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Vandelay Industries, Inc. – Case Study


Vandelay Industries, Inc. (“Vandelay” or the “Company”) is a portfolio company

of Maestro Equity Partners (“Maestro”), a well-known private equity firm based in
Nashville, Tennessee. Vandelay has two lines of business, as follows:

Plastic Films - manufacturer of high quality stretch and custom films (“Films”);

Molded Plastics - manufacturer of injection molded plastic products (“Molded”).

Vandelay’s products are used in a variety of end markets including storage,

transportation, food packaging, foodservice, building products, appliance, automotive and
other commercial and consumer applications. For the twelve months ended August 8,
2014 (Q3 2014)1, net revenue was $682 million and adjusted EBITDA was $20 million.

In August 2011, Vandelay incurred a significant amount of debt as part of a

transaction in which the Company refinanced the debt of its operating divisions and
funded a dividend to its shareholders (the “2011 Recapitalization Transaction”). The new
debt (collectively, the “2011 Credit Facilities”) consisted of the following:

A. $50 million revolving credit facility due August 31, 2015 (the “Revolving

B. $125 million first-lien term loan due August 31, 2015 (the “First Lien
Term Loan” and, collectively with the Revolving Facility, the “First Lien
Facilities”); and

C. $175 million second-lien term loan due August 31, 2016 (the “Second
Lien Term Loan”).

The First Lien Facilities contained only one financial covenant, a senior leverage
covenant which tested total first lien debt to LTM EBITDA on a quarterly basis. The
Second Lien Term Loan contained no financial covenants but was cross default
provisions to the First Lien Facilities. In addition to the debt incurred through the 2011
Credit Facilities, Vandelay also has outstanding $100 million of unsecured notes (the
“Unsecured Notes”).

NOTE: The Company operates on a 4/4/5 week fiscal calendar which for fiscal year 2014 includes the following period
ends: February 7, 2014; May 9, 2014, August 8, 2014; and November 7, 2014.
After entering into the 2011 Credit Facility, the Company experienced a
slowdown in its business during 2011 and 2012, while the prices of polyethylene resin,
the Company’s primary raw material, have increased.

In June 2013, as a result of the poor financial performance of the previous 18

months, the Company’s preliminary results indicated that it would violate its senior
leverage covenant for the second fiscal quarter of 2013 (quarter ended May 10, 2013).
Upon realizing this, the Company proactively commenced discussions with the Agent
bank for the First Lien Facilities in hopes of obtaining a waiver of the prospective breach
of the covenant. Since the Company had never missed an interest or principal payment,
and given the Company’s strong relationship with the Agent’s operations staff, Steve
Counter, Vandelay’s CFO, approached this meeting expecting to find a relatively painless
solution to what he referred to as a “temporary hiccup.” Despite Steve’s optimism, the
Agent and the lender group were uncomfortable about Vandelay’s situation, given its
dramatically weakened financial performance, limited liquidity and the unfavorable
overall market conditions. Responsibility for the credit at several of the First Lien
Facilities lender organizations quickly transitioned to their respective Special Assets
Groups (i.e., “workout”) after this meeting.

As the workout groups began to assert themselves in the credit, pressure built
quickly to either: (a) restructure the Company’s junior debt (i.e., the Second Lien Term
Loan and Unsecured Notes) to suspend interest payments on that debt until the
Company’s financial performance and liquidity had improved; and/or (b) have Maestro
reinvest some of the dividend proceeds it had received in 2011 (which the workout
groups pejoratively referred to as “their money”).

After approximately 60 days of negotiations, Maestro acceded to the lenders’

demands and provided a capital infusion to the Company, thus avoiding a “valuation
event” (i.e., a sale or restructuring). Although Maestro was confident that the Company’s
markets had bottomed and would gradually start to improve, Maestro was not sufficiently
optimistic to infuse its capital as equity, agreeing instead to participate in the First Lien
Term Loan.

Under the terms of the transaction (the “2013 Restructuring Transaction”),

Maestro: (i) acquired $25 million of the First Lien Term Loan at par from the First Lien
Term Loan lenders on a pro-rata basis, (ii) funded $50 million of a new tranche of the
First Lien Term Loan (thus increasing the size of the First Lien Term Loan to $175
million), and (iii) agreed to subordinate the entire amount of its $75 million investment in
the First Lien Term Loan to the other First Lien Facilities, resulting in a last-out
participation in this facility (i.e., junior in collateral only to the other lenders of the First
Lien Facilities, but senior on the collateral relative to the Second Lien Term Loan). In
exchange for Maestro’s capital infusion, the lenders in the First Lien Facilities agreed to
eliminate the maximum leverage covenant and implement in its place a minimum
EBITDA covenant set against the Company’s projections. Since the Second Lien Term
Loan had no financial covenants, no modification of the Second Lien Term Loan was
necessary and the lenders to this facility were not included in the negotiation process. In
consideration of the various accommodations provided by the lenders, the Company paid

the holders of the First Lien Facilities a 75 basis point amendment fee which, pursuant to
the terms of the intercreditor agreement, was also paid to the holders of the Second Lien
Term Loan.

