PrintSpeak survival guide: Asset-based debt restructuring

nil recessus carborundorum

success story...

asset-based debt restructuring

The story of a printer in desperate need of a new press, but who couldn't raise the money through the normal means - until they thought about refinancing an existing press

This B2 sheetfed printer turned over £2.5m annually using two B2 presses: an old four-colour and a six-year-old five-colour. The printer had work available, but it came at a low margin - and at the end of the shift, productivity and quality decreased noticeably. Paying overtime rates for already-tired staff made it even harder to maintain margins. To add to all that, the age of the four-colour press made it expensive to maintain, and any work that needed sealing had to be put on the five-colour.

Planning the work so it went on the right press meant that often a less valuable job was holding up the completion of a more profitable one.

So the printer thought about replacing the four-colour. New press prices had fallen, and a new press with significantly better automation would cost £8,000 per month.

Pressure on cashflow

However, the company was at the limit of its overdraft, and still had 12 months to run on the five-colour at a monthly repayment of £8,035. The bank was less than enthusiastic about investment, knowing that extra pressure would be put on the cashflow as a result.

The printer considered selling the four-colour for £80,000 and using this as a deposit on a new press. But this would still double existing outgoings and put further pressure on the overdraft.

The £80,000 proceeds from the sale of the four-colour reduced the printer's overdraft by £60,000 and bought a new £20,000 pile turner

Alternative financing

Print Finance plc stepped in to offer an alternative. The existing five-colour was worth £180,000. By refinancing £150,000 of this, the existing monthly payments would fall to £3,750, saving £4,285 per month. This released £60,000 in cash for a deposit on the new press, and reduced existing monthly payments. The £80,000 proceeds from the sale of the four-colour reduced the printer's overdraft by £60,000 and bought a £20,000 pile turner.

Happier outcome

Overall, the new monthly payments were £11,750, an increase of only £3,750 instead of £8,000. The outcome was happier all round: a new press, increased flexibility with better automation, a reduced overdraft, happier staff and an improvement in health and safety compliance after installing the pile turner.

Double production capacity

The company more than doubled production capability due to the pile turner and the new press's automation, and the increase in monthly payments is easily met from the reduction in overdraft. So the bank was happier too.

Overtime has reduced, which saves the company £1,000 per month, and maintenance has reduced by £4,000 per year.

what is...

asset-based debt restructuring?

The restructuring of debt is a straightforward process, but get a valuation first, explains Paul Coggins, director of Print Finance plc

Debt restructuring is an excellent way to make your printing equipment work even harder for you by unlocking the equity that exists within it.

Typically, debt restructuring works by refinancing part of the value of an existing, part-encumbered asset - a bit like remortgaging your house.

The refinancing part of the deal works by effectively remortgaging the entire value of the kit and using the proceeds to pay off any existing borrowings or being used as working capital.

The printer in our success story had paid for 85% of its five-colour press, and effectively sold the press to Print Finance plc, which then released the cash to the printer

The released cash is used to pay off some of the remainder of the existing loan. This reduces monthly payments and frees up some cashflow to invest in new capital equipment - or simply to make cashflow a bit more fluid

If you're considering debt restructuring, first ask your accountant what the value of your equipment is on your books, to avoid loss on the sale of your fixed assets.

If you can, try to start the new deal just before the next monthly payment is due on the old deal. This results in a 60-day gap between the old payment and the new, and is an immediate boost to cashflow

who can benefit from...

asset-based debt restructuring?

The asset-based debt restructuring template works well for many types of print company - especially if they have good equity in their kit

It works well for companies that have not invested in equipment for some time, and which have some equity in their equipment. Ideally, the equipment should have been kept in good condition, with regular servicing, and have a recognised resale value

Asset-based debt restructuring also works well for companies that don't want to go down the traditional banking route for asset finance - either because the bank manager doesn't particularly understand the print industry, or because they are nervous about their overall exposure

Existing monthly payments are based on the original capital value of the kit, even though you may have paid for a large part of it already. Therefore refinancing always results in lower repayments, although they are repaid over a longer period

Welcome to the PrintSpeak Printers' Survival Guide - helping you to ride out the recession

The pages of the printing trade press have recently read like a Domesday roll-call of print's great and formerly glorious. Who could have predicted the failure of Borcombe SP, Kelvin Print Group, Quebecor, Capital, Printhaus, Butler and Tanner, Celloglas and more? With margins on print lower than they've ever been, the current global economic crisis is magnifying the cracks in every print business model.

But for every bad news story, there are plenty of success stories. Here at PrintSpeak, we decided to pull together a weekly newsletter looking at printers who recently hit a sticky patch - and what pulled them through. We hope it will provide our readers with food for thought. A struggling business is not necessarily a failing one - and knowing who to call is half the battle. In the coming weeks we'll be looking at subjects including factoring, debt collection, credit management, VIAMBOs, cost rate reviewing, credit insurance, financial restructuring and more - building a library of business know-how and giving you the contacts and knowledge to ride out the recession.

Karen Charlesworth
Publisher, PrintSpeak
karen@printspeak.co.uk