Bankruptcy & Reorganization paper

114 Pages·2015·2.57 MB·English

by  Nick Ang

Construction
BANKRUPTCY &
Equipment Rental
Restructurings:
REORGANIZATION PAPER Neff Corporation
v. Ahern Rentals

Nicholas Ang, Rasheeq Haq, Alex Zhang
New York University
Leonard N. Stern School of Business
January 2015
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Table of Contents
Executive Summary ............................................................................................................................5
Industry Overview .............................................................................................................................6
Business Model and Industry Outlook ...................................................................................................... 6
Cost Structure ........................................................................................................................................... 9
Competitive Landscape ........................................................................................................................... 10
Porter’s Five Forces ................................................................................................................................. 13
Firm Overview ................................................................................................................................. 14
Neff ......................................................................................................................................................... 14
Revenue Model ................................................................................................................................... 15
Store Locations .................................................................................................................................... 16
Ahern ....................................................................................................................................................... 17
Revenue Model ................................................................................................................................... 17
Store Locations .................................................................................................................................... 18
SWOT Analysis ................................................................................................................................. 19
Corporate and Capital Structures ...................................................................................................... 19
Neff ......................................................................................................................................................... 19
Ahern ....................................................................................................................................................... 21
Overview of Bankruptcy Causes ....................................................................................................... 22
Challenging Operating Environment ....................................................................................................... 22
Causes of Bankruptcy for Neff .......................................................................................................... 24
Overleveraged Balance Sheet from Leveraged Buyouts......................................................................... 24
2005 Leveraged Buyout ...................................................................................................................... 25
2007 Leveraged Buyout ...................................................................................................................... 27
Liquidity Constraint ................................................................................................................................. 29
Causes of Bankruptcy for Ahern ....................................................................................................... 30
Debt-Financed Expansion ....................................................................................................................... 30
Costly Financing ...................................................................................................................................... 31
Indenture Limits ...................................................................................................................................... 32
Could the Bankruptcy Have Been Predicted? .................................................................................... 33
Altman Z Double-Prime Score ................................................................................................................. 33
Neff ..................................................................................................................................................... 34
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Ahern ................................................................................................................................................... 35
Could the Neff Bankruptcy Have Been Predicted? ............................................................................. 37
What Went Wrong with the 2007 Leveraged Buyout? .......................................................................... 37
Liquidity Cushion ................................................................................................................................. 38
The 2008 Exchange ............................................................................................................................. 39
Could the Ahern Bankruptcy Have Been Predicted? .......................................................................... 40
Issuance of First Lien Term Loan ............................................................................................................. 40
Pre-Petition Process ......................................................................................................................... 41
Deliberate Pre-Petition Process by Neff ................................................................................................. 42
Discussion with First Lien Credit Facility Agent to Increase ABL Availability ...................................... 42
Marketing Efforts for Post-Petition Financing .................................................................................... 43
Parallel “Third Party” Sales and Investment Process .......................................................................... 44
Poorly Planned Pre-Petition Process by Ahern ....................................................................................... 45
Unsuccessful Debt Restructuring ........................................................................................................ 45
Reorganization Overview ................................................................................................................. 47
Neff’s Pre-Arranged Restructuring ......................................................................................................... 48
Ahern’s Restructuring ............................................................................................................................. 49
Reorganization Analysis of Neff ........................................................................................................ 50
Corporate and Capital Structure ............................................................................................................. 50
First Lien Credit Agreement ................................................................................................................ 51
Swap Obligations................................................................................................................................. 51
Second Lien Term Loan ....................................................................................................................... 52
10% Senior Notes ................................................................................................................................ 52
Identifying the Fulcrum Security ............................................................................................................. 53
Best Interests of Creditors Test – Liquidation Analysis ....................................................................... 53
Objections by Unsecured Creditor Committee ....................................................................................... 55
Objections to DIP Loan and Employee Incentive Plan ........................................................................ 55
Allegations of Fraudulent Transfer ..................................................................................................... 57
Improved Recovery Rates ................................................................................................................... 57
Post-Petition Marketing Process ............................................................................................................. 58
Valuation Analysis ................................................................................................................................... 59
Reorganization Analysis of Ahern ..................................................................................................... 61
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Corporate and Capital Structure ............................................................................................................. 61
First Lien Credit Facility ....................................................................................................................... 61
Second Lien Notes ............................................................................................................................... 62
Identifying the Fulcrum Security ............................................................................................................. 62
Best Interests of Creditors Test – Liquidation Analysis ....................................................................... 62
Preserving Old Equity by Delaying Proceedings ..................................................................................... 63
First Plan of Reorganization and Exclusivity Extensions ..................................................................... 63
Judge Rejects First Plan of Reorganization ......................................................................................... 66
Attempted Corporate Takeover .............................................................................................................. 67
Second Plan of Reorganization ........................................................................................................... 67
Platinum Equity’s Failed Takeover Attempt ....................................................................................... 70
Operational Turnaround ......................................................................................................................... 72
Pre-Bankruptcy ................................................................................................................................... 72
Recovery during Bankruptcy Proceedings .......................................................................................... 74
Don Ahern Emerges Victorious ............................................................................................................... 75
Final Plan of Reorganization ............................................................................................................... 75
Why did Platinum Equity Agree to Exit its Position? .......................................................................... 76
Valuation Analysis ................................................................................................................................... 77
Valuation Dispute between Financial Advisors ................................................................................... 77
Why EBITDA is a Poor Valuation Metric.............................................................................................. 80
Exit Financing Packages .................................................................................................................... 81
Rights Offering and Revolving Credit Facility for Neff ............................................................................ 81
Bridge Financing for Ahern ..................................................................................................................... 82
Forum Shopping ............................................................................................................................... 84
Ahern’s Exclusivity Period ....................................................................................................................... 85
First Extension ..................................................................................................................................... 86
Second Extension ................................................................................................................................ 87
Third Extension ................................................................................................................................... 87
Court Denies Extension ....................................................................................................................... 87
Good Faith Progress and Time Value of Exclusivity ................................................................................ 88
Precedent Cases in Nevada Supported Ahern’s Strategy ....................................................................... 90
Case Background ................................................................................................................................. 91
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Exclusivity Extension ........................................................................................................................... 91
Winners vs. Losers ........................................................................................................................... 92
The Debtor .............................................................................................................................................. 92
Neff – Winner ...................................................................................................................................... 92
Ahern – Loser ...................................................................................................................................... 93
Neff’s Creditors ....................................................................................................................................... 94
First Lien Term Loan Creditors – Winner ............................................................................................ 94
Second Lien Term Loan Creditors – Loser ........................................................................................... 94
10% Senior Notes Unsecured Creditors – Loser ................................................................................. 94
General Unsecured Claims Creditors – Loser ...................................................................................... 94
Ahern’s Creditors .................................................................................................................................... 95
First Lien Term Loan Creditors – Winner ............................................................................................ 95
Second Lien Notes Creditors – Winner ............................................................................................... 95
Old Equity ................................................................................................................................................ 96
Lightyear Capital (Neff) – Loser ........................................................................................................... 96
Don Ahern (Ahern) – Winner .............................................................................................................. 96
Post-Bankruptcy Outlook ................................................................................................................. 97
The Future of the Equipment Rental Industry ........................................................................................ 97
The Future of Neff ................................................................................................................................... 98
Higher Volatility in Equipment Utilization Rates ................................................................................. 99
Leveraged Balance Sheet .................................................................................................................. 100
The Future of Ahern .............................................................................................................................. 102
Key Takeaways .............................................................................................................................. 103
Investors ................................................................................................................................................ 103
Debtors.................................................................................................................................................. 103
Old Equity .............................................................................................................................................. 104
Financial Advisors.................................................................................................................................. 104
Bibliography .................................................................................................................................. 105