The Company’s performance in the second half of 2013 and first half of 2014 did
not improve meaningfully and, upon completing the Company’s preliminary quarterly
financials for the second quarter of 2014 (quarter ended May 9, 2014), the Company
determined that it would violate the recently-implemented minimum EBITDA covenant.
As a result, the Company again approached the Agent bank to address the prospective
default and, as with the Company’s previous experience in this regard, the lenders had
very strong views about the situation, insisting that Maestro again infuse new capital into
the business. Maestro indicated that it was still optimistic about the Company’s long
term value and that it had great expectations for the new TribuneTM shingle product which
Molded was nearly ready to launch. Maestro’s optimism, however, was still not so great
that it was willing to invest new capital as equity. A further investment by Maestro in the
Company’s debt facilities would also be problematic, as the terms of the credit facilities
and the intercreditor agreement did not permit any further expansion of the First Lien

Faced with these impediments to the investment of new capital by Maestro, the
lenders agreed to the following process of investigating strategic alternatives for

 Forbearance from enforcing certain rights and remedies through November 14,

 Company to retain an investment banking firm to investigate sale, financing and

restructuring alternatives;

 Establishment of milestones for a M&A process:

o Distribution of offering materials to prospective buyers – August 8, 2014

o Receipt of Preliminary Indications of Interest – September 5, 2014

o Meeting with Lenders to discuss the findings from the strategic

alternatives process – September 12, 2014

o Execution of Asset Purchase Agreements (if appropriate) – November 10,


 Payment of a forbearance fee of 100bps

In July 2014, after conducting a “beauty pageant” of the investment banking

candidates acceptable to the lenders, Vandelay retained your firm, Darr, Morrow & Nash
Advisors (“DMN”).

Today is November 7, 2014 and the Company has completed its preparations for a
Chapter 11 filing. Given the information and reference materials in the case study, you
should evaluate the various decisions facing the Company and establish a strategy to
remediate the Company’s overleveraged position.


Vandelay is headquartered in Cassopolis, Michigan and is privately owned by

Maestro (94%) and senior management (6%). The Company’s operations are organized
into two subsidiaries, as described below:

(i) Plastic Films – develops and manufactures stretch films and custom
engineered specialty films which are used in a variety of applications,
including product containment, coating, lamination, medical, food,
automotive, textile, carpeting and furniture.

(ii) Molded Plastics – manufactures custom injection molded plastic

components used primarily by appliance and automotive original
equipment manufacturers (the “OEMs”).

The Company’s legal entity structure is presented below:

For the twelve months ended August 8, 2014, the Company generated $682
million of gross revenue and $20 million of EBITDA. This performance represents a
significant decline since 2011, when Vandelay’s generated $929 million of gross revenue
and $78 million of EBITDA for the fiscal year ended November 11, 2011.


Maestro purchased 75% of the common equity of Bell Injection Molders, Inc.
from Lindsay Bell in 2004. After the acquisition, Mr. Bell agreed to stay on as CEO for
approximately three years until his retirement in 2007. At the time of the 2004
acquisition, Maestro agreed that, upon Mr. Bell’s retirement, his remaining equity interest
would be converted into a note in a principal amount to be based on a Molded enterprise
valuation at 6.5x the then LTM Molded EBITDA. Consequently, upon Mr. Bell’s
retirement at the end of 2007, his equity interest in Molded was converted into a $14
million unsecured note which paid cash interest at an annual rate of 12%, had no
amortization and matured in seven years. Since retiring from Molded, Mr. Bell has been
working with Maestro part-time as an industry advisor.

In 2008, Maestro was disappointed with Molded’s lackluster growth and its
inability to lower its cost structure. After considering various strategic alternatives,
Maestro determined to diversify and grow the platform through a selective acquisition,
purchasing National Films, Inc. from Rick Shaw. The purchase was based on an
enterprise value of $350 million, with Maestro acquiring 100% of the equity of National
Films for $125 million in cash (funded primarily through $100 million of newly issued
Unsecured Notes (as later described)) and the assumption of operating debt. Maestro
projected that the combined Molded and Films business would triple Molded’s annual
resin purchases which, they were certain, would significantly improve the ability of both
Molded and Films to negotiate volume purchase discounts with the resin suppliers. With
the improved purchasing of resin, management forecasted that average margins for both
businesses would improve significantly.

