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Case Danfurd - Support Questions

The document provides a case study about Danfurn, a furniture company that was acquired by Birchtree in 2007 but later fell into bankruptcy in 2011. It lists 7 support questions to analyze Danfurn's capital structure, reasons for bankruptcy, liquidation value, fundamental value, the senior lender M&L's position, and potential reorganization plans from the perspectives of Birchtree and a hedge fund holder of Danfurn's mezzanine notes.

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57 views2 pages

Case Danfurd - Support Questions

The document provides a case study about Danfurn, a furniture company that was acquired by Birchtree in 2007 but later fell into bankruptcy in 2011. It lists 7 support questions to analyze Danfurn's capital structure, reasons for bankruptcy, liquidation value, fundamental value, the senior lender M&L's position, and potential reorganization plans from the perspectives of Birchtree and a hedge fund holder of Danfurn's mezzanine notes.

Uploaded by

novasbechatgpt
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Applied Corporate Finance

Spring semester 2023-24


Case: Danfurd

Support questions:
1. What do you think about Birchtree's decision to acquire Danfurn in 2007?
Assuming that fair value was paid for this asset, how was the private equity firm
expecting to generate a return to its investors (LPs), assuming an exit in 3 years?
Please do also evaluate the capital structure used and its impact on returns.
2. Why did Danfurn fall into bankruptcy in 2011? Was it due to bad strategy, bad luck,
bad execution, too much debt, wrong kind of debt?
3. What could be the liquidation value of Danfurn? Provide a valuation of the
company's assets in an orderly liquidation, assuming at least a 25% haircut on
receivables, 40% on inventory and 50% on PP&E and 30% on real estate. Make
additional assumptions about other assets and justify them.
4. Assuming that comparable (but financially healthy) firms have been trading at
around 8× to 9× EBITDA in 2007 and between 6× to 7× EBITDA in 2011, how
much fundamental value is there in Danfurn? Please explain your assumptions.
5. How strong is M&L's position? Was it clever for it to relax the covenants and extend
the maturity of the senior debt? Did such moves put it in a weaker position? Should
M&L seek the repossession of the collateral and proceed with the liquidation of
Danfurn's assets? Should it wait, giving the company some time to recover? What
would be the best strategy for the senior lender?
6. Based upon your analysis, assuming the role of Birchtree, present a plan of
reorganization that could potentially be acceptable to all parties, including the
judge, while leaving the company in a solvent position. In case you are willing to
inject new equity (not exceeding $50million), please show how are you expecting
to generate a return for your LPs. In all scenarios assume that administrative
charges for Danfurn in this process will amount to $4 million.
7. Now assume the role of a hedge fund that has acquired all of Danfurn's Mezzanine
Notes, at a price of 15% of par. Present a new restructuring plan (including new
valuations consistent with that plan). This may include injecting new equity in the
firm (not exceeding $50 million), but not new debt to replace the existing one. Will
that plan be acceptable to all parties? How do you expect to earn the return on your
investment?

Your group must answer all questions. However, in class, you will be asked to assume the
role of either Birchtree, Rasmussen family, M&L or the holders of the mezzanine debt.
In your Plans of Reorganization consider the following structure of claims (USD millions):

1. Danfurn LLC
a. Senior Secured Debt (Revolver & LT Loan) $93.1
b. Senior Unsecured Claims
i. Post Employment benefit Claims $5.9
ii. Trade Creditors $15.8
iii. Other Accrued Liabilities (accounting charge only) $ 0.0
iv. Other Long Term Liabilities $3.3

Total Outstanding Debts of Danfurn LLC:


$118.1

2. Danfurn Management LLC


a. Unsecured Debt $30.0
3. Total Debt of Danfurn LLC and Danfurn Management LLC
$148.1

Danfurn LLC is fully owned by Danfurn Management LLC. This effectively makes the debt
of the latter subordinated to that of the former, a fact that is reinforced by the pledge
agreement signed by holders of the mezzanine notes on behalf of M&L.

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