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Executive Summary
Neff Corporation (“Neff”) and Ahern Rentals (“Ahern”) filed for bankruptcy protection
on May 16th, 2010 and December 22nd, 2011, respectively, after a cyclical downturn in the
equipment rental industry. Although the challenging operating environment precipitated the
rapid increase in credit risk for both debtors, Neff and Ahern had idiosyncratic factors that
contributed to their bankruptcies. This paper will briefly discuss the equipment rental industry
before focusing on Neff and Ahern.
Although both restructurings were inherently different, key lessons can be gathered
from comparing and contrasting both bankruptcies: Neff had an efficient and expedited pre-
arranged reorganization following a deliberate pre-petition process, whereas Ahern had a
poorly planned pre-petition process and a deliberately drawn out reorganization with multiple
exclusivity extensions. This paper will further explore how each stakeholder was affected by the
events in the bankruptcy proceedings, including operational turnarounds by the debtors.
This paper also presents valuation analysis on both restructurings, including
identification of the fulcrum security and the valuation dispute surrounding the Ahern
restructuring. This paper will go on to evaluate the motivations of each debtor in their forum
shopping efforts, and conclude with an analysis of how both debtors emerged from bankruptcy
and more significantly, the winners and losers from the bankruptcy proceedings.
Lastly, this paper will conclude with an industry and firm outlook, as well as the key
takeaways from both bankruptcies.