Simultaneously with the 2008 acquisition of National Films, Maestro formed a

holding company, Vandelay Industries, Inc., which held the stock of the Films and
Molded subsidiaries. Maestro’s expectation was that the consolidation of corporate
functions at Vandelay would reduce the total corporate costs of the two businesses.

In March 2011, Maestro was approached by investment bankers from Kirby &
Sigler LLP (“K&S”) about refinancing the debt at Vandelay’s two operating subsidiaries.
K&S recommended to Maestro that the Company capitalize on its strong recent
performance. K&S suggested that the Company could raise debt financing on a
consolidated basis and use the proceeds to repay the existing operating debt of its
subsidiaries, fund a substantial shareholder dividend and provide the Company with
incremental operating availability. Upon completing its initial due diligence, K&S
offered to underwrite a credit facility of first and second lien debt which would replace
the existing facilities at Films and Molded and fund a shareholder distribution of $150
million. Maestro immediately endorsed the transaction, and the deal closed in August
2011. After receipt of the dividend, Maestro’s basis in Vandelay was reduced to a
negligible amount. Upon the advice of the Company’s counsel, Boyd & Hembree LLP
(“B&H”), the Company retained a local valuation firm, duVair, Ortega & Blake LLP
(“duVair”), to provide the Company with a solvency opinion relating to the transaction.


Following a number of years of strong revenue and earnings growth, Vandelay’s

performance declined in fiscal year 2013 and year to date 2014. Select summary
historical consolidated financial information is set forth in Exhibit D and descriptions of
the Company’s business segments are set forth below.

a. Business Segment Description – Plastic Films

Films develops and manufactures stretch and custom engineered films used in a
wide variety of applications and end-markets including coating, lamination, medical,
food, automotive, textile, carpeting and furniture. The stretch film products are produced
in three standard product grades that are sold through distributors and directly to large
consumers (primarily high volume shippers). Custom films products include highly
specialized films engineered to match a customer’s functional and aesthetic requirements
for use in a variety of applications, including highly specific packaging, laminations and
surface protection. Both stretch and custom films are made primarily from low or linear
low density polyethylene (LDPE or LLDPE) and utilize an array of proprietary
formulations to form the finished product. The Films business has an extensive library of
over 1,000 different formulae, resins and color combinations which are used to generate a
broad range of products of specific configurations, sizes and widths.

Films manufactures and sells several major categories of products, as described


General Stretch Industrial films used to wrap furniture, bedding, pallets,

mulch and building products.

Engineered Products Specialty and healthcare films. Products include

adhesive films which act as heat-activated bonding
layers, absorbent pads and non-woven lamination films
used in products such as dental bibs, surgical blankets
and disposable meat packing trays.

Polyurethane Foam Lamination film that is an integral component of carpet

pad foam, automotive trim components and compression

Masking Films used for protective purposes during transport,

storage, fabrication or installation which provide scratch
and abrasion resistance. Products include acrylic sheet
masking for lighting, bathtub and spa and automotive,
boating and RV applications.

Flexible Packaging Converted packaging and direct films, some of which are
marketed under the FlexiProtectTM brand. Converted
packaging products include stand-up pouches, barrier

films and sealant laminations used in food and non-food

The Films business has a diversified base of customers across many industries
which purchases both standard (Stretch) and customized (Custom) film products. The
Films business is able to offer its customers competitive pricing with the nimbleness and
customer-focused approach of a small company that values every relationship and which
can efficiently turn samples and prototypes of new products in weeks rather than months
(a necessity to compete in the profitable custom films sector).

The majority of Films’ stretch film customers employ just-in-time inventory

management and, consequently, place great value on the Company’s ability to deliver
products in a timely fashion. To provide prompt delivery on customer orders, the
Company requires significant inventories of finished goods at each of its five Films
facilities which are located throughout the country. Vandelay’s selling terms make the
Company responsible for all associated shipping charges.

The Films business is led by Alessandra Edwards, who has 23 years of experience
with the business. Alessandra and the Films management team operate the business
independently from the Molded business, with separate sales, operations, engineering and
accounting staffs. The Films business consults with corporate primarily on legal, capital
structure and strategic matters.

Years ago, Films entered into a long-term shipping arrangement with Express
Shippers, Inc. (“Express”), a leading national less-than-truckload shipper. This contract
was intended to lock in rates that, at the time, Films believed were favorable. However,
based on subsequent changes in fuel and other input prices, this contract has not turned
out to be economic. Exhibit B sets forth a memo that Tom Giles recently received from
Films’ logistics director with projected future prices for diesel fuel and the resulting
projected shipping expenses under the contract. Films continues to receive calls from
other LTL carriers which remain interested in providing shipping services to Films.

