Friendly foreclosing

A recent distressed deal takes advantage of a little-used foreclosure method. By Aaron Lovell.

New York-based distressed investor Monomoy Capital Partners acquired Barjan Products earlier this month in an interesting, if little used, transaction called a “friendly foreclosure.”

The business, Barjan Products, is a distributor of consumer products to travel centres, truck stops and convenience stores throughout the US, and was acquired in early January for $20 million (€16 million) in cash and debt. It is Monomoy’s third acquisition since the turnaround firm was founded last spring.

Barjan has annual revenues of more than $140 million and distributes more than 8,000 individual products, including automotive accessories, consumer electronics, novelty products, books videos and music.

But the acquisition was marked by the use of a relatively rare sort of foreclosure, outlined under Article 9 of the Illinois Uniform Commercial Code. Known as Article 9 foreclosures – or “friendly foreclosures,” they are complex, less transparent, and less expensive than a traditional bankruptcy.

Daniel Collin, a principal with Monomoy, says the transaction made sense in the Barjan acquisition.

“You had an overleveraged business where debt was so far above value of the business,” he says. “The main benefit of Article 9 transactions was the elimination of debt off the balance sheet.” The transaction is also quicker, less disruptive to customers and carries less stigma than a traditional bankruptcy.

For an Article 9 foreclosure to be possible, the value of the business must be far less than the amount of debt held by the business.  “We were able to make the case that any reasonable amount of recovery to senior debt holders would be less than what was owed,” Collin says.

Following the buyout, the firm can now go to its supplier-creditors and discuss the specific terms of the relationship going forward. Collin says the Article 9 structure allows for this flexibility. “We are committed to maintaining key supplier relationships,” he adds.

In some cases, there are downsides to this sort of transaction. “The transaction is not as transparent – in terms of creditors – as a bankruptcy and not as understood by the general public,” he says. Creditors could also sue if the banks sold a company for too low a price.   

Monomoy was founded in March of last year by principals Collin, Stephen Presser, Justin Hillenbrand and Philip Von Burg, all of whom left KPS Special Situations Fund in January 2005.

Collin says, despite the fact it worked out well in the Barjan acquisition, he doesn’t see any reason why there would be an increase in Article 9 deals. “All the circumstances have to align perfectly to pull this off,” he says.