Originally posted in ABFJournal | Written by Robert DiNozzi, Chief Growth Officer, Second Wind Consultants
Handaband USA was a thriving business in the oil and gas market in Texas until unpredictable fuel prices made it difficult to sustain its growth. This is the story of how its previous lender (Crestmark), an Article 9 reorganization, its current owner (Logan Fund) and its newly recruited lender (GemCap) have gotten the business back in the fast lane.
Behind the daily transactional news of originations, intercreditor agreements and creative financing solutions in asset-based finance lie deeper stories of the profound impact made by the industry and its community. This impact is felt on a macro level as value creation in times of growth or value preservation in times of distress.
While every successful asset-based lending transaction necessarily originates in self-interest, it also plays a crucial role in moving capitalism’s invisible hand, working to guide an efficient allocation of resources toward growth or turnaround while creating and preserving value. It is this value that’s felt on a micro level by real people — entrepreneurs, employees, families and their livelihoods. These stories, the ones behind the transactional news, remind our community of its impact and purpose. This is one of those stories.
In November of 2022, ABFJournal reported on a transaction involving Crestmark’s creative exit from a non-performing credit, Second Wind Consultants’ Article 9 reorganization of the guarantor’s business and GemCap’s refinancing of Crestmark to allow it out of previously distressed assets. Behind this transaction is a story of two lenders and a consultancy working creatively to maximize value for all while preserving 30 jobs and the opportunity presented by a rapidly growing business in the oil field services sector. This is the story behind the story.
Once Upon a Time in Texas
This story begins in the oil fields of west Texas. Handaband USA, founded three years ago by a former oil and gas executive at Parkland Fuel, was launched in response to a critical oil and gas production wellsite inefficiency. The thousands of wellsites that dot the Texas landscape operate 24/7, requiring diesel fuel, gasoline and a multitude of lubricants in their uninterrupted operation. Traditionally, producers have relied on logistics involving a constant rotation of trucks to and from servicing stations that are typically between 30 and 80 miles from a wellsite. Along with the associated time, cost, and wear and tear of such logistics, there is also the risk of interruption from mechanical issues and breakdowns in this supply chain.
Enter Handaband, which began offering remote fueling stations capable of being deployed directly at a wellsite and maintaining one week’s worth of usage while being monitored by a software platform communicating by WiFi, cellular data or satellite reporting to detect levels in the tanks. Handaband would sell fuels and lubricants at a markup, reflecting its value add to producers by allowing them to not only outsource supply chain logistics, but also by ensuring constant supply while avoiding the need to offset the risk of interruptions with oversupply. With tens of thousands of remote wellsites in the United States alone, the opportunity for Handaband was tremendous.
After capitalizing the early stages of the business, Handaband’s founder knew they would need cash flow support. In 2018, Handaband partnered with Crestmark, which supported the business as accounts began to grow for the company, which maxed out at an annual run rate of $36 million in revenue and $2.5 million in EBITDA. However, trouble was on the horizon in the form of fuel price gyrations and spikes along with poor credit terms offered to clients, meaning the company’s rapid growth was going to become unsupportable.
In 2018, when fuel prices became highly unpredictable, Handaband was challenged to accurately predict cash flow. Crestmark worked proactively with the borrower to manage this environment, accessing the equity in the company’s equipment by bringing in an equipment lender and extending the company’s facility from 80% to 90% LTV.
Compounding the issues posed by the fuel price environment, Handaband negotiated poor credit terms with its clients, offering net 60 when only getting net 10 from its suppliers. This meant that every time Handaband onboarded a new client, it would have to fill a station six to eight times before a receivable was paid for the initial order. That would translate into approximately $400,000 to $1 million in capitalization per new account. Growth became increasingly expensive and hard to manage, particularly if any account debtor fell out of terms because Handaband simply couldn’t afford to cash flow the delta.
At the same time, there was pressure to grow. Because Handaband’s model was not based on any underlying, protectable IP, being first to market was at the core of its strategy to create barriers to competitive entry. By result, the company had leveraged its maximum availability with Crestmark, so a sudden and historic spike in diesel prices would set the stage for distress.
Handaband had modeled its margins to be wide enough to outpace any variability in the price of supply. But in the spring of 2022, a truly historic spike in the price of diesel would vastly outstrip those margins, at one point rising 50% in a 48-hour period. In this rising price environment, net 60 receivables and net 10 payables rendered growth immediately unsupportable. This is when the spiral toward insolvency truly began.
Having fallen behind on terms with suppliers, Handaband also had approximately $1.8 million of delinquent accounts payable with suppliers in the market, damaging its reputation and limiting its ability to shop the market competitively. And because the company had aggressively and fully leveraged its facility with Crestmark to finance growth, with zero or negative availability on its line of credit, Handaband was left with no option other than to resort to high-interest merchant cash advances and other sub-debt, ultimately totaling approximately $1.5 million. This violation of covenant immediately put Handaband into default with Crestmark, which was collateralized by approximately $5.25 million in accounts receivable and equipment.
Finding the Path to Recovery
Enter Second Wind Consultants, with which Crestmark had worked previously to exit a credit involving a distressed co-packing facility in California. Working creatively together, Crestmark and Second Wind identified a path to full recovery where there would otherwise have been a loss.