Films operates five dedicated manufacturing plants, as summarized in the

following table.

Facility Size Owned / Leased Lease Maturity

Cassopolis, MI 152,000 sq.ft. Owned
Sacramento, CA 85,000 sq.ft. Owned
Stone Mountain, GA 135,000 sq.ft. Leased Sept 2020
Fort Worth, TX 152,000 sq.ft. Leased Oct 2015
Vienna, VA 129,000 sq.ft. Owned

The Films facilities have a combined production capability of 600 million pounds
and are strategically located throughout the U.S. to minimize shipping expense and
delivery time. Each Films facility has comprehensive production capabilities, including
the ability to manufacture both stretch and custom films. Each facility maintains a series

of cast and blown multi-layer and mono-layer lines that have the flexibility to
manufacture films of various widths and thicknesses as well as the ability to print text
and graphics onto the film in up to seven colors.

In addition to the Films production facility, the Cassopolis campus includes a

separate 13,500 square foot building which is home to Vandelay’s corporate
headquarters, as well as the engineering, operations and sales and marketing teams for

For the twelve months ended August 8, 2014, the Films business generated net
sales and EBITDA of approximately $431 million and $30 million (excluding corporate
cost allocation), respectively. A summary of Films’ historical financial performance is
set forth in Exhibit D.

b. Business Segment Description – Molded Plastics

The Molded division utilizes injection molding processes to transform plastic

resin into components which are supplied to appliance and automotive OEMs. Injection
molding is the principal process by which thermoplastic materials are shaped into
components for a variety of end market uses. In injection molding, plastic resin material
is forced at high pressure and temperature through a heated injection unit into a mold.
The molded product is then cooled, resulting in the creation of a marketable
component/product. Injection molding is one of the most widely-utilized industrial
plastic processes in North America due to (i) high-quality finished product properties; (ii)
amenability to a wide range of resins; (iii) light weight, performance, and cosmetic
qualities; and (iv) overall cost effectiveness. The growth of injection molding has been
driven by its increased usage in the manufacturing of components for a variety of end
markets, including appliances, automobiles, computers, consumer products and medical

Given the modest amount of capital investment required to establish an injection

molding operation and the availability of relatively flexible leasing programs, numerous
injection molders sprouted up throughout the United States in the mid- to late-1990s.
Consequently, appliance and automotive OEMs increasingly began to rely on third-party
molders and benefited from reduced pricing due to competition among these new
facilities. In recent years, however, as the OEMs have seen reduced volumes and
rationalized their supplier bases, the injection molding industry has experienced
considerable contraction in revenue and consolidation of facilities. This has left many of
the smaller and newer molders either out of business or relegated to “Tier II” status,
providing only excess capacity / low technology production to the larger molders which
possess long-term relationships with the OEMs.

The Molded business remains a leading manufacturer of large, high volume,

custom injection molded plastic components used in commercial and consumer products
such as appliance and automotive parts. Molded is highly recognized by appliance
OEMs for its production of clear, aesthetic and non-functional components such as
drawers, shelves, ice compartments, butter dishes, and similar products. Automotive and

miscellaneous products include covers for instrument clusters, seat belt components and
buckle covers, armatures and contract molded power tool parts.

Molded has recently increased its focus on exiting targeted non-core accounts
both to improve margin and to free up capacity for new business opportunities. This
effort has primarily focused on exiting automotive OEM sales in favor of expansion in
housing-related products. As a result, in the short term, Molded’s revenue concentration
with the appliance OEMs is projected to increase. Management believes that this
concentration will meaningfully decline as new products come on line, including

Molded has a deep and long-standing relationship with its customers, especially
Whirlpool. Whirlpool is one of the largest manufacturers of major home appliances in
the world and, after a 45 year relationship, Molded’s largest customer. Most of Molded’s
facilities are strategically located near a Whirlpool assembly facility, enabling the
Company to provide superior customer service and streamlined delivery. Over the last
couple of years, Whirlpool has continued to reward Molded with new business awards
related to the launch of new model production as well as take-away business which
Whirlpool has transferred to Molded from other suppliers. In the first nine months of
2014, Whirlpool represented 69% of Molded’s revenue and Tom forecasts that Whirlpool
will represent 76% of Molded’s business in 2015 (before considering any sales of the
TribuneTM shingle products). The Company recently entered into a two-year contract
extension with Whirlpool which does not guarantee minimum sales volumes, but does
reflect a continued commitment to sole-source purchases from the Company. The
Whirlpool relationship is the primary responsibility of Jim Bean, President of Molded,
who has been with the Molded operations in various roles for 23 years. In addition to
Jim, Molded also has a dedicated sales representative who handles sales to other existing

In view of the high cost of shipping their products, manufacturers of major

appliances, including Whirlpool, have opted for low-cost manufacturing in Mexico for
products to be distributed within North America. To better serve the Mexican operations
of Whirlpool, in November 2012 Vandelay acquired Ciudad Fargo Plastics in Del Boca
Vista, TX. Molded’s close proximity to the Mexican border provides a significant
competitive advantage to the Company, as it manufactures products in the U.S. that can
be easily transported to the Mexican assembly operations of the major appliance makers.

