Relaunch, growth and structured finance opportunities for struggling SMEs was the theme of the first illimity meet, a roundtable discussion in collaboration with BeBeez. Guests illimity, Oxy Capital and Gpack
Article published in BeBeez Magazine No. 26, Nov. 23, 2024
by Stefania Peveraro
It will be ready to change hands in mid-2025 Gpack, the luxury packaging specialist controlled by Oxy Capital since 2021 following a debt restructuring agreement under Art. 182-bis of the old Bankruptcy Law (see here a previous article by BeBeez) and returned to profitability last October, ahead of time, thanks to a structured deal with illimity Bank, which provided a €23 million loan, in addition to confirming the €15 million factoring line, thus going on to refinance the entire existing debt and obtaining adequate financial coverage for the growth expected in the coming years (see here a previous article by BeBeez) . This was announced by Federico Scaravelli, vice president of Oxy Capital, and Mario Vanoni, chief business officer of GPack, speaking at the illimity meet roundtable organized by BeBeez for illimity last Nov. 20 in Milan to discuss Relaunch and growth: structured finance opportunities for SMEs (download the video here and the presentation slides here).
If the business has a why, then you are halfway there.
The GPack case was used as a practical example to explain how a fruitful collaboration between a bank willing to give finance even to a company in difficulty, an investor specializing in corporate turnarounds, and a group of appropriately motivated managers can lead to successful results in a relatively short time.
Umberto Paolo Moretti, head of turnaround&special situations illimity, explained that “the starting point of any reasoning, when we have to decide whether or not to finance a distressed company, is to be convinced of the soundness of the business from an industrial point of view. We have to be convinced that that company can have a future of growth and an attractive marginality.” But this of course is only a first screening, it is not yet business due diligence because, continued Moretti, “it is a very quick analysis, after the opportunity is pointed out to us by an advisor.”
And in fact, Moretti continued, “when we decided to finance GPack, it was difficult. We had no information, and managers of a company in crisis don’t have time, they are all focused on saving the business and can’t produce the information for that would be needed by the bank or the potential investor. That’s understandable. So we had to reason on the basis of what little information we could find. In any case, they were enough for us to form a positive view of the company: there was a business that could be relaunched and grow; the company was an object that, if reconfigured, could have a future as an exit.”
What new finance is needed?
At this point we move to a second phase. Continued Moretti: “It has to be understood what the company’s priority financial needs are. Whether it needs emergency finance to get to the maneuver or whether it needs working capital support because, for example, the liquidity has all been drained and the banks have withdrawn. Or if finance is needed to close a financial restructuring. As a bank we have limitations, there are some things we cannot do such as direct equity. On the other hand, we can deploy a broad spectrum of tools that allows us to address different needs, which can change over the life of the deal.”
Mr. Moretti brought up as an example interim emergency finance and then floor finance, accompanied perhaps by purchase of single name receivables on a cash basis to help close the finance deal. And this is in the case where the company has entered into a negotiated crisis resolution procedure and then a possibly arrive at a composition with creditors or debt restructuring. So we are talking about a situation where this company’s receivables are classified by banks as UTPs (unlikely to pay).”
In the case of Gpack, for example, Mr. Moretti pointed out: “We understood that with the debt structure present and the legal instruments available, we could inject emergency financing in prededuction, since at that time the legislation of the old composition agreement, which predates the negotiated crisis settlement, was still in force.” Thus, Illimity disbursed €6 million of medium- to long-term emergency finance in 2020 and immediately made available a €15 million ceiling for a non-recourse factoring line.
Aside from cases similar to the Gpack world, illimity’s head of turnaround&special situations said further, “there is a whole world that is growing tremendously, which we have been intercepting as a bank for a year already, and that is that of companies whose receivables are classified as Stage 2 and Stage 1 watchlist. In these cases the most typical instruments that are used are convertible bonds and hybrid instruments, these are more junior interventions, which we use only when there are no industrial difficulties and no operational turnaround is needed. We also use signature finance and even more often factoring, which we are fortunate to have directly in the bank. Sometimes being able to have a non-recourse or recourse line can be crucial.”
The right traveling companion
Returning to the Gpack deal, Mr. Moretti continued: “We went the first piece of the way with GPack, not knowing if there would be a traveling companion and someone there would refinance the debt. When Oxy Capital’s offer came, we had a chance to get out of the deal, but with them we found great consonance of approach to the industrial part, even before we discussed the financial waterfall. You don’t go anywhere unless both of you are convinced that the company has value and unless you share the recipe for extracting that value.”
Federico Scaravelli, vice president of Oxy Capital, agreed: “The industrial assessment is the most critical part of the analysis we do to decide whether or not to invest in a company. It usually lasts a month: it should be assessed right away that, once the company comes out of the crisis, it has a key product to sell and an attractive customer base. On this point, on the GPack deal, we got along well with illimity, even before discussing the financial maneuver.”