From Crestmark’s vantage point, the repossession of Handaband’s equipment would have been particularly challenging and inefficient, as its collateral was spread over a wide geographic area of approximately 1,700 square miles. On the A/R side, cycles of creditworthiness posed a particular issue in the industry and would likely have meant not only inefficient collection, but also a net loss. Second Wind estimated that if Crestmark were to forcefully collect, it could expect a combined recovery of approximately $4 million, a $1.25 million shortfall of the $5.25 million outstanding.
After exploring multiple options, the parties agreed that Second Wind would structure an Article 9 reorganization of the business, through which Crestmark would sell its collateral under Article 9 for the full $5.25 million valuation to Logan Fund (an investment firm affiliated with Second Wind), which would step in and take over operation of the assets. This strategy offered Crestmark a path to full recovery. However, it also meant Crestmark would need to continue to fund the company through the close of the transaction, a proposition that was creative but not without risk.
While the purchase under Article 9 would take Crestmark out in full, the most significant risk of continuing to fund Handaband until close was posed by sub-debt creditors (mostly MCA lenders), which regularly sweep bank accounts, intercept A/R, or otherwise jeopardize collateral and operations, the viability of which would need to be preserved in order to conclude the sale transaction.
Crestmark’s risk/reward calculus when determining whether to continue funding toward a successful close was informed by Second Wind’s assurance that it could not only protect the company’s operating accounts, but mitigate the risk of A/R being intercepted by UCC 9-406 notices. To protect the A/R lifeblood of the business, Second Wind worked with the purchaser, Logan Fund, to establish an indemnity facility in order to free any A/R potentially frozen by a UCC 9-406 notice. This facility would act as a form of indemnification bond, assuring the account debtor that the A/R could be released with no jeopardy of double payment or incurrence of legal fees arising out of MCA lender claims and/or actions. With sufficient confidence that the business would be insulated from the MCA risk and that a successful close and full exit could be achieved, Crestmark opted to continue to fund Handaband.
On the debtor side, Second Wind structured incentives for its client (and Crestmark’s guarantor) as a non-owner participant in the new entity inheriting the assets. The purchaser, Logan Fund, has leveraged the previous owner’s experience as operator to continue to grow the business. By result, the previous owner is meaningfully participating in the relaunched business with a path toward resolving PGd sub-debt liabilities along with a path to earn back into equity based on performance.
Together, Crestmark and Second Wind’s interim rescue of business operations set the stage for the Article 9 transaction and take-out financing. Second Wind now reached out to funding partner GemCap.
The Next Lender
GemCap had prior experience financing previously distressed assets which had been resolved through Article 9 transactions. Yet the Handaband transaction required particular creativity. Not only would the transaction need to close quickly since Crestmark was continuing to fund a high-risk situation, but GemCap would also need to fund at the same 90% LTV on the A/R that Crestmark had.
On the equipment side, there were issues with insufficient geo-tagging, meaning equipment lenders would require additional time for diligence. It was time neither the business nor Crestmark had.
At this point, Second Wind turned back to GemCap to finance the equipment in addition to the take-out, as this was the only means of getting the deal done. In order to make GemCap comfortable entering the credit, Second Wind presented the plans to improve the company and how it was going to look on both a cash basis and an accrual basis. For one, the Achilles heel of poor credit terms would be immediately addressed with the installation of pay-at-the-pump merchant service terminals on all remote fueling stations. This meant Handaband would, in essence, be out-sourcing payment terms to a third party and converting 60-day receivables into 48-hour receivables. Next, GemCap stretched on the A/R and Second Wind arranged for credit insurance on key accounts. Additionally, GemCap was presented with the growth potential of the credit itself based on the many industries and verticals that could be capitalized upon by remote fueling station technology. Based on all of these factors, GemCap agreed to finance the equipment and the A/R at a 90% LTV.
After the notice period, the Article 9 asset sale transaction promptly closed, taking out Crestmark in full, including early termination fees. On the other side, GemCap entered a performing, collateral-good credit and was insured on a majority of the A/R. As a lending partner, GemCap entered a relationship with a business whose previous mistakes had been identified and rectified by Second Wind while transitioning the business to its new owner, Logan Fund.
Success and Purpose
The future is now bright for Handaband, its employees and its lender. The health of the new business has allowed Logan Fund to transition portions of unsecured vendor liabilities into the new operating entity, ensuring solid supply relationships going forward. The business is now poised to capitalize on remote developments, infrastructure projects and efficient fuel delivery models for homes and businesses alike, which will likely scale its lender’s deployment by a significant multiple.
Handaband was brought back from the brink of liquidation. Rather than having seen its final chapter, much of this business’ story has yet to be written. It owes its second chance in no small part to the creativity of asset-based lenders working to maximize recovery and create opportunity by preserving value that would otherwise have been lost to distress.
Alongside this business with a reason to exist was a story with a reason to be told. It is a story that highlights our purpose as professionals in secured finance and turnaround industries to harness capitalism’s engine and bring new efficiencies to it while making profound and impactful contributions to the betterment of our economy, the businesses we partner with and the livelihoods dependent on them.