In late 2011, faced with only marginal growth and performance of the Molded
business, the Board asked Jim and Bud to come up with a recommendation to
reinvigorate the Molded business. Jim and Bud’s analysis concluded that the Molded
division needed to diversify its product offering to diminish Molded’s concentration with
appliance OEMs. They felt strongly that the Company should consider expanding into
the building products segment, a segment Jim knew well from his prior work experience.
The Board accepted this recommendation and, in 2012, Jim and the Molded design and
engineering team started the development of a polymer roofing shingle product.

After considerable time designing, engineering and prototyping the new product,
by early 2013 the team had completed the development of a polymer shingle product
known as TribuneTM. Based on market studies, contractor focus groups and meetings with
large building products distributors, Jim, the Board, and Maestro believed that TribuneTM
represented a tremendous market opportunity once launched. TribuneTM is an injection
molded panel of shingles that is available in varying sizes, including large panels that
measure ten feet square. Management expects that this revolutionary product will be
used primarily in residential applications. TribuneTM has numerous advantages over the
conventional roofing materials, including asphalt and cedar shingles, as described below:

 As a result of the Company’s mixing process, from the ground, TribuneTM

closely resembles an asphalt shingle and is hard to differentiate from a
traditional shingle.
 TribuneTM is sold in 16 colors, all of which are treated to resist fading or color
changes as a result of UV exposure.
 TribuneTM can be manufactured in large sections (10’x10’), resulting in an
easy and cost-efficient installation process. Tribune’sTM segments are secured
together with the Company’s ingenious LockTight® locking mechanism. The
combination of larger panels and the locking mechanism results in a product
that is not as susceptible to wind, water or ice damage as other alternative
roofing materials.
 TribuneTM will not deteriorate over time as traditional asphalt and cedar
shingles do.

The Company has not yet commenced production of TribuneTM. Nevertheless,

throughout the second half of 2013 and 2014, Jim and a newly-retained sales director
with considerable building products sales experience have conducted numerous meetings
and sales calls with buyers at all of the major national distributors and retailers as well as
through trade shows and direct calling campaigns on large homebuilders. These
marketing calls have been extremely positive, with several distributors indicating that
they are very interested in launching TribuneTM on a six month exclusive basis with the

Molded’s financial projection for TribuneTM which is incorporated into the

Company’s forecast for Molded is set forth below.

Summary Projected Financial Performance
($ in millions)

Projected Projected Projected Projected Projected Projected

FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 FYE 2020
Revenue $ 9.0 $ 22.0 $ 33.0 $ 43.0 $ 54.0 $ 65.0
EBITDA 1.1 3.3 5.3 7.3 9.7 13.0

Molded operates over 120 presses ranging in size from 40 to 1,500 tons. As
summarized in the following table, Molded’s facilities are strategically located in close
proximity to key customers in order to provide low transportation costs and prompt,
reliable delivery. During the first nine months of 2014, Molded’s facilities experienced
average utilization of approximately 53%. All of Molded’s facilities are ISO certified.

Facility Size Owned / Leased Lease Maturity

Evansville, IN 135,000 sq.ft. Leased Jan 2015
Windy City, TN 56,000 sq.ft. Leased Nov 2017
Arkoma, AR 122,000 sq.ft. Leased Oct 2021
Del Boca Vista, TX 138,000 sq.ft. Owned

For the twelve months ended August 8, 2014, Molded generated net sales of
approximately $251 million and an EBITDA loss of $6 million (excluding corporate cost
allocation). A summary of Films’ historical financial performance is set forth in Exhibit


The primary resins used by Vandelay include low density polyethylene (LDPE)
and linear low density polyethylene (LLDPE). These are produced from petrochemical
feedstock derived primarily from natural gas liquids. Vandelay works with several key
resin manufactures which provide what management believes to be an optimal
combination of price, resin availability and product development support. Contrary to
management’s expectations at the time of the acquisition of the Films business, the
Company has been unable to secure the bulk purchasing discounts enjoyed by the
Company’s much-larger competitors. The Company estimates that in order to qualify for
such discounts, it would have to expand its annual resin purchases by approximately 40%
from peak levels, which would result in a price discount to current levels of 1.0% to
1.5%. The North American resin market is primarily characterized by long-term supply
contracts (subject to market price changes), so no short-term hedging opportunities are

