mortgage and keeping the house. This is great news because we love this house!”
The fact that the original investors are choosing to pour money back into the business, shows “they believe in our future,” Tartamella added.
In fact, the company remains profitable and has actually gained market share as competitors have downsized or gone out of business, says Bilbrough.
Business is expected to go on as usual during the two-month restructuring period, and all parties involved should not be affected by any changes. “No one gets hurt," says Bilbrough. "Suppliers get paid on time. No changes for employees. No further downsizing. The company will be in better shape when we come out of this in January by orders of magnitude.”
Generation Brands took a proactive and highly transparent stance in managing this situation, keeping everyone impacted in the loop and even creating a special Web site to provide information and a hotline to field questions and concerns. “It’s a personal philosophy of mine,” says Bilbrough, who said he personally called the company’s 20 largest customers to explain the situation. “And we’re getting good marks for that.”
“It was handled in a most professional way,” agrees Larry Lauck, Vice President of Communications for the American Lighting Assn. (ALA). “The bottom line is that they had a good story to tell. These are tough times and they’ve been able to come out of this showing they’re going to be a stronger company as we move forward coming out of recession.”
ALA has not received calls of concern from members regarding this announcement, Lauck says, adding that he doesn’t expect any changes in the relationship between ALA and Generation Brands.
Still, Bilbrough admits that the term “Chapter 11” alone can cause panic in the absence of the complete story. “Only from the fact that, without all the facts, all people hear is bankruptcy. A lot of people relate that word to liquidation.”
A hearing to approve the restructuring plan is scheduled to take place on Jan. 15 — concurrent to the winter Dallas Market — before Judge Peter J. Walsh of the U.S. Bankruptcy Court in Wilmington, DE. The court already granted permission to Generation Brands on Dec. 9 to use its available cash to pay customers, employees and suppliers as normal, and fund its operating expenses.
All of the regular participants from each of the Generation Brands companies will attend the Dallas Market “in full force,” says Bilbrough minus the CFO who will be attending the hearing. “Hopefully, we’ll be able to announce that the judge has blessed [the agreement] during market.”
Bilbrough says he is "99.9 percent" confident that the plan will be approved, since it has the support of all stakeholders behind it.
For more information, call the company’s information hotline at (866) 360-3479 or visit www.generationrestructures.com.