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Industry Overview
Both Neff and Ahern occupy the highly fragmented equipment rental industry, where
revenues of the top 15 firms account for a mere 30% of the total market1. The construction
equipment rental industry includes groundbreaking, high-reach aerial, crane, concrete, and
power generating units, which are rented to both commercial and individual customers2. While
equipment can generally be classified by the nature of their use (indoor versus outdoor), firms
tend to specialize in renting a certain type of equipment. Different types of rental equipment
have their own business risks and competitive advantages. For instance, cranes are typically
rented for new commercial construction projects as opposed to power generators, which are
rented during natural disasters such as hurricanes3. Therefore, a breakdown of a firm’s
equipment base reveals valuable information not only about its customers and geographical
presence, but also about its risk profile.

Business Model and Industry Outlook
Given the industry’s fragmented nature, it is no wonder why there are over 4,000
locations offering construction equipment rentals in the United States today4. The business
model for equipment rental firms is to rent their equipment to contractors, who may also pay
additional fees for servicing and equipment delivery. Equipment rental firms also sometimes
sell used equipment or parts as a source of revenue5. Revenues for equipment rental firms can

1 “RER 100: Top Rental Equipment Firms of 2013.”
2 “RER 100: Top Rental Equipment Firms of 2013.”
3 “Power Generation Rental.”
4 “Rental Equipment Industry Report.”
5 Neff Corp. FY2014 S-1.
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therefore typically be divided into rental revenue for each subcategory of rental equipment,
servicing revenue, and used equipment sales.
However, the commoditized nature of the industry reduces the pricing power of
equipment rental firms, inflicting pressure on revenues especially during recessions as
competitors engage in pricing wars to survive6. Since equipment rental firms share product
offerings, they often differentiate themselves from a pricing or geographical standpoint.
In 2013, the North American rental industry had annual revenues of approximately $38
billion, and is expected to enjoy a robust 8% compounded annual growth rate (“CAGR”) from
2014 through 20187. Although the projections reflect the potential growth runway for industry
expansion, the industry had suffered a 20% drop in revenues during the Great Recession in
2008 from $40 billion to $32 billion. As the economy begins to recover, industry analysts now
expect the equipment rental industry to surpass pre-2008 levels this year, highlighting industry
cyclicality every five to ten years8.

North America Rental Industry Revenues

Part of this industry growth is driven by higher penetration of equipment rentals versus
ownership, as reflected by increased rental penetration rates from 40% in 2004 to 53% in 2013.

6 Disclosure Statement for the Debtors' Joint Plan Pursuant to Chapter 11 of the Bankruptcy Code. United States
Bankruptcy Court Southern District of New York.
7 “North American Rental Revenue to Reach $38 Billion in 2013.”
8 Neff Corp. FY2014 S-1.
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By renting instead of purchasing equipment, firms avoid incurring capital investments and
maintenance costs, and are able to access a wide array of equipment on an as-needed basis.
Penetration rates for equipment rentals are also contingent on the equipment
breakdown that each firm offers. While high-reach aerial units enjoy a high rental penetration
of around 95%, earthmoving units have only a 51% penetration rate, indicating a potential of
growth in certain categories
and stunted opportunities in
others9. For example, Ahern
Rental specializes in the high-
reach aerial business, which
significantly contributed to the
firm’s difficulty in growing its
revenues organically after the
Great Recession due to the
market saturation in aerial
rentals10.

9 “American Rental Association Penetration Index.”
10 Summary of Financial Status. United States Bankruptcy Court District of Nevada.
8
On the other hand, Neff has the opportunity to expand its organic revenue growth due
to the low penetration rate in earthmoving equipment, which it specializes in—a significant
competitive edge over its larger competitors due to Neff’s exposure to the segment11.

Cost Structure
Since the life cycle of most equipment is typically five to ten years12, firms have to
periodically incur high capital investments to maintain existing equipment and acquire new
equipment. More significantly, firms may over-invest in the boom years to meet increasing
demand for rental equipment, while under-investing during recessions to preserve capital,
exacerbating the pressure on liquidity caused by the cyclical nature of the industry. For
instance, Ahern took a risky bet by doubling down its debt load from 2005 through 2008 to
acquire 16,500 lifts and other pieces of equipment to capitalize on the boom years in its
primary market, Las Vegas13.

11 Morgan Stanley Research.
12 “Industrial Equipment Rental & Leasing in the US: Market Research Report.”
13 “Billionaire Gores Angles for Ahern Rentals: Corporate Finance.”
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