The Company has historically managed resin inventories with a view toward the
expected direction of market prices. During inflationary periods, the Company has been
able to capitalize on the advance notice of pending price increases received from resin
suppliers. In such circumstances, the Company would receive notification from its
suppliers that resin prices would be increased effective as of a certain date, usually two to
four weeks in advance. With a degree of moderation (so as not to antagonize suppliers),
the Company would then typically make excess resin purchases relative to near-term
production needs and store the excess resin in silos or rail cars at the Company’s
operating facilities. Typically, Vandelay and its competitors would then institute
increased pricing on their own products, recognizing a short-term boost in profitability
through the use of the resin purchased before the resin price increased. In declining resin
pricing environments, the Company tries to minimize purchases of raw materials in
advance of reduced prices taking effect.

The price the Company paid for resin increased steadily through 2012 and 2013,
peaking at approximately $0.95 per pound in late 2013. During this same period and
extending into 2014, Vandelay’s liquidity declined with its falling profitability. The
result was a reduction in both raw materials inventories (to 50% of typical levels) and
finished goods inventories (to 60% of typical levels). The Company’s reduced liquidity
left it completely exposed to the consecutive price increases announced during this period
by the resin suppliers. Forced to purchase resin after price increases took effect as
opposed to the “normal” procedure of making advance purchases, the Company
experienced a negative impact on margins and, consequently, earnings of approximately
$5 million during 2008.


Vandelay and its direct and indirect subsidiaries entered into the 2011 Credit
Facility to refinance the debt of its two subsidiaries, to finance a dividend to the
Company’s shareholders, to expand operating liquidity and to take advantage of
favorable interest rates. The sources and uses of funds in the 2011 Recapitalization
Transaction are set forth below ($ in millions):

Sources of Cash Uses of Cash

Cash on the Balance Sheet $34 Cash on the Balance Sheet $6
First Lien Term Loan Facility 125 Repayment of Films Operating Debt 125
Second Lien Term Loan Facility 175 Repayment of Molded Operating Debt 50
$334 Shareholder Distribution 150
Transaction Fees and Expenses 3

The Credit Facilities placed in the 2011 Recapitalization Transaction were

secured by the pledge of substantially all of the Company’s assets (Vandelay, as well as
the Films and Molded subsidiaries), with the Revolver and the First Lien Term Loan pari
passu and junior liens on the same collateral in favor of the Second Lien Term Loan. The
relationship between the first and second lien creditors is governed by an intercreditor
agreement that on balance is favorable to the First Lien Facilities lender group. Salient
considerations regarding the debt facilities include:

 Only the First Lien Facilities have a financial covenant.

 The Second Lien Term Loan is subject to a 90-day standstill in the event
of default, subject to extension for enforcement actions underway on
common collateral.
 The First Lien Facilities can be expanded by up to $50 million in a non-
bankruptcy event and $75 million (in the aggregate) in the event of a
bankruptcy event.
 Comparable price increases and fees for the First Lien Facilities and the
Second Lien Term Loan.

Although the First Lien Facilities and the Second Lien Term Loan are each
syndicated facilities, each investor holds a separate note representing an independent
claim against the Company.

A more detailed summary of the terms of the Credit Facilities is contained in

Exhibit A.

The following table summarizes the Company’s latest information regarding the
holders of the Company’s debt obligations:

Facility Number of Holders Holder Types
Revolver 2 Banks
Banks, some par funds (CLOs) and some hedge
First Lien Term Loan (a) 10
Second Lien Term Loan 15 Par funds (CLOs) and hedge funds
Unsecured Notes Widely held Issued primarily through retail channels

(a) Excluding Maestro participation

The Company believes that less than 20% of the First Lien Term Loan is held by
holders of the Second Lien Term Loan (i.e., minimal “crossover holders”).