Oxy, a European management company with 40 professionals in Italy and Portugal, invests in companies under severe financial strain and problems on the capital front. Mr. Scaravelli explained: “We buy the control of these companies with one euro, we recapitalize them with write-offs and debt conversion, and we provide part of the structured finance ad hoc for the individual operation, from urgent finance, to plan finance, to working capital support lines. The structuring and closing of the deal usually takes 12 to 18 months, depending on the legal framework of the procedure, while the industrial turaround takes 4 to 6 years. After that, the exit process is set up and thus the divestment is achieved.”
When the deal has to be structured, Oxy Capital’s manager said again, “you have to negotiate with the entrepreneur to buy the control of the company, because it is crucial to give a radical change to governance. After that we negotiate with the creditors, that is, on the one hand with the banks and on the other hand with the suppliers. The former are offered various alternative solutions, because there are those who prefer a balance and write-off, while others prefer to reschedule receivables. As for the suppliers, we meet with them in person and ask them for sacrifices but with the goal of giving them future work, restarting activities, and making up for what they have lost.”
A proposal suitable for creditors and suppliers.
And Mr. Scaravelli recalled again, “about GPack we were contacted by PwC in May 2020, in the middle of the Covid period. The company had everything standing still, apart from the plant producing for the pharma sector, but was losing money. We evaluated the competitors, the m&a market, the fact that illimity had already intervened with emergency finance, and four-handedly with them we defined an offer that was accepted by the entrepreneur, both because we kept him in the company, since his know-how and relationships had value, and because the offer covered the whole company and all the plants. We offered 5 different options to creditors from settlement to full repayment, while we asked suppliers to waive up to 60% with repayment over 5 years. Once we found the agreement, we started the industrial turnaround, which went very well, but we had difficult times because in the meantime the war broke out in Ukraine and the price of paper skyrocketed to +300%. In short, a perfect storm. Then illimity supported us with the factoring line, without which the company was in danger of getting stuck again. So it was that we went from 50 million in revenues and an ebitda of 1.9 million in 2020 to 90 million in revenues this year and, I estimate, to an ebitda of more than 15 million.”
A financial partner who is present and motivated.
It is clear that at this stage having a financial partner was crucial, because it allowed the company to survive. In general, Scaravelli added, “in these cases as a guarantee for the bank we insert a CRO (chief restructuring officer), which is crucial for monitoring the cash, since that of the transfer of control from the entrepreneur to the fund is a moment in which there is a lack of governance and those are the riskiest moments not to lose sight of the cash and treasury.”
And, returning to the Gpack case, the financial partner in question was as mentioned illimit. Since 2021, when Oxy made its investment, illimity has been providing GPack with floor finance, also reserving an equity kicker to benefit from the hoped-for success of the deal, thus providing 14 million euros of new finance as part of the restructuring agreement and confirming the 15 million nonrecourse factoring line. And in 2024 it then, as mentioned, the bank helped the company to close the restructuring agreement early, in detail by disbursing an 11 million euro line, with which the creditors in the agreement were repaid, and by disbursing a second 12 million line, with which the new finance disbursed for the restructuring agreement was repaid. All this while still maintaining the 15-million ceiling of non-recourse factoring lines.
That was financial assistance that at the same time allowed the company to accomplish the industrial turnaround. “At this point, the restructuring agreement is over and we finance the company with different technical forms to accompany the company, which is now clearly in bonis,” Mr. Moretti said again, emphasizing ”the common thread of factoring, which has been fundamental, even at the time of the exit from the crisis, because typically banks that have been hurt before with a company, before financing it again, put up a lot of resistance, although in reality it is now a whole different company.” Of course, though, putting up the factoring line in these cases is also not trivial: “You have to figure out what line you can do and to which customers, and then you have to figure out whether non-recourse or recourse works better.”
Now that the turnaround is over, everything is much simpler. Mr. Moretti explained: “Now we are still following the company, the final part is support with fairly traditional financial structures, we continue to follow with factoring. The element of continuity of relationship is fundamental because knowing the company from the inside is one of our characteristics: those who carried out the operation are always the same people who then continue to follow the company and it is therefore easier to structure a refinancing even in a less favorable market moment. In the meantime, the company is preparing for the exit phase because an object of this kind will certainly find its place between trade buyers and private equity”.
And on the subject of exit, Mr. Scaravelli specified: “We have tried from the beginning to align the objectives with illimity in terms of timing and maximization of value. We have also done the same thing with the managers, not only with the CEO, but also with all the managers of the first line so that every decision has a direct impact on the valorization of the asset. In the meantime, the company has set up a 15 million investment program that will end in June 2025 with the company’s complete conversion to luxury. At that point, we will decide the timing and methods of the exit”.
The following article is also part of this analysis:
Vanoni (Gpack), the recipe for profitability? The group’s conversion to the luxury segment