Under the terms of the 2013 Restructuring Transaction, the following changes
were made to the Credit Facilities:

 Maestro acquired $25 million of First Lien Term Loan debt on a pro-rata basis
from each of the existing First Lien Term Loan lenders;
 Maestro purchased an additional $50 million of newly-issued First Lien Term
Loan debt;
 Maestro subordinated its (resulting) $75 million holdings of the First Lien
Term Loan to the other holders of the First Lien Facilities, creating a “last
out” participation in these facilities;
 The lenders to the Company’s credit facilities were paid a 75 bps amendment
fee; and
 The maximum leverage covenant was replaced with a minimum LTM
EBITDA covenant set against the Company’s projections. The new minimum
LTM EBITDA covenant was set at the following levels:

Q3 2013 thru Q2 2014 $22.5 million

Q3 2014 thru Q2 2015 $35.0 million
Thereafter $40.0 million

Pursuant to the terms of the First Lien Facilities, the Company was required to
enter into interest rate swap arrangements such that at least 50% of the Company’s term
loans were locked into a fixed rate of interest. As a result, shortly after the closing of the
2011 Refinancing Transaction, Vandelay entered into four swap arrangements, two for
$31.25 million each with maturities of August 31, 2015 and two for $43.75 million each

with maturities of August 31, 2016. The swaps are general unsecured obligations of
Vandelay. Both its Molded and Films subsidiaries have guaranteed these obligations.
Pursuant to these swaps, the Company swapped LIBOR for a fixed rate of 5.13%. The
swaps are terminable pursuant to notice to the defaulting party or automatically upon a
bankruptcy filing. Termination of the swaps results in: (i) the termination of the quarterly
payment obligations of the counterparties (i.e., both the swap provider and the Company)
and (ii) a liquidated claim in the amount of the mark-to-market payments then due under
the swaps. As of October 31, 2014, if the swaps were terminated, the swap provider has
indicated that it would have claims against the Company for approximately $8.9 million
($2.3 million relating to the 2015 swaps and $6.6 million relating to the 2016 swaps).

The Unsecured Notes were issued by the Company concurrently with the
acquisition of Films in 2008. The notes pay cash interest of 6.5%, semi-annually on
October 31 and April 30 and mature in 2019. The notes are unsecured obligations of
Vandelay Industries, Inc., have guarantees from both Films and Molded and are
subordinated to both the First Lien Facilities and the Second Lien Term Loan (though
pari passu with the Company’s unsecured debt). Last week, the Company did not make
the interest payment due to the Unsecured Notes, starting the clock on the 30-day grace
period provided under the note indenture.

In conjunction with the strategic alternatives process undertaken by DMN, B&H

also preliminarily reviewed the status of the liens held by the lenders under the 2011
Credit Facilities. Based on this review, B&H determined that neither the First Lien
Facilities lenders nor the Second Lien Term Loan lenders have valid and perfected liens
on the intellectual property of Films. As such, the Films’ IP is an unencumbered asset.
As a result, Vandelay recently retained a intellectual property valuation expert to value
Films’ IP. The expert determined that the value of Films’ intellectual property was
approximately $20 million.


The Company is a party to various contractual agreements and leases, as

summarized in the table below.

Lease Payment Term

Stone Mountain, GA – Films $62,000/month Sept 2020
Fort Worth, TX – Films 79,000/month Oct 2015
Evansville, IN – Molded 50,000/month Jan 2015
Windy City, TN – Molded 14,000/month Nov 2017
Arkoma, AR – Molded 28,000/month Oct 2021
Ricoh, Inc. (copiers/fax) 5,400/month 90 days
Java Services (coffee machines) 600/month 30 days
Express Shippers, Inc. N/A March 2016


Since your retention in early July 2014, you have been actively working to
evaluate the Company’s strategic alternatives and have considered restructuring,
refinancing and sale alternatives. A summary of the results of this process is below:

i. Financing Process

You contacted 29 lenders which are not currently lenders to the Company
regarding providing financing as a whole, to Films and/or to Molded. As a result of this
process, five lenders submitted preliminary proposals for first lien financing. The table
below sets forth the approximate amount of new first lien debt offered by these capital
providers (based on third quarter 2014 results):

Estimated Senior Debt

Vandelay $72 million
Films $42 million
Molded $30 million

The lenders who submitted proposals have indicated that the contemplated debt
facilities are primarily asset-based loans. As such, based on the Company’s current
receivables and inventory and the lenders’ reasonably conservative eligibility criteria
(advance rates of approximately 75% on accounts receivable and 55% on inventory,
assuming ineligible amounts of A/R and inventory of 5%), the amount of new borrowing
capacity is limited. The lenders’ willingness to provide Vandelay with new term debt
was also limited, with the Company’s PP&E supporting only approximately $40 million
of term debt (advance rate of approximately 10% on net PP&E). During this process you
did not request financing proposals from the incumbent lenders or request proposals for
second-lien financing. Additionally, the Confidential Financing Memorandum that was
used did not include any information about a possible debt restructuring and the resulting
capital structure for the Company.

ii. M&A Process

Simultaneously with the financing process, you actively marketed the Company
for sale, either as a whole or in pieces. Of the 171 buyers contacted during the M&A
process, most declined the opportunity. The initial indications received are set forth in
the table below:

Indicated Purchase Price

Whole Company
New American Plastics $250 million - $450 million
Wrigley Partners No value provided
None --

Maestro Equity Partners $75 million
Eastside Molded $65 million

Shortly after the receipt of the preliminary indications of interest in the financing
and the sale processes, you and the Company convened a meeting with each of the
Company’s key creditor groups to discuss the outcomes of these processes and to decide
on the transaction process going forward. As a result of these meetings and several days
of negotiating thereafter, the Company, the First Lien Facilities lenders and the Second
Lien Term Loan lenders agreed in principle to:

 Terminate all but the Molded M&A process (i.e., discontinue the investigation
of third party refinancing, the sale of the whole Company or the sale of
 Seek definitive purchase agreements from both prospective purchasers of
Molded; and
 Schedule a meeting between the Company and its existing creditor
constituents to explore a restructuring of the Company’s debt.

Although not conclusively determined at the time, a general sense existed within
the working group that a Chapter 11 filing would be necessary to consummate any sale or
restructuring transaction. Tom had remained hopeful that the impact on operations and
the expense associated with a Chapter 11 filing could be avoided.

After approximately 45 days of continued due diligence, both Molded bidders

were prepared to enter into definitive purchase agreements with no due diligence or
financing contingencies. A side-by-side summary of the two definitive transaction
alternatives is set forth below:

Both prospective purchasers have indicated that they are hopeful of being selected
as the stalking horse buyer. In considering the proposals and asking each party to
improve their bids, both parties declined and indicated that they had put their best foot
forward to be the stalking horse bidder.


Given the Company’s overleveraged condition and limited liquidity, the Company
recently received an unsolicited proposal for a “defensive” debtor-in-possession

financing facility from the Agent and lenders under the First Lien Facilities. The general
terms for this facility are set forth below:

Borrowers Vandelay Industries, Inc. and all of its direct and indirect subsidiaries
and affiliates
Lenders Members of the lender group of the First Lien Facilities
Commitment $65 million; includes a full “roll-up” of the pre-petition
Amount revolver and approximately $20 million of incremental
post-petition liquidity ($10 million on an interim basis)
Collateral First priority priming lien on substantially all assets of the Borrowers,
including all Films IP
Priority Super-priority administrative claim
Fees and rates Upfront Fee: 300 bps on Commitment Amount
L+600, 3% LIBOR floor, 150 bps unused fee
Maturity Earlier of: (i) Effective Date of a Plan, (ii) Event of Default, and (iii)
12 months from the Petition Date

In connection with the submission of their DIP financing proposal, the First Lien
Facilities lenders also delivered a stern message to the Company that they will oppose
any alternative DIP Financing Facility, priming or otherwise. The Agent has reluctantly
concluded though that due to an administrative error at the inception of the 2011 Credit
Facilities, the lien on the Films IP was not perfected. As a result, the Agent believes that
even though the 2011 Credit Facilities do not benefit from a lien on the Films IP, the
Films IP is available to support the debtor-in-possession financing. Further, the Agent
has indicated that an agreement has been reached with a majority of the Second Lien
Term Loan lenders whereby the Films IP will only collateralize new money advances on
the proposed DIP Facility and no portion of the roll-up DIP.

As set forth in Exhibit C, Steve has worked with the accounting department of
both Films and Molded and assembled a weekly cash flow for the next six months.
Based on this analysis, the Company projects that in a bankruptcy (where the Company
assumes that they would no longer be required to pay interest on account of unsecured
debt), operating cash flow is sufficient to fund necessary operating and restructuring
expenditures and still have positive cash flow. As a result, Steve is an advocate of
avoiding the cost and complexity of a DIP financing facility and instead funding
operations from the cash flows of the business.


As a result of its recent poor financial performance, the Company has generated
certain tax carry-back and carry-forward attributes. For purposes of this case study, you
should assume that these attributes are unavailable for the Company’s use.


Projected financial performance for the Company as well as both of the business
segments, through 2020, is set forth in Exhibit D.


Vandelay Industries, Inc. – Case Study

List of Exhibits

A. 2011 Credit Facility Summary

B. Express Shippers Memo

C. Twenty-Six Week Cash Flow Forecast

D. Historical Financial Results and Projections through FY2020

E. Tear Sheets for Related Companies

F. Industry M&A Transactions

G. Miscellaneous Valuation Documents

H. Legal Primers on:

1. Lease and Executory Contract Rejection

2. Subordination Provisions / Subordination Agreements

3. Plan Classification and Voting, the Absolute Priority Rule,

and Cram Down

4. Use of Cash Collateral and “DIP” Financing